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Property Rights: The Foundation of Freedom

In the United States, we tend to study the Constitution to secure and understand our freedoms.  This is a bit strange as our freedom throughout history has been secured mainly by property rights.  This was understood by the founders and many others.

 

There is a “diversity in the faculties of men, from which the rights of property originate…. The protection of these faculties is the first object of government.”[1]

James Madison’s Federalist 10

 

“The reason why men enter into society is the preservation of their property.” John Locke

 

“No other rights are safe where property is not safe.”

Daniel Webster

 

“Ultimately property rights and personal rights are the same thing.”

Calvin Coolidge

 

Without property rights, no other rights are possible.

Ayn Rand “Man’s Rights,” The Virtue of Selfishness, 94, http://aynrandlexicon.com/lexicon/property_rights.html

 

“Property rights … are the most basic of human rights and an essential foundation for other human rights.”[2]

Milton Friedman

 

Property rights in the United States were a matter of state law for most of its history, with the minor exception of the Fifth Amendment.  Thus to gain a better understanding of how our freedom is secured, we need to study property rights.  This is a big subject and this post will focus on the historical development and the philosophical foundations of property rights.

The concept of property rights started with some sense of ownership of food and personal possessions among nomadic people.  People had the idea of a superior moral claim to the apple they picked or the deer they killed or the clothes they made and wore compared to other people.  With the advent of the Agricultural Revolution people began to think they had a superior moral claim to the land they cultivated and the crops grown on this land, which was the beginning of the idea of property rights in land.  However, these were not real property rights, because the King or other political body almost always reserved the power to trample peoples’ property rights when it was politically expedient.  In the Middle Ages “property rights” were thought to reside ultimately in the King or the sovereign.  Legal realists still hold onto this idea.  During the Renaissance legal theorist worked on a rational basis for property rights, starting with Hugo Grotius in the early 1600s.  Adam Mossoff has written an excellent paper explaining the historical development of property rights theory including the major theories today, called What is Property? Putting the Pieces Back Together.[3]

After Grotiuss, John Locke continued the work of developing a rational theory of property rights.  Locke’s formulation is that anything in a state of nature (unowned) that someone makes useful, results in them having a property right in the item they made useful.  So if you shoot a deer you have property rights in the deer or if you plant olive trees on some ownerless land you have a property right in the land and the trees.  This is true according to Locke because you have an exclusive moral claim over yourself (body and mind) and anything you create value in gives you property rights in the item.  This is commonly summarized as having property rights in one’s self.

It is important to understand that all of law is based on property rights logically (and historically).  Some libertarians have tried to postulate systems where property rights are some sort of contract.  You cannot have a contract unless you have an exchange and you cannot exchange something you do not own.  You also need to have property rights over yourself to enter a contract.  Contract law presupposes property rights law and to reverse the process results in nonsense.  Tort law makes no sense without property rights.  If you do not own yourself or some property how can you claim to have been harmed.  This is true of all other areas of law also.

Property rights law was developed in common law countries and in the United States along Locke’s theoretical formulation for at least a century or more.  For instance, in the United States the Homestead Act (of 1862) provided that any adult who had not taken up arms against the U.S. could acquire 160 acres of land by farming and living on the land for five years.  The Act made the implicit assumption that the land was in a “state of nature” and that people could obtain property rights by making it more valuable.  This is almost an exact formulation of Locke’s theory of property rights, except that the land had to be surveyed first and the acquirer had to put in an application.

There are several interesting things about the Homestead Acts.  One is that they were first proposed before the U.S. Constitution was ratified and many other homestead acts were passed after the one in 1862.  The Homestead Act of 1862 was clearly passed as part of the politics of the Civil War in the U.S.  Another interesting point is the Homestead Act implies that land grants by Kings did not result in valid property rights.  For instance, the land grants to George Washington for his military service from the British Crown did not confer valid property rights in the land.  Washington had problems with squatters on this land, who seemed to understand that Washington’s property rights in this land were invalid since he did nothing to create value in the land.[4]

Another interesting thing about the Homestead Act is that the surveyed plats were separated by roads.  There were no taxes to create or maintain these roads, so they were un-owned land or land in which no one could have property rights in.  It is important to note that property rights in land that cannot be accessed make those rights meaningless.  An essential element of all property rights in land includes access to and from the land and the rest of the world.  This does not mean that the owner of the land cannot exclude people from their land, but it does mean that property rights in land cannot interfere with reasonable travel.  This is one of those questions in law where the philosophy lays out the general theory, but the law has to work out some practical realities in which there is no exact answer.  In the Homestead Act, they decided that roads had to exist around every square mile block of privately owned land (one mile grid).  This obviously would have to be modified sometimes for terrain and another distance or pattern for the roads could have been selected without violating the general principles.

It would also be an abridgement of people’s right to travel if property rights in land could imprison people.  People exercised the right to travel over land before there were any property rights in land.  Thus property rights in land that unduly impinge on the ability of travel violate other people’s rights.

It appears the Romans understood this.  In the twelve ancient Roman tablets that set out the law, tablet seven appears to require land owners to maintain the roads.  “1. Let them keep the road in order. If they have not paved it, a man may drive his team where he likes.”[5]  Table eight requires “Where a road runs in a straight line, it shall be eight feet, and where it curves, it shall be sixteen feet in width.”[6]  Tablet nine requires “When a man’s land lies adjacent to the highway, he can enclose it in any way that he chooses; but if he neglects to do so, any other person can drive an animal over the land wherever he pleases.”[7]  The Roman tablet eight also require space between buildings, “A space of two feet and a half must be left between neighboring buildings.”[8]  This last law could have been for travel or to keep fires from spreading through the city.  Unfortunately, there does not appear any commentary to let us know.

Some people have suggested that this ownerless land for roads in the Homesteading Act is inconsistent with Ayn Rand’s Objectivism: “Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”[9]  This mistake is based on a misunderstanding.  There is no such thing as property.  There are property rights and things in which people may have property rights.  In informal language we often use the shorthand property to refer to something in which we or other people have property rights.  Unfortunately, this shorthand results in confusion.  Correctly interpreted what Rand’s statement is saying is that governments cannot have property rights in land or anything else only people can.  What the government has is a custodial duty.  The government cannot have a moral claim to have made something useful, only individuals can do this.  Rand explained it this way with respect to the Homestead Act of 1862:

Thus, the government, in this case, was acting not as an owner but as the custodian of ownerless resources who defines objectively impartial rules by which potential owners may acquire them.[10]

Rand did not directly address the concept of property rights, however she laid out many of her ideas in two articles in Capitalism: The Unknown Ideal: 1) The Property Status of Airwaves, and 2) Patents and Copyrights.  Rand echoes Locke when she explains the origin of property rights, “Any material element or resource which, in order to become of use or value to men, requires the application of human knowledge and effort, should be private property—by the right of those who apply the knowledge and effort.”[11]  Rand is stating that because you made/created something valuable you have a moral claim to the item that is greater than other peoples’.  Rand’s main refinement over Locke is to make it clear that this includes mental effort (in a way Locke leaves more ambiguous), “thus the law establishes the property right of a mind to that which it has brought into existence.”[12]

One important point that should be clear from this discussion is that dead people cannot have property rights.  Property rights are a moral and legal relationship between a person and an item (tangible or intangible).  A related point is that when someone abandons their property rights by no longer making something useful, then it is ownerless again and therefore in a state of nature.  This means that someone else can come in and make the item productive again and therefore acquire property rights in the item.  This is a very complicated subject and covering it in even a cursory way could be a whole book, however I will point to some examples.  In common law there is something called adverse possession, which “is a situation when a person who does not have legal title to land (or real property) occupies the land without the permission of the legal owner” and gains legal title to the land.[13]  Another complicated situation where these principles come into play is when a person dies or estates law.  A dead person cannot have property rights in anything, so suddenly those items they had property rights in are ownerless.  Property rights in land do not go on forever as many people assume.  A detailed- discussion of this issue is beyond the scope of this article.

We have talked about how property rights arise, but not what they are.  Many people think that their property rights in their land are unlimited that they go up infinitely into the sky and down to the center of the Earth and they can do anything they want on their land.  Why do they think this?  Did they create value 500 feet below the surface of their land?  Did they create value 500 feet into the air above their land?  Of course not.  The property rights you obtain are related to the value you created.  The most common form of property rights is called “fee simple” in the law.  Fee simple allows you (ignoring building codes) to farm/ranch and have a house (building), run a business, etc. on your land.  It does not allow you to put a commercial hog sty on your farm next to your neighbor’s house.  This would violate nuisance laws, which ensure that you have reasonable enjoyment and use of your land.  On the other hand, you cannot buy a farm and then build a house next to your neighbor’s pig sty and then sue them for nuisance.

In addition, there are other groups of property rights such as mining rights, which come in two varieties, lode and placer.  Lode mineral rights are designed to ensure that the person who discovers a vein of say gold is the owner of the whole vein.  Otherwise it would be easy for other people to say they discovered the obvious other end of the vein and profit at the expense of the true discoverer of the vein.  These rights may not include any rights to the surface land above them, while a place type of mineral rights does.  There are also grazing rights, water rights, easements, trademark rights, property rights in chattel, copyrights, patent rights (inventions), trade secrets, etc.  All of these property rights are different and come with different rights of action and rules, based on the value that was created.

The property rights you obtain are related to the value you created

Property rights are not monolithic as many people seem to believe.  As Adam Mossoff explains in his paper, Why Intellectual Property Rights? A Lockean Justification:

As Locke first explained, property is fundamentally justified and defined by the nature of the value created and secured to its owner … To wit, different types of property rights are defined and secured differently under the law.

Some property rights come with the right to exclude, however grazing rights do not include a right to exclude unless the person is interfering unreasonably with the grazing rights owner’s ability to graze the land.  Even with “fee simple” ownership of land your right to exclude is limited to using reasonable means to exclude people who are interfering with you enjoyment and use of your land.  This means you cannot shoot someone for crossing your land.

Property rights are a vast and complex area of law of which this article just touches on.  Property rights are the most important area to securing our freedoms and all law starts with and builds on property rights.  The key philosophical foundations of property rights are:

Property rights is the foundation of all law

Property rights are a moral and legal claim to take action with respect to an object

Property rights arise when a person creates value

The rights obtained with property rights depend on the value created

– they are not monolithic.

Property rights are the foundation of all our freedoms and

much more important than the Constitution in securing our freedoms.

 

[1] The Economic Principles of America’s Founders: Property Rights, Free Markets, and Sound Money, Paul Ermine Potter and Dawn Tibbetts Potter, accessed 4/15/17,  http://www.heritage.org/political-process/report/the-economic-principles-americas-founders-property-rights-free-markets-and#_ftnref3

[2] Milton Friedman’s Property Rights Legacy, Forbes, Ken Blackwell, accessed 4/15/17 https://www.forbes.com/sites/realspin/2014/07/31/milton-friedmans-property-rights-legacy/#238d1416635d

[3] Mossoff, Adam, What is Property? Putting the Pieces Back Together. Arizona Law Review, Vol. 45, p. 371, 2003. Available at SSRN: https://ssrn.com/abstract=438780 or http://dx.doi.org/10.2139/ssrn.438780

[4] George Washington, Covenanter squatters, http://explorepahistory.com/hmarker.php?markerId=1-A-28F accessed April 30, 2017.

[5] http://www.historyguide.org/ancient/12tables.html, accessed May 7, 2017.

[6] http://www.constitution.org/sps/sps01_1.htm, accessed May 7, 2017

[7] http://www.constitution.org/sps/sps01_1.htm, accessed May 7, 2017

[8] http://www.constitution.org/sps/sps01_1.htm, accessed May 7, 2017

[9] “What Is Capitalism?”Capitalism: The Unknown Ideal, 19 Ayn Rand Lexicon, http://aynrandlexicon.com/lexicon/capitalism.html accessed May 7, 2017.

[10] Ayn Rand, Capitalism: The unknown Ideal, The Property Status of Airways, p. 132.

[11] Ayn Rand Lexicon, “The Property Status of the Airwaves,” Capitalism: The Unknown Ideal, 122

[12] Ayn Rand, Capitalism: The Unknown Ideal, Patents and Copyrights, p. 141.

[13] https://en.wikipedia.org/wiki/Adverse_possession, accessed May 7, 2017.

May 20, 2017 Posted by | -Legal, -History, Legal Philosophy | , , | Leave a comment

What’s Wrong with Patents Today?

A recent order by the Court of Appeals for the Federal Circuit (CAFC) summarizes everything that is wrong with patent law today (and perhaps the US generally).  The CAFC in an order in Cascades vs. Epson, Sony stated “there is no inconsistency in concluding that patent rights are property and that the source of that right is a public right conferred by federal statute”  A number of things should stand out in this statement, for instance the idea that a right is granted by a federal statute.  This means are rights come from government, not as the Declaration of Independence says that they are inalienable.  If rights come from our government, then they can be taken away by the government, which means they are not “rights” but grants.  This idea goes back to the Devine Right of Kings.  The American Revolution was fought over the idea that there is no such thing as the Devine Right of Kings.  However, in the United States today it is clear that the law does not apply to the government, just like it did not apply to the King, it only applies to private citizens.  For instance, see Hillary Clinton, the IRS, Eric Holder, the NSA, the EPA, and on and on and on.

The next thing that should strike you is the phrase “public right.”  What is a public right?  A right is a moral claim to take action and in which no one can morally stop them from taking that action.  Only individuals can take action.  A group all doing the same thing is just a group of individuals in which all of them are taking action.  This nonsense of a public right goes hand in hand with group identity politics, such as women’s rights, Black rights, gay right.

Patents are issued in the name of the inventor(s) not the company employing them, because they recognize that people create inventions not entities.  The inventors legally own the invention (patent) first and then they assign it to the company.  This clearly shows that inventions are owned by the individual(s) not the public.  What is a public right anyway?  Here is how Wikipedia explains a public right.

In America, public rights, as compared to private rights, belong to citizens but are vested in and vindicated by political entities. Public rights cannot be vindicated by private citizens. A right must normally be a private right to be vindicated in court.

A patent does not and never did fit this definition.  A patent is private right and the government is recognizing that right not creating it.  A patent is not like the “right” to a trial by jury, which is not really a right but a procedural guarantee and is still not a public right according to the definition from Wikipedia.

May 13, 2017 Posted by | -Law, News, Patents | , , | Leave a comment

Is Objectivism Compatible with Austrian Economics?

There have been a number of papers comparing Objectivism to Austrian Economics.  The motivation appears to be Rand’s relationship with Ludwig Von Mises, since both are known for advocating Laissez Faire Economics.  Most of these papers have focused on ethics, particularly whether the subjective theory of value in Austrian Economics (AE) is consistent with Objectivist ethics.  The majority of these papers have argued that AE (at least the Menger-Mises side) and Rand are actually very similar and compatible, but not all including Rand herself.  In order to arrive at these conclusions, the authors have often provided nuanced explanations of what the Austrians or Rand said.  For instance, Richard Johnsson argues:

It seems to be a well-established fact that there are similarities between Rand and Menger, despite the objectivist/subjectivist issue.  Once we concede that something can be intrinsic value, in Moore’s sense, I believe the differences between Austrian subjectivism and Rand’s Objectivism vanish.[i]

Roderick Long concludes in his paper, Praxeology: Who Needs It:

I have argued that the features of Misesian praxeology that Rand found most objectionable—its aprioristic methodology, its value subjectivism, and its claims about motivational psychology—can be reinterpreted in ways that make them congenial to Rand’s philosophical principles while still preserving the essential points that Mises was seeking to make. Hence there is no reason for those of a Randian philosophical bent to deprive themselves of the powerful methodological instrument developed by Mises and his fellow Austrians: praxeology, the a priori science of human action.[ii]

And Ed Younkins argues:

Objectivism’s Aristotelian perspective on the nature of man and the world and on the need to exercise one’s virtues can be viewed as complementary with the praxeology of Austrian economics.[iii]

Objectivists are generally more critical of the Hayek branch of AE.  For instance, David Kelley writes “if a defense of freedom depends on individualism, and individualism presupposes individuals capable of genuine self-direction, Hayek cannot successfully defend freedom.”[iv]  Ed Younkins says this about Hayek, “Hayek is primarily concerned with the nature, scope, limits, use, and abuse of reason in human life. For Hayek, a man’s knowledge of the world and himself is at best limited, incomplete, and uncertain.”[v]

This paper will focus primarily on the similarities and differences of the epistemology of various Austrian Economists (Menger, Mises, Hayek) and Rand.  Rand and the economists will be taken at their word.  Unlike many previous researchers, this paper will argue that the epistemological theories of Austrian Economists are incompatible with Objectivism and inconsistent with the science project of the Enlightenment.

 

Menger

Menger lays out his epistemology in his book Investigations into the Method of Social Sciences.[vi]  Lawrence H. White in the introduction to the book, explains.

Fortunately, Menger draws and even emphasizes a suitable distinction between the “realist-empirical orientation of theoretical research” and the “exact” orientation (p. 59). The search for so-called ,”exact laws” alone is more appropriately considered the task of purely theoretical research in economics. We can make sense of “exact laws” as theoretical propositions which (necessarily) take an “if-then” form: if conditions A and B hold, then condition C must also obtain. Menger rightly insists (pp. 70, 215) that realist-empirical generalizations (e.g., A and B are usually accompanied by C) can by their nature never attain the strictness that necessarily characterizes logical implications. The two sorts of “laws” are on different epistemological planes. So without too much dissent from Menger’s thought we may divide economic theory from economic history where he divided strict theory from what he considered an empirical sort of theory. What is empirical is really historical, and this accounts for its different status from what is deductive.[vii]

Lawrence H. White goes on to explain:

But this is not because, like some economists, he (Menger) sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science. [viii]

As a person who has a masters’ degree in physics and a BS in Electrical Engineering and has worked with scientists and engineers his whole life, I am unaware of any so-called theoretical side of chemistry or other natural science that is ‘non-empirical, non-falsifiable (“exact”)’ nor have I ever heard such an idea proposed by others.

Ed Younkins describes Menger’s epistemology as:

Menger distinguishes between the empirical-realistic orientation to theory and the exact orientation to theory (36–44). Whereas the empirical-realistic branch of economics studies the regularities in the succession and coexistence of real phenomena, the exact orientation studies the laws governing ideal economic phenomena. He explains that empirical-realistic theory is concerned with regularities in the coexistence and succession of phenomena discovered by observing actual types and typical relationships of phenomena. Empirical realistic theory is subject to exceptions and to change over time. Theoretical economics in its realistic orientation derives empirical laws that are valid only for the spatial and temporal relationships from which they were observed. Empirical laws can only be alleged to be true within a particular spatiotemporal domain. The realistic orientation can only lead to real types and to the particular. The study of individual or concrete phenomena in time and space is the realm of the historical sciences.[ix]

Younkins and White both seem to agree that according to Menger there is theoretical side of economics that is exact and cannot be tested empirically.  Menger argues there is also an empirical side of economics, which is not exact and subject to change over time.

Menger’s epistemology should be familiar as it is a restatement of the analytic-synthetic distinction.  “Analytic propositions are true by virtue of their meaning, while synthetic propositions are true by how their meaning relates to the world.”[x]  Not surprisingly the origin of this distinction can be found in Kant and comes from his metaphysics, in which he argues there is a noumenal and phenomenal realm.[xi]  The noumenal realm is a realm of pure ideas and phenomenal world is a realm where our senses are engaged.  This logically gives rise to an epistemological analytic-synthetic distinction.

Leonard Peikoff states, “The theory of the analytic-synthetic dichotomy presents men with the following choice: If your statement is proved, it says nothing about that which exists; if it is about existents, it cannot be proved.”  Menger seems to disagree with at least the analytic (theoretical) side.  Menger seems to argue that theoretical laws of economics can be derived by just thinking about them.  Somehow these theoretical laws can tell us something empirical about economics.  Whether that is true or not, it is not consistent with Objectivist epistemology and it is not science.  The philosophy of science is a complex topic especially now days when Karl Popper is supposed to be the foremost philosopher of science and the Copenhagen Interpretation of Quantum Mechanics appears to undermine objectivity and even the law of identity.   However, even these deviations in the philosophy of science do not suggest that science can be divorced from empirical evidence.

 

Mises

Mises’ epistemology is described in his praxeology, which is supposed to be the study of human action.  The Action Axiom is the fundamental starting point of praxeology and it states “that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.”[xii]  According to Mises the principles (axioms) “are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts.”[xiii]  Mises continues, “A fashionable tendency in contemporary philosophy is to deny the existence of any a priori knowledge. All human knowledge, it is contended, is derived from experience.”[xiv]

According to Long, Rand objected to this idea of a priori knowledge in her marginalia of her copy of Human Action.  “There is no ‘a priori’ knowledge,” Rand insisted in the margins; “[t]here is no knowledge not derived from experience” (Rand 1995a, 113–14).”[xv]

Long argues that Rand’s definition of axioms is the same as Mises’ a priori.  Long admits that Rand ultimately bases her axioms on reality while Mises does not, but relies on Rand’s explanation of an axiom as “a proposition that defeats its opponents by the fact that they have to accept it and use it in the process of any attempt to deny it.”[xvi]

According to praxeology the attempt to deny the action axiom necessarily means that you are acting towards a purpose.  While it might be true that the person arguing against the action axiom is taking action toward a goal, it is not true that a person having a seizure is taking ‘conscious actions toward chosen goals’.  A person in an abusive relationship suffering from ‘battered person syndrome’ is not engage din conscious actions toward chosen goals.  Advocates of praxeology might argue that the abused person feels responsible for the abuse they are suffering and therefore they are working toward the goal of relieving their guilt.  Any impartial observer would say that the abused person’s actions are not working toward relieving their guilt or getting out the abusive relationship.  In economics it is at least an open question whether the idea of unintended consequences fits the action axiom.  In that case the result obtained was not those the person(s) was striving for.

Note, Rand says that an axiom requires a person accept it in any attempt to deny it.  Arguing that person having a seizure is not engaged in conscious actions toward chosen goals, does not mean that they have accepted the action axiom.

Another part of Mises’ action axiom is, human action is necessarily always rational.  According to Mises, “the term ‘rational action’ is therefore pleonastic and must be rejected as such.  When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless.”[xvii]  Mises further states, “however one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”[xviii]

This is a clear contradiction between Rand and Mises on an epistemological and ethical level.  This is not a minor disagreement, but goes to the very fundamentals of Mises’ praxeology and Objectivism.  Long however argues that this is not the case.  “Mises of course did not mean that people always pursue the most rationally defensible ends (for Mises there are no such things) or even that, given their ends, people always choose the most rationally defensible means to their ends. In part, what he meant was simply that human action is purposeful.” [xix]  According to Long, when Mises says people always act rational, he means “in a manner appropriate to their situation in the way of actually seeing it that is constitutive of their action. And this is a claim that Rand has no reason to reject”[xx]

Rand defines reason as, “reason integrates man’s perceptions by means of forming abstractions or conceptions, thus raising man’s knowledge from the perceptual level, which he shares with animals, to the conceptual level, which he alone can reach.  The method which reason employs in this process is logic—and logic is the art of non-contradictory identification.”[xxi]  Thus for Rand to act rationally is to act in accordance with reason.  This does not include all purposeful actions.  Hitler acted purposively to kill off the Jews, but this action cannot be considered rational according to Rand.

All the massaging of what Rand and Mises meant cannot reconcile these two radically different positions.  While English was Mises’ second language, his ideas about praxeology were fundamental and Mises never retracted his statements or reinterpreted them and neither did Rand.  An informal review of video lectures by Austrian Economists shows that they take Mises at his word.  It is very dangerous to reinterpret what people are saying.

Mises is clear that praxeology is a type of philosophical rationalism.

“[Praxeology’s] cognition is purely formal and general without reference to the material content and particular features of the actual case. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.”  Mises, Human Action, p. 32

“All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given.” Mises, Human Action, p. 66

“Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.”  Murray N. Rothbard https://mises.org/library/praxeology-methodology-austrian-economics.

Philosophical rationalism is defined as “the doctrine that reason alone is a source of knowledge and is independent of experience.”[xxii]  Philosophical rationalism is commonly associated with Descartes and Spinoza.  Here is what Rand said about rationalism.

[Philosophers came to be divided] into two camps: those who claimed that man obtains his knowledge of the world by deducing it exclusively from concepts, which come from inside his head and are not derived from the perception of physical facts (the Rationalists)—and those who claimed that man obtains his knowledge from experience, which was held to mean: by direct perception of immediate facts, with no recourse to concepts (the Empiricists).[xxiii]

Mises’ epistemology is not science.  At a minimum science always requires that concepts (hypothesis) are checked against reality and reality is ultimate determiner of what is true.  William Thomas, Director of Programs at The Atlas Society, argues that Mises was not a philosophical rationalist and shows that some of the concepts Mises uses, such as money, can only be derived from experience.  This is another attempt to massage the words of Mises.  What this shows is that Mises’ praxeology and his ideas about money result in a logical contradiction.  Rand’s response from Atlas Shrugged might be “contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong.”

An interesting point is that Mises’ subjective theory of value is fundamental to his ideas on praxeology.  “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “[xxiv]  “However one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”[xxv]  As a result, it is impossible to separate the subjective theory of value from Mises praxeology.

George Reisman makes some important point about Mises’ contention that economics (science) should be value-free.

The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science. The leading historical illustration of the truth of these propositions is the case of Galileo and the moral outrage which all lovers of science and truth must feel against those who sought to silence him. [xxvi]

 

Hayek

F.A. Hayek’s epistemological ideas are contained in his ideas on “cultural evolution”.  Hayek was proud of his ideas on cultural evolution and considered them central to his ideas on economics.  “The theory (cultural evolution), of which Hayek himself was proud, is on all accounts central to his economic, social, and political project”[xxvii]

Cultural evolution is the idea that social institutions, such ethics, law, and economic systems are created by a non-rational evolutionary process.  “According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups.”[xxviii]

Bruce Caldwell describes cultural evolution as:

The term “cultural evolution” refers to the evolution of a tradition of learnt rules, norms, ethical precepts, and practices, “especially those dealing with several property, honesty, contract, exchange, trade, competition, gain, and privacy” (Hayek 1988:12). This cultural heritage emerged through “a process of winnowing and sifting, directed by the differential advantages gained by groups from practices adopted for some unknown and perhaps purely accidental reasons” (Hayek 1979:155). The traditions and institutions that resulted allowed the development of a vast extended order, one capable of sustaining huge increases in population, an order that would have been considered fantastical to earlier humans existing under more primitive conditions.[xxix]

According to Hayek, no individual is capable of using reason to determine which social institution will end up with the best result beforehand or why a particular set of social norms does work well.  Linda C. Raeder in Humantis makes this point and also points out that David Hume’s ideas entered the mainstream libertarian movement through Hayek.

“The picture of man as a being who, thanks to his reason, can rise above the values of civilization, in order to judge it from the outside . . . is an illusion.”  For Hayek, morals, values, and reason are entirely natural phenomena, evolutionary adaptations which have enabled man to survive and flourish in his particular kind of world.

Perhaps no other area of Burke’s and Hayek’s thought is as congruent as their understanding of the role of reason in human affairs; their views are so close as to suggest that Hayek’s thought on this issue is merely an elaboration, although quite an extensive one, of Burke’s theme. Hayek developed several of Burke’s most crucial insights: 1) the priority of social experience (or “tradition”) over reason; 2) the notion that inherited social institutions embody a “superindividual wisdom”  which transcends that available to the conscious reasoning mind; and 3) the impotence of reason to ‘design’ a viable social order.[xxx]

David Kelley elaborates on this point:

Hayek, by contrast, is a critic of what he calls ―constructive rationalism. His concept of rationalism is somewhat idiosyncratic, and is not equivalent to Rand‘s conception of reason. Nevertheless, it leads him to claim that ―no universally valid system of ethics can ever be known to us, which is obviously not consistent with her view. For Hayek, moral rules have a status lying ―between instinct and reason.

Is Hayek anti-reason?  It’s hard to say, however arguing that reason is fundamentally limited (as opposed to making a mistake) in understanding reality without any real evidence is an attack on reason itself.  Like Hume, Hayek cannot say reason is completely impotent, because what would be the point of writing.  Writing presumes some ability to reason.

Hayek’s case for freedom is based on the limits of reason.  In order for Hayek’s cultural evolution to work, you cannot substitute the decisions of a single leader (or small group) for those of the masses.  To do so undermines the evolutionary process.  As David Kelley explains:

This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.

Hayek does not think that reason can tell you how or why social institutions, including the law and ethics work.  This is totally inconsistent Rand’s ideas and undermines the very idea of science.

Interestingly, Hayek’s position on ‘the subjective theory or value’ is a fundamental part of his epistemology, just like Mises’.  His cultural evolution requires that we cannot formulate a rational ethics because that would undermine the evolutionary process.  As a result, every ethical system is subjective and therefore so is every law.  The most we can do is put our faith in the process and blindly hope our ethical and legal systems are better than they were in the past because of the evolutionary process of cultural evolution.

 

Economics vs. Philosophy

It is clear that Austrian Economics’ epistemological positions are incompatible with Objectivism and science more generally.  However it is entirely possible that despite this, Austrian Economics has achieved great things in economics.  For instance, David Kelley has shown that John Locke made a number of epistemological errors with respect to perception, in his book The Evidence of the Senses, and yet Locke’s ideas on Natural Rights are still profound and fundamentally sound.

In this case however, when Objectivists and Austrians are talking they are not even speaking the same language.  For instance, when Rand says she is for capitalism, she means “a social system based on the recognition of individual rights, including property rights”[xxxi]  By individual rights, Rand means a moral claim based on man’s nature and discovered using reason.  Austrians do not think that a rational ethics is possible.  As a result to Austrians, capitalism is an economic system that has low levels of governmental interference, based on some utilitarian criteria.  (You cannot live without an ethical system, so most Austrians default to utilitarianism)

When Objectivists talk about property rights, they mean an ethical claim to take action with respect to something, such as land.  This ethical claim is based on a rational, natural rights system.  When Austrians talk about “property rights”, they do not really mean a “right” in any way except a purely arbitrary legal claim.  Austrians argument for “property rights” is a purely utilitarian or historical argument (Hayek) that can be fudged to meet the utilitarian goal or historical precedence.

These differences result in real differences in economic policy.  Menger, for instance, advocated 1) public works constructed by the state such as roads, railways and canals, 2) government established agricultural and vocational training institutions, 3) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture, and 4) government intervention to stop child labour.[xxxii]           Hayek was in favor social security, some sort of government provided health care, emergency government assistance for natural disasters, and suggested that manipulating the money supply might be used to alleviate recessions/depressions.[xxxiii]

Even Ludwig Von Mises waffles on economic policies that are inconsistent with capitalism as an Objectivist would define it.

There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule.[xxxiv]

Note that Mises justification for fire regulations is based on utilitarianism, which Rand condemns as “’the greatest good for the greatest number’ is one of the most vicious slogans ever foisted on humanity.”[xxxv]

The Austrians sound a lot more like modern conservatives than capitalists.  When it is a government policy that Austrians are in favor of, they are quite happy to override peoples’ individual rights.  They just want these programs to be run more efficiently.  Austrians make a number of errors in their analysis of the economy also, however there is not time in this paper to take on these issues.

 

Conclusion

Austrians often argue that if you do not support the Austrian school of economics then which school (economists) do your support then, as if this was an election or a smorgasbord with a limited number of choice.  Science is a creative endeavor and we are not limited only the existing choices.

New Growth Economics’ central point is that wealth is created by the human mind.  This should be exciting to Objectivists, because that sounds very much like Ayn Rand.  It also points to an objective basis for economics.  Every human needs to acquire and consume a minimum number of calories or they die.[xxxvi]  This provides an objective standard that is very similar to Rand’s standard for her ethics.  It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.

Inventions are the result of applying man’s reasoning power to the objective problems of life.  The way we become wealthier is by increasing our level of technology.  I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.

All species are biologically designed to spend most of their existence on the edge of starvation.  The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.

[i] Richard C.B. Johnsson, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 317-335.

Subjectivism, Intricism, and Apriorism,:Rand Among the Austrians, Penn State University Press, http://www.jstor.org/stable/pdf/41560286.pdf.

[ii] Roderick D. Long, “Praxeology: Who Needs It JARS, http://praxeology.net/praxwho-x.pdf

[iii] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf

[iv] David Kelley, Rand versus Hayek on Abstraction,  Symposium: Rand and Hayek on Cognition and Trade, Reason Papers Vol. 33, https://reasonpapers.com/pdf/33/rp_33_1.pdf.

[v] Edward W. Younkins, The Road to Objective Economics: Hayek Takes a Wrong Turnhttp://rebirthofreason.com/Articles/Younkins/The_Road_to_Objective_Economics_Hayek_Takes_a_Wrong_Turn.shtml

[vi]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

[vii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xi.

[viii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf ,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xiii, Lawrence H. White.

[ix] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf

[x] Wikipedia, Analytic–Synthetic Distinction, Accessed  October 21, 2016, https://en.wikipedia.org/wiki/Analytic%E2%80%93synthetic_distinction.

[xi] Kant’s noumenal/phenomenal distinction is restatement of Plato, in which there is a realm of forms (ideas) and the imperfect world we live in.

[xii] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics

[xiii] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf

[xiv] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf

[xv] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 300, http://praxeology.net/praxwho-x.pdf

[xvi] Galt’s Speech,, For the New Intellectual, 155, http://aynrandlexicon.com/lexicon/axioms.html

[xvii] Ludwig Von Mises, Human Action, 1.I.32, http://www.econlib.org/library/Mises/HmA/msHmA1.html

[xviii] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational ,  What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.

[xix] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 309, http://praxeology.net/praxwho-x.pdf

[xx] Roderick D. Long, “Praxeology: Who Needs It JARS, p. 310, http://praxeology.net/praxwho-x.pdf

[xxi] “Faith and Force: The Destroyers of the Modern World,” Philosophy: Who Needs It, 62, http://aynrandlexicon.com/lexicon/reason.html.

[xxii] Dictionary.com, http://www.dictionary.com/browse/rationalism, accessed October 22, 2016.

[xxiii] “For the New Intellectual,” For the New Intellectual, 30, http://aynrandlexicon.com/lexicon/rationalism_vs_empiricism.html.

[xxiv] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics

[xxv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational ,  What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.

[xxvi] George Reisman, Capitalism: A Treatise on Economics, p. 36, http://www.capitalism.net/Capitalism/CAPITALISM_Internet.pdf.

[xxvii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.

[xxviii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.

[xxix] Bruce Caldwell , The Emergence of Hayek’s Ideas on Cultural Evolution, p. 6, http://www.gmu.edu/depts/rae/archives/VOL13_1_2000/caldwell.pdf.

[xxx] Linda C. Raeder, The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, HUMANITAS, Volume X, No. 1, 1997. National Humanities Institute,  http://www.nhinet.org/raeder.htm.

[xxxi] What Is Capitalism?” Capitalism: The Unknown Ideal, 19, http://aynrandlexicon.com/lexicon/capitalism.html.

[xxxii] Social Democracy For The 21st Century: A Realist Alternative To The Modern Left, http://socialdemocracy21stcentury.blogspot.mx/2012/08/rescuing-menger-from-austrians.html, accessed October 23, 2016.

[xxxiii] Nicholas  Wapshott,  Hayek on health care, social safety nets and public housing (quoting from Road to Serfdom) https://sites.google.com/site/wapshottkeyneshayek/hayek-on-health-care-social-safety-nets-and-public-housing  accessed October 23, 2016.

[xxxiv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 741, https://mises.org/sites/default/files/Human%20Action_3.pdf.

[xxxv] Textbook of Americanism,” The Ayn Rand Column, 90, http://aynrandlexicon.com/lexicon/utilitarianism.html.

[xxxvi] Calories make a convenient catch all for all human requirements including air, water, micronutrients etc.

May 10, 2017 Posted by | -Economics, philosophy, bioeconomics | , , , , , , | Leave a comment

Review of Intellectual Capitalism: Practical and Philosophical Aspects of Capitalism

This is the latest review of my book Intellectual Capitalism.

 

Author Dale Halling is an American patent lawyer interested in the practical and philosophical aspects of capitalism, specifically regarding the way in which human wealth is created.

The first part of this book covers Intellectual Capitalism. Halling reviews the most popular theories on economics (neoclassical, Keynesian, Austrian) and highlights the flaws and irrationality that he sees in each. Then he expands on his thesis that humans are different than other living creatures because humans can invent ways to survive by changing their environment while other living creatures must adapt to the given environment through evolution. The book covers fiat money, legal tender laws, fractional reserve banking, and central banking with a goal o identifying the source of real per capita increase in wealth.

The second part of this book is Halling’s 2014 book “The Source of Economic Growth.” I reviewed that book separately.

The third part of this book is a collection of essays comparing and critiquing the ideas of Menger, Mises, Hayek, Rand, Locke, Schumpeter, Hume, Aristotle, Friedman, Smith, and others, making distinctions between ideas based on science versus pseudo-science.

I highly recommend this book to people interested in the subject matter, but be aware the book is technical and not for mainstream readers. The author’s thinking is clear and well explained in a direct and to-the-point style. Some of the ideas are outside of what people might read in mainstream economics textbooks and therefore of interest to economists.

March 20, 2017 Posted by | reviews | | Leave a comment

The Law: Foundations

Laws are the implementation of political philosophy and political philosophy is a subset of ethics.  If a country’s political philosophy is a monarchy then the law will be whatever the king (queen) says it is.  If a country’s political philosophy is a theocracy then the law will try to implement the ideas embodied in the Bible or Koran or other holy book.  If the political philosophy is democracy, then the law will be whatever the majority votes into law.

The underlying political philosophy of this post is Natural Rights (individual rights) as explained by Rand and Locke.  This does not automatically lead to a constitutional republic or a parliamentary monarchy, however it says that the law is based on reason and can be found using reason.  When people base law on reason it is called natural law.  A subset of natural law is natural rights theory as articulated by John Locke and Ayn Rand.  Locke’s ideas on natural rights were highly influential on the Founding Fathers and the common law generally.  Locke’s influence on the common law was through William Blackstone’s Commentaries on the Laws of England, where he mentions Locke a number of times.

 In the United States today and most common law countries there are two or three major competing political philosophies.  The United States was founded on Natural Rights political philosophy, however the dominate political philosophy today is socialism or democracy.  As a result, the law is a confused set of overlapping and contradictory rules.  Socialist political philosophy is not based on reason and individual rights, but on the “rights” of groups, equality of outcome, and most importantly the idea that the state is king (or god).  Conservative political philosophy is not based in reason or Natural Rights either, however conservatives may support some Natural Right’s positions based on historical reasons.

When people hold different political philosophies they will interpret the same laws in different ways as we see with the United States Supreme Court.  The U.S. Constitution was written with the assumption of Natural Rights and when socialists (confusingly caused liberals in the U.S.) interpret the Constitution they come to absurd conclusions.  For instance, in 381 U.S. 479 Griswold v. Connecticut (No. 496), Justice Stewart and Justice Black stated in a dissent that the ninth amendment was a truism.

The Ninth Amendment, like its companion, the Tenth, which this Court held “states but a truism that all is retained which has not been surrendered,” United States v. Darby, 312 U.S. 100, 124

If the ninth amendment is a truism then why was it written down in the Bill of Rights?  Only a socialist could come to this conclusion.

The ninth amendment states:

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Under the proper natural rights interpretation of the Constitution, the ninth amendment means that all natural rights are protected under the Constitution.  For instance, the right to self defense (immediate) is not mentioned in the Constitution, but would be included in the ninth amendment.  The right to work would be another right under the ninth amendment.  However this would not mean that someone has to give you a job, it would mean the government cannot require licenses, fees, or other impediments to peoples’ effort to do work.

Conservative justices are no better.  A standard cry of the conservatives is something along the line of where is “such and such” a right stated in the constitution.  Think abortion or privacy or healthcare.

In the law the word “right” has many meanings and therefore can be confusing.  A proper right is something that logically follows (directly) from the idea that you own yourself and is a moral and legal claim that a person can undertake certain actions.  For instance, since you own yourself you own those things that you create, which is the basis of property rights.

Many people are uncomfortable with the idea of self-ownership or self-sovereignty, however both Rand’s and Locke’s (and the Founding Fathers) political philosophy incorporates this concept.  Both provide differing arguments for this and I think Rand’s is superior but both are better than the arguments against them.  Note that while Locke invokes god, he also bases his argument in reason.  Thus he does not rely on god.

 

1) Self-ownership is the concept of having moral and legal exclusive control over your own body and life.

2) Rand and Objectivism argue that each person has exclusive control over their body and life.

3) Therefore Objectivism is a philosophy of Self-Ownership.[1]

 

This is a simple syllogism and does not lead to the idea of slavery.  The right of self-ownership is inalienable and logically you cannot create a valid contract to sell yourself.  A contract is a legally binding agreement between two parties.  Since a slave cannot enforce a contract against their owner the contract would be invalid.

The opposite of self-ownership is that someone else has the legal and moral right to control your body and life, in other words, slavery.

Why do we need the law?  Many anarchists argue we do not need laws, although they almost always fall back on contracts, which is law.  Rand and Locke advance the same reason for the law.  In a civil society with a proper government, the law is there to protect our individual rights and in return we give up the right to delayed retaliatory justice.  “A government is the means of placing the retaliatory use of physical force under objective control—i.e., under objectively defined laws.”[2]

All law starts with property rights law.[3]  Your property rights exist before and separate from governments.  You cannot have contract law unless you have property rights in something to trade and property rights in yourself, so you have the authority to enter into a contract.  You cannot have tort law without first having property rights in yourself or what would be the basis for complaining you or your objects you have property rights in have been harmed.  The same is true of criminal law, estates, and all areas of law.  Property rights law is foundational and the most important area of law in protecting all your rights.  It is much more important than Constitutional law and the Founders recognized this.

 

“No other rights are safe where property is not safe.” – Daniel Webster

“No power on earth has a right to take our property from us without our consent.” – John Jay

Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government which impartially secures to every man whatever is his own. – James Madison, Essay on Property, 1792

 

Ayn Rand also considered property rights law as being the most important in securing man’s rights.

 

Without property rights, no other rights are possible.

“Man’s Rights,” The Virtue of Selfishness, 94, http://aynrandlexicon.com/lexicon/property_rights.html

 

There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life. … —and the right to property is their only implementation.

“Man’s Rights,” The Virtue of Selfishness, 93 http://aynrandlexicon.com/lexicon/individual_rights.html

 

The law is the implementation of political philosophy.  Natural law and specifically Natural Rights is based on reason.  Thus a reason based approach to law will be based in Natural Rights.  Under Natural Rights all rights are derived from the idea of self-ownership – that is property rights in one’s self.  As a result, all law and rights theory starts with property rights law

 

 

 

____________________________

[1] Money rests on the axiom that every man is the owner of his mind and his effort. (For the New Intellectual, p. 89.

 

“What greater wealth is there than to own your life and spend it on growing?”–Ellis Wyatt, Atlas Shrugged, Pt. 3 of book.

 

“For centuries, the battle of morality was fought between those who claimed that your life belongs to God and those who claimed that it belongs to your neighbors — between those who preached that the good is self-sacrifice for the sake of ghosts in heaven and those who preached that the good is self-sacrifice for the sake of incompetents on earth. And no one came to say that your life belongs to you and that the good is to live it.”–John Galt, Atlas Shrugged, http://aynrandlexicon.com/lexicon/good,_the.html

 

“There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life.”  Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 93

 

Without property rights, no other rights are possible.            Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 94

 

[2] Ayn Rand Lexicon, The Nature of Government,” The Virtue of Selfishness, 109.

[3] There is no such thing as property.  You have property rights in things.  When we say something is property we are using short hand.  For instance, you have property rights in land, but land is not property.  As a result, I call it “property rights law” not “property law”.

March 18, 2017 Posted by | Legal Philosophy | 4 Comments

Intellectual Capitalism – My New Book on Economics

Intellectual Capitalism: An Objective Scientific Approach to Economics

This book is about the science of economics that occurs by asking the question:

What is the Source of Real per Capita Increases in Wealth?

and following the scientific evidence to its logical conclusion.  The book is divided into three parts.  The first part explains the economic science that results from answering the question above.  The second part is a copy of my book the Source of Economic Growth, which answers the questions of book-coverwhat causes real per capita increases in wealth and what caused the Industrial Revolution.  The third part is a series of essays on various topics in economics.

 

This book challenges many of the assumptions of free market economists that argue that economics is a social science.  It is first school of economics that is consistent with Objectivism and the founding principles of the United States of America

March 2, 2017 Posted by | News | , , , , | 2 Comments

The Greenhouse Effect does Not Exist: The Scientific Fallacy Underlying the Whole Anthropomorphic Global Warming Story

Anthropomorphic Global Warming (AGW) is based on the greenhouse effect.  Here is how the greenhouse effect is explained.  The Earth is modeled as a blackbody.  A blackbody is an object that absorbs all the radiation that impinges on it and does not reflect any light.  Such a body in thermal equilibrium will emit what is called blackbody radiation.  The Stefan–Boltzmann law can be used to determine the temperature of a blackbody.  Specifically it states that the power emitted per unit area of the surface of a black body is directly proportional to the fourth power of its absolute temperature.

I = σT4 or rearranged  T = (I/σ)1/4

I is in watts per meter squared

T is the temperature in Kelvin

σ is the Stefan-Boltzmann constant (5.670367(13)×10−8 W⋅m−2⋅K−4)

here is website that will do the calculation for you http://byjus.com/stefan-boltzmann-law-calculator/

 

The greenhouse effect then assumes that Earth is in thermal equilibrium with the Sun and therefore the total radiative (electromagnetic) energy received from the Sun less what is reflected must equal the blackbody radiation from the Earth.  The greenhouse effect hypothesis recognizes that the Earth only receives solar energy over half its surface, however it radiates over its whole surface area.  Because of this the greenhouse effect hypothesis spreads the solar radiation over the whole surface of the Earth.

I = Is x πR2/(4πR2) = 343 W/m2

                                Is – is the solar radiation hitting the Earth and is 1370 W/m2

                                R is the radius of the Earth in meters

 

Since clouds, the atmosphere, and the ground reflect some of the light, which is called albedo, this Intensity level is further reduced by 30% or 240 W/m2.  This intensity is put into the Stefan-Boltzman equation and returns a temperature of 255°K, which is negative -18°C or about 0° Fahrenheit.  Based on this analysis it is clear that something else must be happening, because the Earth’s average temperature[1] is around 16°C (60° F).  This makes a very convincing argument for some sort of greenhouse effect.  After all we have all walked into a greenhouse on a cold day and noticed how much warmer it is than the outside temperature.

According to the greenhouse effect the reason Earth is at 16°C instead of -18°C is because of the heat absorbing components of our atmosphere.  These greenhouse gases reflect the infrared light emitted from the Earth, thus trapping this extra energy.

greenhouseeffect

 

Or here is a more technical diagram.

 

ghemath

If you want to see the math associated with this model, you can find it in Chapter 7.3 of Introduction to Atmospheric Chemistry, by Daniel J. Jacob, Princeton University Press, 1999.

Without this greenhouse effect the Earth would be very cold according to its advocates.  I have to admit that I found these arguments convincing.

Before I explain the errors in the above analysis, here is something that should cast a little doubt that the above analysis makes sense.  The moon is about the same distance from the Sun as Earth and its temperature varies from 106°C during the day to -173°C during the night.  Note that there appears to be some variation of opinion on the temperatures of the moon, but 106°C appears to be on the low side.  Since the moon is essentially the same distance from the Sun the solar irradiance (energy) is about the same as the Earth receives.  The moon has essentially no atmosphere, its atmospheric pressure is around 3×10−15 atm, which means it has an atmospheric pressure that is around a 1000 trillion times less than Earth.  Since the moon has almost no atmosphere there is nothing on the moon to trap the blackbody radiation from the surface of the moon and therefor the moon’s temperature ought to be close to the -18°C that is calculated by the greenhouse effect for Earth with a small variation for having a different albedo.  If we assumed that the moon was perfect black body, using the greenhouse effect method of calculating the surface temperature, the moon’s surface temperature would be about 5°C.  Way off from the observed 106°C or higher.

The empirically data from the moon shows that something is awry with the greenhouse explanation for the temperature of Earth.  The first mistake in the greenhouse explanation is spreading the solar radiation over the whole surface of the Earth.

I = Is x πR2/(4πR2)

The Earth does radiate out over its whole surface and the total energy of electromagnetic emissions from the Earth has to equal the total energy of the electromagnetic emissions absorbed by the Earth or its temperature would be increasing (decreasing).  None of this justifies setting the emissions equal to each other over the whole Earth.  On the sunny side of the Earth it absorbs net energy and on the dark side of the Earth it emits net energy.  This is why the night time temperatures are lower than the day time temperatures.  The greenhouse model assumes that the temperature of the Earth is uniform (same during the day and night).  This mistake also occurs because the greenhouse hypothesis assumes Earth is in thermal equilibrium with the Sun which is a condition for the blackbody radiation calculations.  Again this would require the Earth surface to have a uniform temperature (day, night, poles, equator), which is clearly nonsense.

The second big mistake of the greenhouse effect analysis is misunderstanding heat transfer.  “The direction of heat transfer is from a region of high temperature to another region of lower temperature.”[2]  “The three fundamental modes of heat transfer are conduction, convection and radiation. Heat transfer, the flow of energy in the form of heat, is a process by which a system’s internal energy is changed.”[3]  According to the greenhouse effect analysis, somehow the cold atmosphere is warming up the hotter surface of the Earth, which violates the second law of thermodynamics.  The atmosphere near the Earth gets colder with altitude.  It does not exceed the Earth’s temperature until the troposphere at about 75,000 feet altitude.  Any radiative heating from the troposphere would have to get through the denser atmosphere that according to the greenhouse effect are good at absorbing the long wavelength light that is supposed to be heating up the Earth’s surface.  The advocates of the greenhouse effect never really explain the fine details of how this could occur.

There are three main mechanisms of heat transfer: conduction, convection and radiation.  Radiation is mainly important only “for very hot objects, or for objects with a large temperature difference.”[4]  Neither of these is true for the atmosphere and the Earth’s surface.  In addition, the atmosphere is gas, which allows for easy convention and therefore convention is likely the dominate heat transfer mechanism between the Earth’s surface and the atmosphere.  This is what causes high pressure and low pressure systems and most of our weather.  Another point just glossed over by the greenhouse effect analysis.

So how does the atmosphere effect Earth’s surface temperature?

Compared to the moon, which has a mean daytime temperature of 123C and mean nighttime temperature of -233C [a diurnal range of 356C!], the presence of Earth’s atmosphere serves to greatly cool during the day and retain warmth during the night to reduce the diurnal temperature range to only ~11C.[5]

The atmosphere acts to slow the warming during the day and slow the cooling during the day.  The atmosphere acts like an imperfect heat reservoir or heat bath, absorbing excess heat from the Earth’s surface during the day and releasing excess heat in the atmosphere during the night.[6]

Without the greenhouse effect the whole Anthropomorphic Global Warming hypothesis falls apart.  Since a cold object cannot transfer heat to a hotter object, there can be no net radiative energy from the atmosphere that heats up the Earth’s surface.  Thus it is irrelevant whether the gases in the atmosphere are good at absorbing infrared wavelengths of light.

The effect of increasing CO2 levels in the atmosphere on temperature is so trivial as to be immeasurable.  CO2 makes up about 0.04% or 400 parts per million (PPM), which is trivial and does not add to the heat reservoir of the atmosphere.

 

     * There is no greenhouse effect

      * Without the greenhouse effect Anthropomorphic Global Warming cannot Exist.

 

[1] Actually, the term “Earth’s average Temperature” makes no sense.  Do you just add up the temperature readings around the world and divide by the number of readings?  Most temperature readings are in the Northern Hemisphere and almost none are at the poles.  Perhaps with Satellite readings you can make more sense of this term, but you still have the correctly weighting the temperature by the area or volume that it applies to.

[2] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[3] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[4] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[5] Why can’t radiation from a cold body make a hot body hotter?, http://hockeyschtick.blogspot.mx/2014/11/why-cant-radiation-from-cold-body-make.html, accessed January 24, 2017.

[6] https://en.wikipedia.org/wiki/Thermal_reservoir, accessed January 27, 2017.

February 5, 2017 Posted by | physics | , , , , | 2 Comments

How Central Banks Create Inflation (Intellectual Capitalism Part 4)

This article continues from where my article Money and Banking ended.

Central Banks like the Federal Reserve in the United States are different than commercial fractional reserve banks.   As explained in the article A Brief History of Central Banks on the Federal Reserve Bank of Cleveland’s website,

A central bank is the term used to describe the authority responsible for policies that affect a country’s supply of money and credit. More specifically, a central bank uses its tools of monetary policy—open market operations, discount window lending, changes in reserve requirements—to affect short-term interest rates and the monetary base (currency held by the public plus bank reserves) and to achieve important policy goals.[1]

Unfortunately, this definition misses that fact that central banks are monopolies and therefore not part of capitalism (free market).

A central bank, or monetary authority, is a monopolized and often nationalized institution given privileged control over the production and distribution of money and credit. In modern economies, the central bank is responsible for the formulation of monetary policy and the regulation of member banks.[2]

According to this definition a central bank has control over “printing” the national currency, which in the modern world can be done by just a computer entry.  If you look into the Federal Reserve of the United States you will find that they have control over printing paper money, while the Treasury has control over minting coins.  However most currency today is just a computer entry and here the answers get even more obscure.  The best answer is that direct money creation is a dance between Congress, the Treasury, and the Federal Reserve.  Everything becomes convoluted when a central bank is added into the equation and so far we have only discussed direct creation of currency not open market operations, discount window lending, and changes in reserve requirements.  I think politicians and central banks, not to mention the largest banks and brokerages, like this obscurity.

In order to make this less obscure I will analyze each “tool” of a central bank separately.  In addition, we are going to analyze the direct money creation issue through the lens of Modern Monetary Theory (MMT).  One reason to look at MMT it is how most central bankers see the world, which is illuminating.  It also points out some uncomfortable truths and exposes some of the Keynesian nonsense.  Wikipedia explains MMT as:

Modern Monetary Theory (MMT or Modern Money Theory, also known as Neo-Chartalism) is a macroeconomic theory which describes and analyses modern economies in which the national currency is fiat money, established and created by the government. The key insight of MMT is that “monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay”.[3]

This quote is very revealing, especially the idea that “the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors.”  At the beginning of this series I pointed out that when money enters the equation in economics, people think magic happens and logic disappears.  The MMT people think they can create wealth by manipulating money.  The MMT advocates believe money and banking allow for good magic and Austrian Economics argues that money and banking are bad magic (meaning it destroys wealth). econgrowth.small

This is why I wrote my book on The Source of Economic Growth, which shows that increases in real per capita wealth are created by applying our reason to the objective problems of life – in other words by inventing and increasing our level of technology.  Money is not wealth, as I showed earlier in this series.  Money and banking are mainly a lubricant for the economy.  Of course real inventions in money and banking do increase our per capita wealth, such as cryptocurrencies might do if the governments (central banks) of the world would get out the way.  Cryptocurrencies hold the promise of significantly reducing the cost of transferring money around the world.

Modern Monetary Theory is correct that the government cannot run out of money if has legal tender laws, but that does not mean that “the government has an unlimited capacity to pay for the things it wishes.”  The Gross Domestic Product (GDP) of the United States in 2016 was around $17 trillion.[4]  If the government decides to spend $20 trillion of wealth and continues to spend more than the total output of wealth of the United States, then the Unites States will go bankrupt.  The ability to print (create) more money will not matter.  Venezuela has a central bank, but it has not saved Venezuela or allowed its government “to pay for the things it wishes.”  The expected inflation rate in 2017 for Venezuela is 1,660% according to the IMF (International Monetary Fund) and its GDP fell 15% in 2016.  It also did not save the Weimar Republic which had a central bank, and it did not provide the government an unlimited capacity to pay for the things it wishes.  The MMT’s answer to the Weimar Republic is that they were forced to repay their war debts in gold.  According to MMT governments with a central bank and legal tender can be infinitely wealthy, which is clearly absurd.

The problem with MMT is it confuses money with wealth.  This is similar to how Keynesians reverse cause and effect, by arguing wealth is created by spending (consumption).  The ideas underlying MMT were proposed by John Law, who created the Mississippi Company in France in the early 1700s and almost bankrupt the whole country.[5]  It is a fascinating story, but beyond the scope of this article.

According to MMT the government creates money by spending.  As this article, Why a Central Bank Can Never Run Out of Money, explains:

The U.S. government spends it currency into existence. This is important, too. The government spends first and then collects taxes. (Logically, this is how it began, or else how would people get the money to pay taxes?) Taxes are what give the dollar value. As Alfred Mitchell-Innes, a diplomat and credit theorist, once put it: “A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it.”

According to this statement then increasing spending causes inflation, while increases in taxes cause deflation.  In the United States the Democrats (socialists) always want to increase spending and taxes, which cancel each other out according to MMT.  Republicans (conservatives) want to reduce spending and taxes which would also cancel each other out by this theory.  This analysis again confuses money with wealth and it ignores debt financing.

Another amazing thing about this statement is that if you or I “spent money into existence” it would be called counterfeiting and would be considered theft.  Somehow when the government does this, it is okay and according to MMT stimulates the economy (creates wealth).

The parenthetical comment “else how would people get the money to pay taxes?” is easily refuted by history.  People in the United States paid taxes, before the United States government had any legal tender.  As a result, there was no way for the government to spend before it collected taxes.  Even a cursory review of history provides numerous other examples, including early man in which there was no formal government.  In addition, my earlier article on Banking shows that banks create money when they create loans, which any MMT advocate should know.

I cannot make any sense of the final statement that the value of a dollar is created because of the tax necessary to redeem it.  This statement could only make sense to a totalitarian.  Totalitarians believe that when the government spends money it gives up some of its power and when it taxes and redeems the money it redeems this power.

This article explains the mechanism by which money is created as:

The Treasury spends dollars into existence through the central bank. The central bank credits the accounts of banks, and banks credit whoever is getting paid. Taxes reverse the process. Banks then debit accounts, and the central bank debits the banks. The government cannot run out of credits.

Note that no liability is created by the government in this direct money creation and no one is paying interest on this money, just like no one pays interest when money is printed.  There is a myth that all money in the United States (most modern countries) is created by a loan and that we have to pay the banks interest on all money created.  This is incorrect, the money created by this direct money creation process is not a loan and no one pays interest to have this money.

This process of money creation is only possible because the government has legal tender laws.  In my earlier article on Banking, I pointed out that legal tender laws were necessary for the government counterfeit money.  Since a central bank is tasked with controlling the money supply they require legal tender laws.  One of the fastest ways to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

In theory Congress has to first authorize spending first.  However, in the United States we are not allowed to audit the Federal Reserve.  Thus it is possible even likely that the Federal Reserve creates money (direct money creation as opposed to a loan) and no one knows about it.  For instance, the Federal Reserve admitted that it could not account for $9 trillion of off-balance sheet transactions.[6]  While these may have been loans (we don’t know because we cannot audit the Federal Reserve), it shows how easy it would be for the Federal Reserve (or Treasury) to just credit someone’s bank account without anyone knowing.  Of course, I have no evidence of this, because we cannot audit the Fed, but human history would be on my side.

 

“Simple Inflation” under a Central Bank

In my earlier article on Banking and Inflation I defined simple inflation as that which occurs because of printing money or debasing the currency.  This direct creation of money function the same as these processes.  The amount of direct money created is equal to the total amount of money spent by the government, less the amount of taxes received, and less the amount of money borrowed by the government.  When a government resorts to direct money creation to pay for a large part of their operations, it results in rapidly increasing inflation rates.  Venezuela is the most blatant example today.

 

What we have learned:

  *Central banks do not arise in a free market (capitalism) they are a distortion of the free market.

            *Central banks require legal tender laws in order to fulfill their mission of controlling the money supply.

            *The amount the government spends less the amount it taxes and borrows is the amount of money created by the government (government counterfeiting), which results in simple inflation.

            *Modern Monetary Theory confuses money with wealth.

            *The fastest way to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

 

Discount Window Lending

When most people think about the Federal Reserve (the central bank in United States) they immediately think about interest rates.  The Federal Reserve mainly affects interest rates in the United States by it setting of the Federal Funds Rate and by the Discount Rate.  The Federal Funds Rate is set by the Federal Reserve and is the interest rate at which banks lend reserve balances to each other.  The Discount Rate is the interest rate that the Federal Reserve charges banks to borrow from the Federal Reserve.  Both of these are related to the Federal Reserve’s function as a lender of last resort and are intended to prevent a “run on a bank.”

A run on bank is when a bank does not have enough cash (species) on hand to meet its customers demand.  This can occur to a sound bank and just represents a cash flow issue or it can be the result of a legitimate lack of solvency and confidence in the bank.  One of the main justifications for creating the Federal Reserve was to reduce the frequency of this occurring.  The empirical evidence is a mixed on this issue.  The Federal Reserve was created before the Great Depression and there were huge numbers of bank failures then.  However, the number of runs on banks and the number of bank failures where depositors lost money have probably decreased in frequency since the Great Depression.

When the Federal Reserve changes the Federal Funds Rate or the Discount Rate, which they usually change at the same time, it affects the interest rates that banks charge.  If the Federal Reserve increases either or both of these interest rates it usually causes banks to increase the interest rates they charge customers.  Generally the goal of raising interest rates is to reduce the number of loans banks are making and thereby decrease the money supply or slow its growth.  The opposite is true when the Federal Reserve lowers interest rates.  Thus it is normally considered inflationary when interest rates are lowered and deflationary when interest rates are raised.  Unfortunately, the empirical evidence is a bit murky on this issue.  For instance, interest rates were very low during the Great Depression in the United States and the money supply was shrinking.[7]  Milton Friedman and Anna Jacobson Schwartz argued that the Federal Reserve failed to fulfill their responsibility of lender of last resort.[8]

Since there appears to be some contradiction between the empirical data and the theory let’s examine this issue more closely.  When the Federal Reserve increases interest rates above the free market rate the result is that some projects that would have made economic sense to fund with a loan no longer are.  As a result fewer loans will be imitated by banks than would have been the case if interest rates were at the free market rate (the free market rate is the interest rate that banks would charge if there was no central bank).  This will reduce the money supply.  However this is a transient effect.  Once the economy has adjusted to the new interest rates loans will be created at this new lower rate.  At this point it is likely the money supply will grow (shrink) roughly at the same rate as the economy, as I explained in my earlier article on Banking.  If the Federal Reserve raises interest rates too far above the free market rate it can cause a nationwide liquidity crises, which will destroy some wealth that was or would have been created.  The government can destroy wealth, but it cannot create wealth only redistribute it.

If the Federal Reserve sets the interest rate lower than the free market rate but not too low, then more projects that would have not made economic sense to fund with a loan now are.  This results in a one-time increase the money supply and after that it the money supply should grow at about the same rate as the economy.  As a result, lowering the interest rate below the free market rate, but not too low, will result in a one-time increase in the money supply.

If a central bank lowers the interest rates too low, banks will refuse to initiate loans.  How low?  Well if the interest rate that banks can charge to commercial customers is the same as they can get on Treasuries, then the banks are not compensated for the risk and expense of initiating a commercial loan.  Banks need to be able to charge interest rates to their commercial customers that compensates for the extra risk and expense involve over supposedly safe investments like Treasuries (government bonds).  As a result, when interest rates are set too low by the central bank it results in a contraction of the money supply.

This shows that low interest rates (lower than free market rates) are not the cause of long term inflation and if the interest rate is too low it can be deflationary.  This is likely what has been happening in Japan since the 1990s and happened in United States during the Great Depression.  Other government policies can also effect how the economy behaves, which makes it hard to nail down the exact effect of the central banks policies.  For instance, Friedman and Schwartz seemed to blame the Federal Reserve for everything that happened in the Great Depression, however it is clear that other anti-free market policies by Roosevelt and Hoover before him also contributed significantly to the Great Depression.

Central banks can also change the number of loans that are initiated by changing the reserve ratio requirement.

The commercial bank’s reserves normally consist of cash owned by the bank and stored physically in the bank vault (vault cash), plus the amount of the commercial bank’s balance in that bank’s account with the central bank.[9]

However, this also should have a one-time effect on the money supply.  The result is that long term inflation is not caused by a central bank’s interest rate policy.  A central bank’s failure to act as a lender of last resort may cause an extended period of deflation however.

 

Open Market Operations

Another tool of central banks is open market operations where the bank goes into the market and sells or buys securities, usually bonds.  When a central bank buys securities it increases the money supply.  This operation involves the central bank creating money (a computer entry without any associated liability) and then buying the securities, which puts money into the economy.  As those bonds (normally the central bank buys bonds) are paid off it decreases the money supply.  As a result, buying securities results in a one-time increase in inflation that is removed as the bond is paid back.  Of course the central bank can continue to buy bonds if it wants to continue to inflate.

Alternatively, the central bank can sell securities, which results in a decrease in the money supply as private parties trade cash for the security.  As the private parties receive payments from the securities (if they are bonds) the money is reintroduced into the economy.  Each purchase by the central bank is a one-time decrease in the money supply (assuming the security is a bond) that is removed over time as the bond is paid back.

Both of the scenarios above assume that the central bank is buying or selling bonds (or other securities) at their free market rate.  If the central bank over pays for a bond the amount that it overpays for the bond is a direct creation of money and is not redeemed as the bond is paid off.

When the bond is a government bond (national) and the central bank agrees to purchase the bond at a lower interest rate than the free market rate, then this results in the direct creation of money equal to the difference in the required payments in a free market verses what the government actually pays.  This is clearly inflationary and very subtle.

When a central bank starts buying a significant percentage of the government bonds when issued, the most likely reason is that private buyers are not willing to purchase the bonds at the price (interest rate) the government wants to sell them at.  This is one of the surest signs that the central bank is creating large amounts of money to finance the government.  However, it is very subtle.  It is very hard to calculate how much money has been directly created.  If the central bank buys the government bonds near their real cost and requires payments based on tax receipts, then the amount of inflation is very small or not at all.  The central bank can just quietly retire these bonds and then the inflation is huge.  Since in the United States we cannot audit the Federal Reserve we have very little idea of what is really happening.  Inflation caused by open market operations and interest rate targeting are subtle and hard to detect and I call the inflation caused by these operations “complex inflation.”  Central banks and the legal tender laws they depend are designed to obscure what the government and central bank are doing.  This allows for all sorts of mischief and inside deals.

Attempts to measure money creation, M0-M4, do not differentiate between these mechanisms and therefore are poor at predicting inflation.

How many companies did the Federal Reserve bail out in 2008?  Did these companies really pay back these loans?  We know for sure that banks were allowed to “borrow” huge sums money from the Federal Reserve at near zero interest rates and then “invest” this money in Treasuries.  This was just a complex way of hiding the fact that the Federal Reserve created (printed) money and gave it to these banks.  The procedure was obscure enough that most Americans would either not understand what was happening or would get bored when someone explained it to them.  However, the money created was paid for by (really stolen from) all those Americans (and people forced to use US dollars around the world) who hold or work for US dollars.  The bankers then paid themselves huge bonuses for their brilliant investment strategies.

 

Here is what we have learned:

          *Central banks create money directly, although in theory in the United States with the direction of Congress and the Treasury.
            *When central banks change the interest rates it causes a one-time increase in inflation (deflation).  Low interest rates do not

            *Open market operations provide numerous ways to increase inflation that are subtle and hard to detect. 

 

 

History of Central Banks in the United States

Many people label the First National Bank of the United States as a central bank.  A central bank is different from a national bank, such as the First National Bank (FNB) of the United States setup during Washington’s presidency.  The FNB was a private bank in which the federal government had a twenty percent equity interest.  It was forbidden from buying government bonds, had a mandatory rotation of directors, it could not issue notes or incur debt beyond its capitalization, and the federal government could withdraw its money from the FNB and place it with another bank.[10]  The FNB of the United States was a truly a private bank not a central bank.  It did not set the policies that “affect a county’s supply of money and credit.”  It also did not issue legal tender.

Hamilton and Washington pushed for a national bank because the national government had to be able to pay bills through-out the nation and a national bank made this easier than working with multiple different banks.  Depending on a person’s view of central banking they either vilify Hamilton or think he was a genius.  Both sides seem to confuse the national bank issue with the Hamilton’s efforts to put the newly formed United States government on sound footing.  Hamilton’ s first report on public credit did not mention a national bank, it only dealt with the state and foreign bonds left over from the revolutionary war.  The report called for:

1) Assumption of the state and foreign bonds that were trading around 20-25% of their face value.

2) Paying off these state and foreign bonds at their face value by issuing new federal bonds.

3) Tariffs and tonnage duties would back these new federal bonds.

The result of this legislation, according to Wikipedia was:

The adoption of Hamilton’s Report had the immediate effect of converting what had been virtually worthless federal and state certificates of indebtedness into $60 million of funded government securities. Fully funded, the central government regained the ability to borrow, attracting foreign investment as social unrest destabilized Europe. In addition, the newly issued bonds provided a circulating currency, stimulating business investment.[11]

Hamilton’s plan worked brilliantly and it had nothing to do with a National Bank.

            The national bank was proposed in a separate report.  Hamilton would not have been in favor of a central bank.  Hamilton believed that a bank run by the government would be tempted print too much money.[12]  The First National Bank was not a central bank, however it was a government chartered and supported enterprise sort of like Fannie Mae and not strictly a free market enterprise either.  Such enterprises are prone to inside deals.

Most people point to the Second National Bank of the United States created in the Madison administration as a central bank.  The Second National Bank was modeled after the First National Bank, except it had some regulatory authority over other banks.  This made it closer to a central bank, however it did not have the power of legal tender or a monopoly on the issuance of money.  Apparently, the Second National Bank was poorly run and became involved in politics.  Andrew Jackson refused to renew its charter so its operations ended in 1836.  The information I could find on the Second National Bank was sparse compared to the First National Bank.

The first real central bank in the United States is the Federal Reserve, which was created in 1913.  The Federal Reserve is a private entity of sorts.  It is more like Fannie Mae than a true private bank however.  It has the power to create legal tender, it is tasked with setting interest rates to achieve policy goals, and it has regulatory control over the whole banking system in the United States.

There were two main justifications for the Federal Reserve: 1) the United States needed a lender of last resort to avoid banking panics, and 2) the idea that the United States government almost went bankrupt a couple of times, but JP Morgan saved the day.[13]

The United States did suffer from a number of bank panics, but these were due to over-regulation, not the free market.  Oddly, finance (stocks and bonds) was not regulated at all in the United States until the Kansas’ Blue Sky Law in 1911, which was the blue print for the Securities Act of 1933.  Banks on the other hand were highly regulated, the most obvious of these regulations were unit banking laws.  Unit banking laws required that banks could have only one location and these laws existed in a number of states and was applied to federal banks.  These resulted in a lack of diversification in banks’ portfolios, which increased their risk of failure.[14]  Canada did not have these restrictions.  Canada had many nationwide banks and as a result did not have a single bank fail during the Great Depression.[15]

Private banks had already created clearing houses that acted as a lender of last resort, before the Federal Reserve.

Friedman understood . . . that before the Federal Reserve Act financial panics in the US were mitigated by the actions of private commercial bank clearinghouses. Friedman and Schwartz’s view of the 1930′s was that the Fed, having nationalized the roles of the clearinghouse associations [CHAs], particularly the lender-of-last-resort role, did less to mitigate the panic than the CHAs had done in earlier panics like 1907 and 1893. In that sense, the economy would have been better off if the Fed had not been created. This position is perfectly consistent with the position that, provided we take the Fed’s nationalization of the clearinghouse roles for granted, the Fed was guilty of not doing its job.[16]

The idea that the United States needed a central bank, is not justified by the banking failures before the Federal Reserve and the Federal Reserve failed in this function during the Great Depression.

The other justification for the creation of the Federal Reserve was the supposed bailouts of the United States federal government in 1893 and 1907 by JP Morgan.  The United States was on a gold standard and the governments gold reserves were being depleted rapidly in both cases.  In both cases Morgan guaranteed to buy bonds issued to purchase gold for the United States Treasury.  These bonds were sold on the strength and credit of the United States and Morgan profited by both of these so-called bailouts.  If the Treasury had been doing its job correctly it would have cultivated a market for these bonds long before this crisis.  In addition, the federal government could also have slashed spending.  Not surprisingly the bailout of 1907 happened under the bad economic policies of Teddy Roosevelt.  In addition, the United States had the power to issue legal tender, which it could have done to conserve its gold.  The history surrounding these events is confused and has not been fully explored.  This paper is not full exploration of this topic, however it raises serious doubts that the narrative of these panics was a legitimate justification for the creation of the Federal Reserve.

Another narrative pushed by the banking interests is that somehow banks are different than other businesses.  Banks always argue that if one bank (large politically connected bank) fails then the whole banking system will collapse.  This narrative is trotted out every time banks demand a bailout, the most recent being the bailouts in 2008.  When a bank fails it goes through bankruptcy, which acts as a circuit breaker from a cascading series of failures.  This is exactly what happens in other areas of the economy.  Another solution that I do not endorse, but is better than bailouts, was the Resolution Trust Corporation that was created to liquidate the savings and loan failures of the late 1980s.  The Resolution Trust Corporation was essentially a massive bankruptcy proceeding and importantly its existence was limited.  It had to liquidate all its assets by 1992 (five year life).

The justifications of for the Federal Reserve are weak at best and considering the damage the Federal Reserve has done to the economy and its potential for abuse it should be ended.  The origins of the Federal Reserve are based on government failure, specifically interference in a free market.

 

What we have learned:

        *Central banks do not arise naturally in a free market and are not part of a free market.

            *Central banks and legal tender laws are the source of inflation, not private fractional reserve banks.

            *Central banks provide an easy way to obscure that the central bank and the government are creating inflation.

            *Lowering interest rates causes a one-time increase in the money supply over the trend line.

            *The fastest way to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

 

 

[1] Bordo, Michael D., A Brief History of Central Banks, Federal Reserve Bank of Cleveland,

http://www.clevelandfed.org/research/commentary/2007/12.cfm, A Brief History of Central Banks, December 1, 2007.

[2] Investopedia, Central Bank http://www.investopedia.com/terms/c/centralbank.asp#ixzz4V5iaLeW, accessed January 7, 2017.

[3] https://en.wikipedia.org/wiki/Modern_Monetary_Theory, accessed January 13, 2017.

[4] We can debate the accuracy of the actual number, however the point is the same.

[5] https://en.wikipedia.org/wiki/Mississippi_Company, accessed January 13, 2017.

[6]

[1] Lawrence Hunter, Forbes, OCT 29, 2012,  Is The Federal Reserve Using Money-Laundering Techniques To Cleanse Banks’ Balance Sheets?, http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-federal-reserve-regulated-banks-laundering-dirty-money/#6da1ce8f27cb accessed February 7, 2017.

[7] Ivan Pongracic Jr., The Great Depression According to Milton Friedman, FEE, Saturday, September 01, 2007, . https://fee.org/articles/the-great-depression-according-to-milton-friedman/, accessed January 14, 2017.

[8] [8] Ivan Pongracic Jr., The Great Depression According to Milton Friedman, FEE, Saturday, September 01, 2007, . https://fee.org/articles/the-great-depression-according-to-milton-friedman/, accessed January 14, 2017.

[9] Wikipedia, https://en.wikipedia.org/wiki/Reserve_requirement , accessed January 14, 2017.

[10] The book, Hamilton’s Blessing, is a great reference for this but I do not have a copy anymore.

[11] https://en.wikipedia.org/wiki/First_Report_on_the_Public_Credit#Funding_the_national_debt , accessed January 15, 2017.

[12] Gordon, John Steele, Hamilton’s Blessing: The Extraordinary Life and Time of Our National Debt, Penguin Books, 1997, p. 34.

 

[13] http://www.investopedia.com/articles/economics/08/federal-reserve.asp, accessed January 15, 2017.

[15] CARPE DIEM, http://mjperry.blogspot.mx/2008/09/great-depression-not-single-canadian.html , accessed January 15, 2017.

[16] . https://fee.org/articles/the-great-depression-according-to-milton-friedman/,  The Great Depression According to Milton Friedman, Ivan Pongracic Jr., Saturday, September 01, 2007, accessed January 15, 2017.

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