Whether you love or hate Bitcoin and cryptocurrencies you have to admit that it is one of the greatest economic experiments of all time. It is very rare in economics to have a well-defined and controlled experiment. I learned about this experiment in a decentralized private currency with a limited supply by 2012. At the time it was not clear if this experiment would ever really get off the ground. Bitcoin was valued at about $13, with a market capitalization around $15 million. In addition, it was difficult to buy and sell Bitcoins. Despite this I had conversations with people about the questions Bitcoin posed, particularly about the nature of money. There had been other cryptocurrencies before Bitcoin and when they got traction governments shut them down.
Now it is clear that Bitcoin, cryptocurrencies, and the underlying technology (decentralized, trustless, blockchains) are here to stay. A single Bitcoin is valued at over $6,300.00 and the total market capitalization of cryptocurrencies is around $181 billion. This is small compared to the FOREX market, but too large to ignore, which means the economic experiments will be played out. Here are just some of the questions posed by this experiment.
1) What is money?
Bitcoin and most cryptocurrencies do not actually have a physical or even computer coin or token. They are in fact just ledgers where the “coin” is the unit of value. The ledgers show who paid whom what and a positive account shows that you have provided value and are owed (or at least hope to) obtain value from the community in the future. If Bitcoin is successful it will show that money is not a thing, it is really just an accounting system that is it is just information.
It will also show that money is technology. Andreas Antonopoulos points out that the last real upgrade to that technology was the credit card, introduced by Dinner’s Club in 1950.
2) Does Money Have Inherent Value?
Or stated another way does money need to have an inherent value? Bitcoin does not have inherent value and in fact nothing has inherent value. For something to have value means it has to have value to someone. Value cannot be separated from the valuer. The only things that even come close to having inherent value to humans are food, water, and air. If Bitcoin succeeds it should settle the question of inherent value.
3) Do We Need Legal Tender Laws for Money to Work?
Most people seem to assume that money must be backed by a government or it will not work. Legal tender laws are laws that state you must accept the legal tender as settlement for any debts public or private. Of course, there are many examples in history where people used gold and silver as money that was not endorsed or backed by any government. The United States did not have any legal tender laws from the Constitution until the Civil War. If Bitcoin succeeds then it will be clear that money can be private, i.e., not backed by a government and legal tender laws. If you want to know more about legal tender laws in the U.S. see Money and Banking.
4) Is a Low Rate of Inflation Good for the Economy?
The Federal Reserve and most central banks argue that a little inflation is good for the economy. We are warned that without inflation we might fall into deflation, which caused the Great Depression. In the United States the target inflation rate is 2% per year, which means the purchasing power of a dollar today would be ¼ of what it will be in 70 years later. Even Milton Friedman argued that the money supply should grow at the same rate as the economy. According to Friedman this would keep the value of the dollar stable. This means if the economy grows at 3% per year then according to Friedman the money supply would grow at 3% per year. One question Friedman does not answer is who benefits from this growth in the money supply? The answer is the Federal Reserve and the U.S. government, essentially get 3% of the value of the economy in this example for doing nothing. Also note that the U.S. was in a deflationary period in the 1880s and 1890s and it was a time of extraordinary economic and technological growth.
Bitcoin has an inflation rate (supply increase) that is used to pay the miners during the start-up years. Presently the supply increase is about 4% per year. In order to convert this into an inflation rate the way the term is commonly used in the United States, we would have to subtract out the growth rate of the economy. The expected growth rate of the U.S. economy this year is 2.7%. Thus the inflation rate for Bitcoin is 1.3%, which is less than the Federal Reserve’s target rate. Also Bitcoin’s inflation rate slows down overtime and the total number of Bitcoins that can ever be produced is 21 million.
If Bitcoin succeeds, we will see whether a little inflation is good for the economy. We will also see if private citizens prefer to hold a devaluing currency or value increasing currency.
5) Do We Need Central Banks?
Central Banks are a fairly recent phenomenon. The United States did not have a central bank until the creation of the Federal Reserve in 1913. The U.S. did have national banks, but these were not central banks. A central bank has control over the currency of a nation and through convoluted processes creates and destroys money to “manage” the economy and to fund the government. For more see How Central Banks Create Inflation. The record of the Federal Reserve of “managing” the economy is very checkered including the Great Depression, the inflation and high unemployment of the 1970s, and losing 95% to 97% of the purchasing power of the dollar during its existence.
If Bitcoin succeeds, it will end the power of or at least significantly diminish the power of central banks. We will then see if a central bank is necessary to create prosperity and smooth out the ups and downs of the economy.
6) Do We Need Securities Regulations – the SEC in the U.S.?
Securities like stocks and bonds were mainly regulated by common law fraud and contract law until the 1920s in the United States. The justification for securities regulations have always been to protect investors. There have been a number of studies on point and not one of them has shown that investors have done better because of securities laws and some have shown they do worse.
Bitcoin’s technology has the potential to create stocks, bonds and other securities. However, it is not as clear that these can escape the regulatory rules in the way that Bitcoin can. Already we have seen crypto-assets created that bypass both Venture Capitalists, Wall Street, and securities regulations. Before the creation of the SEC in the United States in the 1930s this was quite common.
If Bitcoin’s technology can escape securities regulations, we will see if securities regulations help investors or if they just entrench large Wall Street banks.
7) Is a Financial Sector that Takes Up 20% of the GDP Good for the Economy?
Cash is almost dead in most modern economies, which means we pay for goods and services with credit or debit cards. This “convenience” costs at least 3% of the transaction price assuming the bill is paid immediately. It also puts the banks and government in between almost every transaction. Securities regulations and banking regulations are so complicated that people are forced to use financial intermediararies for almost any financial transaction. In 1947 the financial sector was only 10% of the United States GDP. Finance does not create wealth, it just greases the wheels of transactions. For instance, money is just a way for one person to sell their “time” and buy goods.
Bitcoin and Bitcoin’s underlying technology if they succeed may significantly shrink the financial sector. For instance, by allowing everyone to be their own bank or credit card company or loan originator the fees to the financial sector will be severely undercut. If Bitcoin succeeds we will see if the large financial sector was creating wealth or consuming it.
8) Do We Need Income Taxes?
Bitcoin has the potential to severely undermine income taxes and capital controls. Do people think they get value for their income taxes? Are income taxes a method of raising revenue or a system for punishing the politically un-connected or unpopular?
9) Can Bitcoin Decentralize the Internet?
The Internet was built on a series of decentralized technologies. Because of the inefficiencies of our financial sector, the only way to monetize the Internet was with centralized systems like Google, eBay, Youtube, Amazon, etc. Efficient micropayments that can be implemented using Bitcoin technology have been postulated as a way to decentralize the Internet and return it to its origins. Only time will tell.
10) Do We Need the NSA to Protect Us?
The technology behind Bitcoin has the potential to store and transfer information that is not trackable and cannot be hacked. These systems are just being developed. If they are successful, we will find out if the NSA was just a boondoggle or if it was truly protecting us, not the government.
 Unless you are an Austrian Economist and then you do not think experiments and therefore observation are relevant to economics, which means you are not doing science.
Rand in The Virtue of Selfishness states that a breach of contract is the use of force, like fraud is an indirect use of force.
A unilateral breach of contract involves an indirect use of physical force: it consists, in essence, of one man receiving the material values, goods or services of another, then refusing to pay for them and thus keeping them by force (by mere physical possession), not by right—i.e., keeping them without the consent of the owner. Fraud involves a similarly indirect use of force: it consists of obtaining material values without their owner’s consent, under false pretenses or false promises.
“The Nature of Government,” The Virtue of Selfishness, 111
This is incorrect and to the extent Objectivists accept this they hurt themselves and their psyche. A simple example will illustrate the flaw in the above statement. Assume a musician contracts to play at a venue a month from now. Then the day before the concert he is killed in a car accident. The musician certainly cannot fulfill the contract, so he is in breach of the contract and it was unilateral. The venue and promoter will certainly lose money because of this. Should the promoter be able to sue for breach of contract and recover damages?
A contract is a legally enforceable promise. In any immediate contract, such as buying food, contract law is boils down to fraud protection. It ensures that the purchaser does not take the goods and not pay for them or that the merchant does not take the money and not hand over the goods. For immediate contracts Rand’s statement above is true.
Long term contracts that are carried out over several days to several years can easily have extenuating circumstances that mean a breach is not an indirect use of force. Remember a contract is a legally enforceable promise. This promise cannot take every circumstance into account. One way lawyers try to account for unforeseeable circumstances in a contract is by inserting an “act of god clause”, also known as a force majeure clause. When these clauses are used in insurance contracts they lead to a contradiction. The whole purpose of insurance is to protect against unforeseen events. They are bad clauses in any contract because they are inherently vague and subject to widely varying interpretations.
When a contract is in dispute the role of the court is to discern what the parties intended. If the parties did not take something into account, such as the musician dying in a car accident, then the court has to decide what the parties would have done if they had thought about the issue. In the case of the musician, the “breach” was not intentional. I doubt that the intention of the parties was to hold the musician financially responsible if he dies in a car accident the day before the concert. Lawyers can try to anticipate every circumstance but this leads to long unread contracts, where the parties really did not agree to obscure clauses. It also leads to what is called the battle of the forms, where each party tries to get the other party to agree to their form just as the deal is closed. Clauses that are not discussed or agreed to explicitly defeat the real intention of contracts and should be viewed with skepticism by courts.
Government imposed clauses, such as the Uniform Commercial Codes’ (UCC) implied warranty of merchantability should never be allowed. The implied warrant of merchantability “is a warranty implied by law that if a seller knows or has reason to know of a particular purpose for which some item is being purchased by the buyer, the seller is guaranteeing that the item is fit for that particular purpose.” There is no need for the implied warrant of merchantability if that was intended by the parties and if it was not the intention then it should not be enforceable. This “implied warranty of merchantability is why software was licensed and not sold. Software could not meet the implied warrant to merchantability in its early days. This lead to a number of other problems that still afflict us in the software space and is an example of the unintended problems that occur when the law is stretch outside of its logical framework. Note that a contract to commit a tort (crime) is not and should not be enforceable.
Long term contracts, such as thirty of even forty year mortgages, are fraught with unforeseeable circumstances. We cannot know the future that well. In cases like these even intentional breaches are not necessarily the use of indirect force. Many long term contracts have termination clauses to account for this and to an extent invoking the termination clause is not a breach. However, most termination clauses have a part that covers a breach and how it is handled. For instance, a long term contract to supply say gas to a business on the first of the month, might be breached if the supplier’s truck(s) is broken down on the first of the month. Technically the supplier is in breach of the contract. Most termination clauses will allow the breaching party to cure the breach within a period of time.
What if the supplier’s wife is murder and he becomes depressed and chooses not to deliver gas anymore. The supplier is intentionally breaching the contract, but has he used indirect force against the customer? Most likely the customer has not paid for the gas yet or has only paid for one month in advance. A contract cannot be used to turn someone into a slave. Because of this, all long term contracts have an implied termination clause. It is also why we have bankruptcy laws. It is also important to note that you do not have right to a risk free life and law cannot and should not be used to remedy every small harm that happens to people.
Mortgages are an interesting long term contract and of course in the news after the financial crisis in the U.S. in 2008. People have the mistaken impression that a mortgage is like a personal loan between friends. The bank does not give the house buyer money out of its coffers, it creates the money. The bank collateralizes the house, much like a bond issuer creates the bonds “out of thin air”. The bank takes legal title to the house either directly or indirectly as security that the loan will be paid back. If the “home owner” cannot or does not pay the mortgage the bank asserts its legal ownership of the house and sells the house to extinguish the money created in the mortgage contract. Note I did not say pay back the mortgage. The money is literally destroyed, just like a bond that has been paid off no longer exists. If the home owner purposely breaches the mortgage, did they use indirect force? One answer is no because the mortgage contract implicitly includes a termination clause that the bank takes legal control of the house if the mortgage is not paid. In other words the bank made a deal that if you payoff the mortgage you get legal control of the house and if not the bank gets or keeps legal control of the house.
So how should we think about long term contracts? First of all we should understand that all long term contracts have an implied termination clause. Second, we need to remember that contracts cannot be used to turn people into slaves. Third, we should remember that contracts are an agreement between two parties. As long as the parties are getting along there is no reason for the government to be involved even if the parties are not following the contract. The main reason for most long term contracts is to provide a roadmap of how the two parties are going to do business together. As a result, courts should be skeptical of clauses in contracts that were not discussed. Not doing so turns contracts into a lawyers game of gotcha and does not fulfill the purpose of contracts. Most long term contracts are used by the parties to show their intention at the time the deal was made. This usually comes up when one of the parties is unhappy. A good contract should help resolve these issues. In fact, that is the most important purpose of a long term contract. However, sometimes the issues between the two parties are too great to be resolved. In that case the termination clause, whether implicit or explicit, should kick in. If the termination is too burdensome then bankruptcy laws should kick in. Both parties should be aware of this possibility.
Except for immediate contracts Rand’s statement that unilateral breach of a contract is an indirect use of force is incorrect. This just proves that Rand was human and not an expert in law.
Libertarians make the mistake of trying to base property law on contracts, when it is the other way around. Contract law presumes that both parties own themselves (have legal control over their actions) and often presumes that one or both of the parties have property rights in something. But libertarians like Rothbard try to turn things around and create property rights out of contracts. Reversing cause and effect leads to all sorts of problems. However this mistake by libertarians is based in the fact that they do not understand property rights. In fact, libertarians do not “believe” in property RIGHTS they believe in property privileges that solve the economic problem of scarcity.
A proper understanding of property rights and contracts is essential for a free society to exist. Contracts presume property rights and ownership of one’s self. Long term contracts cannot be used to turn people into slaves or to commit a tort. Objectivists hurt themselves when they treat contracts like Christians treat the Ten Commandments.
 This is related to the legal saying that “hard cases make bad law”. https://en.wikipedia.org/wiki/Hard_cases_make_bad_law
This is an excellent book that cuts through the morass of theories about the source of wealth to make an identification that gave me a thrilling “Eureka!” moment, followed by an “Of course! Why didn’t I see that?” which comes with every brilliantly made, clearly expressed discovery. Thank you for clearing the cobwebs on the vital issue on the source of ongoing wealth — the dissemination of your well-supported identifications can make the difference in the quality of life in all nations for all lifetimes to come.
Terry Jean Taylor
Economists often argue that the West is wealthier because profit margins are driven down by competition. For instance, here is a quote from an article in Forbes by a researcher at the Adam Smith Institute
What this means is that prices to us, the consumers, keep coming down as a result of that competition. And yes, if the prices we have to pay for things decline then we are becoming richer. Our real incomes are rising as a result.
Economists have two scientific sounding theories for this idea, perfect and pure competition or the zero profit tendency.
Pure and Perfect Competition
According to Investopedia under perfect “Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.” Economist hold up perfect completion up as the ideal market situation and any other situation result is “excess profits”. In fact, perfect competition is the theoretical underpinning of anti-trust law.
There are a number of problems with this theory of perfect competition and I discuss them in depth in my book Source of Economic Growth, so this will just be a brief overview. First of all we do not create wealth by consuming, we create wealth by producing and we can only produce more efficiently by inventing. Our standard of living is defined by our technology. Second the wealthiest countries are those that have producers (companies and workers) whose profit margins have not been squeezed to the bare minimum. How wealthy are the owners of a company making the bare minimum of profits? How much can they pay their employees, when their margins are at the bare minimum?
We get wealthier by inventing new technologies that provide large profit margins. Railroads had (have) much larger profit margins than human mules (Sherpa’s), or canal owners, or wagon drivers. They still deliver goods for much less cost despite their higher profit margins. In the future railroads may be obsolete as UAVs take over the job of transporting goods as Amazon is experimenting with.
Zero Total Profit Tendency
Austrian Economics supposedly rejects the perfect competition theory, however they replace it with their own version, the tendency that total profits will be zero when an economy is in equilibrium. Like perfect competition they assume that competition will drive profits down or toward zero.
Competition is not the source of wealth. In fact in a perfect world economically, we would all produce unique items of extremely high value. This is not to say that government inhibition of competition is good or makes us wealthier either. However, every property right (that is enforced) results in less competition and we would not be wealthier without property rights. Competition is a result of capitalism, it is not the definition of capitalism or what makes us wealthy. It is this sort of confusion about cause and effect that has so-called free market economists either arguing for anti-trust laws or arguing for anarchy (the absence of property rights).
The source of all real per capita increases in wealth is due to increasing levels of technology, not competition. The only way we increase our level of technology is by inventing. Property rights for inventors are the most important property right economically and the fundamental basis of all property rights.
 Tim Worstall, Amazon Vs Walmart On Free Shipping – It’s Not Capitalism That Makes Us Rich But Market Competition, https://www.forbes.com/sites/timworstall/2017/05/09/amazon-vs-walmart-on-free-shipping-its-not-capitalism-that-makes-us-rich-but-market-competition/#6dc7b5593c8e accessed June 7, 2017.
 Perfect Competition http://www.investopedia.com/terms/p/perfectcompetition.asp#ixzz4jLsXzRQ accessed June 7, 2017.
Driving the Market Process: “Alertness” Versus Innovation and “Creative Destruction” https://mises.org/library/driving-market-process-alertness-versus-innovation-and-creative-destruction accessed June 7, 2017
In an article entitled, Overpopulation Hoax, on Lew Rockwell.com, Walter Williams argues that Thomas Malthus was incorrect in his prediction about food and population. Williams misstates what Malthus said in suggesting that populations will have catastrophic collapses. What Malthus predicts is that all species’ population will expand to fill the available food sources. This means that individuals within the species will be on the edge of starvation. If the population declines from starvation or because of some other cause, then there will be surplus calories available and the population will increase until there are no surplus calories for the species’ population.
Williams Misrepresents Malthus
If there is a positive genetic change (or positive change in the environment), there will be excess calories and the population will increase until there are no surplus calories for the species’ population. This is true for all living species on Earth for all of history, including humans until about 1800. Malthus’ ideas underlie all of evolutionary biology. Even when I was born in 1960 over half the world’s human population was living in the Malthusian Trap (on the edge of starvation). Today less than 15% of the World’s human population is living in the Malthusian Trap. Overpopulation is not a hoax, however the catastrophic collapse nonsense of the environmental left, such as Paul Ehrlich predictions are.
Julian Simon Humans are Assets
Williams quotes economist Julian Simon that humans are the ultimate asset. This is almost true. Extra human beings being born in North Korea are a liability to the North Koreans, not an asset. Humans are an asset when they are free to create new technologies and their property rights in those new technologies are protected. Under those circumstances every additional human has a chance to be an asset. The only way humans escaped the Malthusian Trap and the only way humans increase their real per capita income is by increasing their level of technology, which means inventing. For more information about the cause of real per capita increases in wealth see my book Source of Economic Growth.
PS: Walter Williams is an excellent economist.
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.”
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.”
“Ultimately property rights and personal rights are the same thing.”
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.”
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.
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.
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.” 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.” 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.” The Roman tablet eight also require space between buildings, “A space of two feet and a half must be left between neighboring buildings.” 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.” 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.
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.” 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.”
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. 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.
 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
 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
 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
 George Washington, Covenanter squatters, http://explorepahistory.com/hmarker.php?markerId=1-A-28F accessed April 30, 2017.
 “What Is Capitalism?”Capitalism: The Unknown Ideal, 19 Ayn Rand Lexicon, http://aynrandlexicon.com/lexicon/capitalism.html accessed May 7, 2017.
 Ayn Rand, Capitalism: The unknown Ideal, The Property Status of Airways, p. 132.
 Ayn Rand Lexicon, “The Property Status of the Airwaves,” Capitalism: The Unknown Ideal, 122
 Ayn Rand, Capitalism: The Unknown Ideal, Patents and Copyrights, p. 141.
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 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’ 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]
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.
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.
[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
[v] Edward W. Younkins, The Road to Objective Economics: Hayek Takes a Wrong Turn, http://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
[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.
[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.
[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.
There are a lot of misconceptions about money and banking. Often people either think these are the root of all our problems or the solution to all our problems. Both seem to believe that once money enters the equation in economics magic happens. This paper will focus on how money and banking work in a free market and then examine the distortions caused by government manipulation of money and banking.
If you examine an economics book on money it will tell you money is a medium of transaction, a store of value, and a unit of account. Some economist say that money being a medium of exchange is the real function (definition) and the other two functions follow from money’s primary purpose. I agree and therefore in this paper the definition of money is a medium of exchange.
All sorts of things have served as money including sea shells, tobacco leaves, grain, large immovable stones, tea leaves, cigarettes, silver, gold, paper, and computer bits (entries). Why money is a useful invention is usually explained by way of an example. Suppose that you raise cows for a living and you wanted to buy a loaf of bread. If you tried to trade your cow to the butcher, you would want several hundred loaves of bread in return. Most of the bread would spoil before you can eat it, so you only want two loaves of bread now. On top of this, the baker wants chickens not a cow. Under a bartering system these transaction will not occur, however with the addition of money you can sell your cow to the butcher and he will give you money. You can then use the money to buy two loaves of bread, which the baker can use the money to buy chickens.
It is likely that money originally grew out of an IOU (I Owe yoU) system. For instance, in the example above it is possible that once the rancher and the baker agree that the cow is worth 300 loaves of bread, then the baker would give the rancher two loaves of bread and an IOU for 298 loaves of bread. The rancher intends to present the IOU to the baker every week for his two loaves of bread. At which time the baker will give him two loaves of bread and an amended (new) IOU.
Unfortunately, the rancher gets sick and needs a doctor. The doctor agrees to accept the baker’s IOU in payment for his services. Now the baker’s IOU has acted as medium of exchange, which means it is money.
Money is just a generally accept IOU. In other words many people will accept it as a general IOU that they can “redeem” from most people. In the example above the doctor would have to worry that the baker might not make good on his IOU. Now some people will argue that only paper fiat money is a generalized IOU. However, even gold is functioning as a generalized IOU. It is commodity money and as a result may have value in the market separate from its use as an IOU, but the person accepting it as money does not need it as a commodity. He is planning on trading it with other people for goods and services. On a deserted island (with no hope of rescue) you could have a ton of gold, but it would useless and you would not be better off with it than without it. This also shows that wealth is not the same thing as having money.
One of the advantages of this point of view on money as an IOU is that it makes it clear that money is not wealth, even gold. The Spanish Kings and Queens found out this point when they brought back tons, literally, of gold and silver but still ended up going bankrupt. The gold was not wealth and they spent their gold on things that did not create wealth. Wealth is the things and knowledge that solve the objective problems of life (inventions). I added the knowledge part because if you give an aboriginal person living in the Brazilian rain forest a super-computer, or an MRI machine, or even a bulldozer they are not wealthier because they do not know how to use these things (inventions) or even trade them. Wealth is also about the objective problems of life, the most fundamental ones being air, water, and food. These are still problems for many people in the third world. Even in wealthy first world countries people have real objective problems, such as health problems, safety, etc. It might not be as obvious why cruise control or smart phones solve objective problems, however if you think about it both do.
The idea that money is not wealth is important because it immediately makes the fallacy of Mercantilism apparent, which Adam Smith spent 100s of pages on. In addition, it makes it clear that we cannot become wealthier by manipulating the money supply. The only way to become wealthier on a per capita basis is to create new things that are more efficient at solving the objective problems of life or solve new objective problems of life, in other words create new inventions.
People often argue about the differences between money, currency, real money, commodity money, debt money, paper money, and fiat money. Currency is generally defined as something that is specifically designed to function as money, such as coins. Commodity money is when the money is a commodity such as silver, gold, grain, or is backed by a commodity. Now real money can mean several different things, however I am talking about people who argue that only gold (silver) is real money. By this they seem to mean that gold is a commodity money and all other currencies are to be measured against gold. All commodity moneys have the advantage that they are more difficult for the government to devalue, however bitcoin also has this feature. The other point is that gold has a long tradition as a widely recognized money. This is true but does nothing to enlighten what money is or what its function is.
Fiat money is money that is not backed by a commodity. Usually it is paper money although more and more it is just electronic entries in a computer and often it is legal tender, which will discuss in more detail shortly. Paper money is self-explanatory. Debt money can have several meanings, but usually means the money “created” when a person (entity) takes out a loan. Many people argue that debt money is evil or somehow costs us interest just to have money. Since all money is essentially an IOU, all money is created by a debt, i.e., a claim to future goods and services.
Banking and money have been closely linked at least since the Agricultural Revolution about 11,000 year ago. The Agricultural Revolution was a series of inventions that provided man with access to a huge increase in the number of calories per acre. As a result, the human population expanded enormously and the territory of humans also expanded. These excess calories were converted into population increases until the number of calories collected/created by the human population were roughly equivalent to the number necessary to support that population.
The grains that were the major source of these extra calories had to be stored, because the grains ripened all at once. While the grain was stored, it needed to be protected from water and vermin. If the grain ran out before the next harvest, people starved to death. Efficient, effective storage of grains reduced the chances of running out grain before the next harvest. A centralized grain storage (grain silos) was more effective than individual storage of grains. When a farmer deposited their grain they received a receipt (clay tablet) for the grain. Eventually people started to use these receipts to pay for other goods (services). For instance, if you wanted to buy a chicken instead of going to the grain silo and taking out enough grain to pay for the chicken, you just handed over some of these clay tablets to the owner of the chicken. In other words these receipts became money.
In ancient Mesopotamia, as long ago as 5000 B.C.E., clay tablets were used to represent beer or grain. These clay tablets functioned as money. Gold also started functioning as money about the same time, but was probably only used for large or long distance payments and therefore was not used by average people. These clay tablets were “created out of thin air” in the vernacular of today. After a harvest there would be a lot of these clay tablets around and we would say the money supply increased. As people withdrew grain, the grain bank would redeem these receipts. We do not know if the “bank” destroyed these clay tablets, which would have been the logical thing to do or if they stored them for the next harvest. Either way the money supply would shrink until the next harvest. In fact the number of clay tablets (in circulation) would have shrunk to almost to zero just before the next harvest. We know this is the case because of evolution. Population expands until it takes up the available food supply, which is known as the Malthusian Trap. This means the grain would be almost gone by the time the next harvest rolled around.
If you eliminate money (clay tablets) this does not change the economic situation. Until the Industrial Revolution people lived on the edge of starvation and it was common for families to have to ration their food and even pick who would get food and who would not. Because the healthy adults were the only way any of them would survive through the next year, the old, the young, and the sick were the first one’s whose food was cut off. This is a grim reminder that economics is not just a game, but has real world consequences.
If we replaced the clay tablets with coins (e.g., silver, gold), then the money supply would not go up and down. However, the price of food (and other goods) would go up and down. After a harvest the price of food would be cheap and just before the harvest food would be very expensive. The monetary system would not change the underlying economic situation one bit.
This is what we have learned about money in a free market:
1) Money is a medium of exchange
2) Money is a generalized IOU
3) The money supply can vary in a free market without fractional reserve banking.
4) Many things can function as money and only the market should “decide” what is money.
5) Money is not magic and does not allow magic in economics.
Now we are going to introduce some government (non-free market) distortions to money. Going back to our clay tablets, someone probably realized that it did not make sense to destroy the clay tablets when people withdrew grain, since they would have to make new clay tablets after the harvest. The “bank” probably started storing them and this of course led to the temptation of stealing the clay tablets. Also the government probably decreed that taxes had to be paid in these clay tablets, which was the first step to making them legal tender.
We are going to skip forward to Roman times. The Roman’s used silver coins as their currency. The main unit of money was the denarius, which was between the size of a modern nickel and dime and equivalent to a day’s worth of wages for a skilled laborer. As late as 68 C.E. the silver in a denarius was almost 100%, but then it started to decline. People balked at using this debased money, however the government declared the new, lower silver coins legal tender. By 265 C.E. the silver content in coins was down to 0.5%. Not surprising the Roman Empire suffered huge inflation. The Roman’s minted so many coins that even today you can buy several Roman coins of standard quality for twenty dollars or so. For clarity later on I am going to call this “simple inflation”.
An important point here is that legal tender laws are always the first step towards inflation. The only reason for a government to pass a legal tender law is so that they can “print” money. In other words, the government is undertaking an endeavor that would get any private citizen throw in jail. With the end of the Roman Empire legal tender laws and banking died out during the Dark Ages. Coins were mainly used by the rich during this period.
By the 1700s legal tender laws were being seen again in Europe. France experimented with legal tender laws, allowing The Mississippi Company in the 1710s to have control over its legal tender with disastrous results. Supposedly, the French swore off paper money and modern banking for years after this. Some historians have even argued that this backwardness in France’s finance system was part of why they were beaten by the English. This is a fascinating story, but beyond the scope of this article.
The British followed suit in 1833 making banknotes issued by the Bank of England (a private bank at the time) legal tender. The United States had no legal tender laws (after the Constitution) until 1862 during the American Civil War. The North printed $450,000,000 under this law to help finance the war. Eventually this law was declared unconstitutional in Hepburn v. Griswold, 75 U.S. 603 (1870). The Court reasoned that the Constitution allowed the federal government to coin money, but not the power to make paper legal tender. The government argued that since it had the power to carry out war and the issuance of the legal tender was necessary for carrying on the war, then legal tender laws fell under the “necessary and proper’ clause of the Constitution. The Court rejected this argument and also pointed to the fact that the Constitution prohibited the states from interfering with contracts. The Constitution did not specifically, prohibit the federal government from interfering with private contracts, but it would be against the spirit of the Constitution to allow the federal government to do so. In one of the stranger twists in history, Salmon P. Chase helped push the legal tender legislation through as Lincoln’s Secretary of Treasury, then he was appointed Chief Justice of the Supreme Court and lead a 5-3 decision to declare the law unconstitutional. Unfortunately, this case was quickly overruled by the Knox v. Lee, 79 U.S. 457 (1871) Supreme Court decision.
Multiple competing bank notes were the norm at that time. According to the Cato Institute, “the government did not entirely monopolize issuance of notes until 1935, but the laws that made the monopoly possible date from the Civil War.” Today the legal tender law in the US is 35 USC § 5103 which states:
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
Legal Tender laws are necessary for government counterfeiting to be successful. Without legal tender laws, people would quit accepting the money printed by the government. The key point is that legal tenders are necessary to create inflation. Any further investigation of money will require that we first examine how banks work.
The first banks in Europe after the Dark Ages were goldsmiths. Because goldsmiths were working with valuable materials they needed vaults. Wealthy patrons would often give some of their gold or other valuables to the goldsmith to secure in their vault. The goldsmith would give the patron a receipt for their gold. Overtime, just like the clay tablets for grain, people started to trade the receipts instead of taking out gold and paying with the gold.
Some of the customers also started asking for loans. The goldsmiths wanted to reduce their risk if the customer defaulted on the loan, so they asked for collateral. Originally, they probably asked for jewelry or other things made of silver and gold, since they knew they could liquidate (sell) these items fairly easily. The goldsmiths could have given the customer gold out of their gold reserve (capital) and they probably did initially. Most likely many customers then gave the gold back to the goldsmith and took receipts for the gold. If the goldsmith’s receipts were trusted enough, they could skip this step and just give the customer receipts. If the customer failed to pay the loan back, the jewelry (collateral) became the property of the goldsmith.
Or the goldsmiths could have given the borrower gold on deposit from other customers, which is the way most people think of banking working. In that case then the gold the goldsmith had on hand (deposit) was less than the amount of the receipts outstanding for the gold, which is fractional reserve banking (assuming the goldsmith had no gold capital or the loan(s) were greater than the goldsmith’s gold capital). Fractional reserve banking is defined as:
a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal.
Most customers probably deposited the borrowed gold with the goldsmith and took receipts. Again the goldsmiths probably began to skip the step of giving the borrower actual gold (silver) and just gave them receipts for the gold. At this point it might appear that the goldsmith is “creating money out of thin air”, however the receipts in this case are backed by the collateral, jewelry in this example. Actually, all the outstanding receipts are now backed by the gold on hand and the collateral the goldsmith has for loans.
At this point the goldsmith risks all the holders of these receipts asking for their gold and the goldsmith does not have enough gold to fulfill all these demands. However, the goldsmith does have enough capital to fulfill the demands, because the collateral, jewelry and gold on deposit in this example. It is likely that initially most of these loans were “callable”, meaning that the goldsmith could demand the borrower pay them back in full (gold or receipts) at any time. If the borrower paid up, then the goldsmith had no problem paying off the receipts. If the borrower did not pay up, then goldsmith became the owner of the collateral (jewelry) and could sell it to fully back the receipts.
Eventually the goldsmiths realized it was not only jewelry (gold and silver items) that had value and could act as collateral. For instance, arable farmland was one of the most valuable assets that people could own for most of history since the Agricultural Revolution. The goldsmith could not put the farmland in his vault, however he could have a legal claim to the land. That claim stated that if the borrower did not pay back the loan, then the goldsmith owned the farmland. Of course it takes longer to liquidate farmland than jewelry and farmland might be more subject to market fluctuations. As a result, the amount the goldsmith would lend against the farmland was lower than for gold and silver items.
At first goldsmiths probably made loans against farmland that someone owned outright. Eventually, they figured out that they could make loans on farmland that was being purchased, as long as there was a big enough down payment (the equivalent of loaning less than the value of collateral). What the goldsmith is doing is securitizing assets other than gold. When the goldsmiths created receipts for gold and silver deposits they were securitizing gold (and silver). “Securitize is a pooled group of financial assets that together create a new security” or banknote in this case. This means that goldsmiths receipts (banknotes) are backed by not only gold deposits but the other assets that they hold as collateral.
This is exactly what a company does when it sells bonds (stock). The bond is backed by the assets (collateral) of the company. The bonds are usually very liquid and can be sold or traded in exchange for goods and services, i.e., the bonds are money.
These goldsmiths became fractional reserve banks once they started securitizing assets other than gold. Fractional reserve banking is an important invention and is created (exists) in a free market. A fractional reserve bank is doing something analogous to what engineers have done with the telephone system. The backbone that connects two people together on a phone line does not have the capacity to allow everyone to make a call at the same time. The engineers know that only a certain fraction of people will normally be on their phones at the same time. By designing a system to handle this level of usage plus a margin, the cost of the telephone system is reduced. Of course occasionally, like in the time of an emergency, everyone wants to use their phone at the same time and then you receive a message like ‘all circuits are busy, please try your call again later.’ Another example is the time sharing of resources is done by computers. Before the 1980s this was done by having a number of computer terminals all connected to one large computer that time shared its resource among these terminals. This is still done within your computer when it runs multiple programs. The processing power of the microcontroller is time shared among these programs.
Banks know that only a small number of people will want gold at the same time. Most of the time people will be happy with banknotes or just accounting entries. However, if people lose confidence in the bank, then they will all want to withdraw gold (cash) at the same time. This is called a ‘run on the bank’ and is the same thing as everyone trying to make a telephone call at the same time. Note that this is a cash flow issue and can happen even to a bank that is profitable. Usually, banks that were clearly profitable could borrow gold from other banks to weather the run.
When a fractional reserve bank (hereinafter bank) initiates a loan against an asset, let’s say a farm, the bank creates a security (banknotes or an entry in a ledger) equal to the amount of the loan. In this process it “creates money” equal to the loan. At one time this might have been done by printing a bunch of banknotes, but now it is an electronic entry in the banks accounting system. An article entitled “Money Creation in the Modern Economy” published by the Bank of England explains “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” This article also points out that “money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.” According to the article, “Money in the Modern Economy: an Introduction”, there are three main sources of money in modern economies, currency, bank deposits (loans by commercial banks) and central bank reserves. This article also points out that most money in the economy is created by banks initiating loans. 
Some people call this debt money and argue it is bad for the economy. They imply that this system of money creation requires we pay interest to have money. First, it is important to point out that this sort of money creation happens in a free market. Second, the only one paying interest is the person who took out the loan. In a free market there would also be other forms of money, such as gold, silver, bitcoin etc.
When loans are paid back money is destroyed, just like the case of the clay tablets being destroyed (taken out of circulation) when people turned them in for their grain. The bank no longer has access to the collateral (e.g., farmland, jewelry, etc.). As a result, the banknotes (electronic entries) are destroyed. Note that money is also destroyed if the borrower defaults on the loan.
In a free market (for this discussion most importantly means no legal tender laws and no central bank) banks’ ability to ‘create money’ is limited by the value of the assets used as collateral. The bank is not creating money, it is securitizing assets and the banks’ ability to create money is then limited to the assets that can be securitized.
If the banks create too many loans that cannot be paid back, then they will tighten their lending standards. This will result in fewer loans and less money being created. When the economy is growing banks will fund more loans and create more money. However, the amount of money in the economy will be proportional to the assets that can be collateralized in the economy.
As a result, in a free market fractional reserve banks do cause variations in the money supply, but do not cause inflation or deflation. Note that the United States had fractional reserve banks from before the revolution and the United States did not have any periods of inflation. The banks were constrained in how much money they could create. Now prices did vary widely sometimes, particularly in times of war. However it is necessary to separate out the fluctuation in prices due to changes in supply and demand from those due to changes in the quantity of money. During a war (crop failure) there is an increase in the demand for goods and services, particularly food. Men are off fighting instead of planting their fields and the war itself often destroys the crops on large tracks of land. This increase in the price of food will mean that farmland that is not threatened by the war will be more valuable. As a result, it is likely banks will be willing to lend more money against these farms. This will result in some increase in the money supply. However, when the war ends the prices of the farm goods will fall and so will the value of the farmland, which will reduce the number of loans outstanding, reducing the amount of money in the economy. Averaged out over time money grows at the same rate as the economy and prices are roughly stable.
This is what we have learned about banking in a free market:
1) Fractional reserve banking exist in and our an invention of a free market.
2) Fractional reserve banks do create and destroy money, however the amount of money created is proportional to the assets in an economy.
3) Fractional reserve banks do not cause inflation.
(I wanted to include a discussion of central banks, however this article is already too long. So I will post on central banks and their effects in another article)
 Peter Dockrill, This 5,000-year-old artefact shows ancient workers were paid in beer, http://www.sciencealert.com/this-5-000-year-old-clay-tablet-shows-ancient-mesopotamians-were-paid-for-work-in-beer; and
Rachelle Samson, History of money: From clay tablets to legal tenders
History of money: From clay tablets to legal tenders, http://www.versiondaily.com/the-history-of-money-from-clay-tablets-to-legal-tenders/.
 Jeff Desjardins, Currency and the Collapse of the Roman Empire, http://money.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/, accessed 11 November 2016.
 coins https://www.amazon.com/Lot-10-Uncleaned-Ancient-Bronze/dp/B001BMWATA?SubscriptionId=AKIAIKBZ7IH7LXTW3ARA&&linkCode=xm2&camp=2025&creative=165953&creativeASIN=B001BMWATA&tag=wwwbookcompar-20&ascsubtag=5820b98a48308f0454a513ac
 A. Andreades, History of the Bank of England 1640 to 1903, http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/andreades/HistoryBankEngland.pdf,
 Schuel, Kurt, Cato Journal, Vol. 20, No. 3 (Winter 2001) p 454.
 Counterfeiting in an economic sense is any currency that is not backed by productive or creative effort that someone willing exchanged their creative effort for. Gold is clearly not counterfeit money, since it requires productive effort to mine gold. Buy paper money presents a problem. It takes productive effort to make and print paper, but no one would trade twenty dollars of their effort for someone who printed a twenty dollar bill. Economic counterfeiting is really a fraud where someone believes the other person has provided value that they did not provide and purposely withheld this fact from the other party.
 Fractional Reserve Banking Definition | Investopedia http://www.investopedia.com/terms/f/fractionalreservebanking.asp#ixzz4QUDQvzpR, accessed November 19, 2016.
 The collateral is usually worth more than the loan to deal with market fluctuations. This is why people used to say that a bank would only loan you money if you were already rich.
 Securitize Definition | Investopedia http://www.investopedia.com/terms/s/securitize.asp#ixzz4QVLtJy4H, accessed on November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money creation in the modern Economy, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money creation in the modern Economy, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money in the modern economy: an introduction, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money in the modern economy: an introduction, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf, accessed November 19, 2016.
 Debt-Based Money vs. Sovereign Money, http://positivemoney.org/our-proposals/debt-based-money-vs-sovereign-money-infographic/, accessed November 19, 2016.
 Credit cards and personal loans may seem to violate this, but a person’s willingness to work is an asset.
 JOSH ZUMBRUN, A Brief History of U.S. Inflation Since 1775, http://blogs.wsj.com/economics/2015/12/14/a-brief-history-of-u-s-inflation-since-1775/, accessed 12/3/2016.
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