Hazlitt on Inflation

With his usual clarity, rigor, and razor-sharp language:

“Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

But it is never “inevitable.” We can always stop it overnight, if we have the sincere will to do so.”

From his book What You Should Know About Inflation (pdf file).

Needless Luxury

Upon revisiting Benjamin Barber’s article, Overselling Capitalism with Consumerism, both mentioned in D’s previous post, and found here, I am compelled to comment.

It seems that Mr. Barber has a bad understanding of capitalism. He says,

“Capitalism’s core virtue is that it marries altruism and self-interest. In producing goods and services that answer real consumer needs, it secures a profit for producers. Doing good for others turns out to entail doing well for yourself.” (emphasis mine)

I am at a loss for where Barber found this understanding. I suspect it is the caricature of capitalism against which he can be most easily argue, but then again, how hard is it to knock down a straw man? I suppose by real consumer needs Barber means the essentials: water, food, housing from the elements, clothing, and in today’s world, oil (though, this last one would probably be a begrudged admission at best). From there, it is hard to glean what else would be considered to be in this category. Of course the luxuries of life are not real consumer needs. Indeed, he writes,

“The world teems with elemental wants and is peopled by billions who are needy. They do not need iPods, but they do need potable water, not colas but inexpensive medicines, not MTV but their ABCs. They need mortgages they can afford, not funny-money easy credit.”

While it seems obvious that iPods are not a necessity of life, the line between necessity (clothing), and unneeded luxury (fashionable clothing) is blurred. What about necessity (grain) and luxury (wine)? How would Barber respond to this entry from Lieutenant Colonel Mercin Willet Gonin DSO, a contributing member of the liberation of the Bergen-Belsen concentration camp in 1945. I shall post a good portion of it for context.

“It was shortly after the British Red Cross arrived, though it may have no connection, that a very large quantity of lipstick arrived. This was not at all what we wanted, we were screaming for hundreds and thousands of other things and I don’t know who asked for lipstick. I wish so much that I could discover who did it, it was the action of genius, sheer unadulterated brilliance. I believe nothing did more for these internees than the lipstick. Women lay in bed with no sheets and no nightie but with scarlet red lips, you saw them wandering about with nothing but a blanket over their shoulders, but with scarlet red lips. I saw a woman dead on the postmortem table and clutched in her hand was a piece of lipstick. At last someone had done something to make them individuals again, they were someone, no longer merely the number tattooed on the arm. At last they could take an interest in their appearance. That lipstick started to give them back their humanity.” (This was found in Rob Bell’s new book, Sex God)

Think upon that last line. That lipstick gave them their humanity. People dying. Sick. Utterly forgotten. No longer human. And it was lipstick. A luxury. Bread would have fed them. Wool would have clothed them. Wood would have sheltered them. But lipstick gave life, human life, to the dying. Dignity to the undignified. Respect to the disrespected. Lipstick. A luxury.

Subprime mortgages and capitalism

Every so often the economy experiences a boom period followed by a bust period; every 1920’s has its 30’s; every 1990’s has its . . . well, early 2000’s, although there may be darker days ahead.

The Austrian business cycle theory points out that this nation-wide period of ‘over-investment’ followed by its doomsday — recessions and depressions — is not primarily a function of entrepreneurs who are either evil or somehow uniformly deceived across the nation in a free market. Instead, the ABCT points to a far more obvious explanation for cycles: the way in which the Federal Reserve controls the money supply.

Money in its primitive form was simply a convenient way for chicken farmers needing shoes to forgo finding a cobbler badly in need of eggs. Having a medium between these exchanges — that is, using indirect exchange — seems inefficient on its surface, but it turns out to be an incredibly effective way to get from eggs to shoes and also from eggs to legal services. Without trading for gold first, the farmer depends on shoe-makers who need eggs, or likewise lawyers that need them. But when a commodity, historically gold and silver for many fascinating reasons, arises as a good in high demand everywhere, the farmer need not worry about the “market” of eggs for legal services or eggs for shoes.

Thus, it is clear that money had its value not simply as an arbitrary token, but that a given society would have already recognized the value of gold or silver, and therefore prices for any given good could be expressed in terms of the metal. Its use as money came from its pre-existing value and its convenience for the purposes of exchange; it was not due to gold’s use as money that it became valuable.

It is easy to see, then, why paper fiat currencies are inherently unstable. The value of a dollar is necessarily predicated on its use as a medium of exchange — and not the other way around. A central bank that has been given the task of regulating fiat currencies finds itself in a crisis of calculation. How much money should there be on the market at any given time? Should the money supply increase, and if so, at what rate? Should the money supply ever decrease? In what way should “new” money be pumped into circulation — to whom do we give the money that we have created out of thin air? Since the banks “make up” how much money exists, they are prone (and bound) to make lots of damaging mistakes. You can’t fudge up how much gold is in the warehouse, unless you lie. But how can you hold someone accountable when they can simply create something from nothing?

Since the functioning of a central bank are necessarily political — that is, not based on pleasing consumers through voluntary exchange but rather backed by simple government edict — its decisions will not direct resources to their most urgent needs. Practically, this works out in many ways. For example, recipients of “new” money fresh off the press have historically been those closest to the central bank — the financial district in New York — and the government. Since the government has no need of money other than to spend it, it immediately goes to those with the best political connections: in most cases, government contractors. The poor and those on fixed incomes (retired people, pastors, those working the lowest jobs, etc.) are hurt the most.

Subprime mortgages, a recent bubble-burst that will undoubtedly be evaluated ad nauseum for the next decade, are a great example of how central planning causes credit and finances to go awry. The Federal Reserve has been pumping money into housing as a part of the government’s efforts to boost production and growth that particular industry. Many people bought, expanded, or built homes who otherwise wouldn’t have, and they were financed by banks who were getting cheap credit from the central bank. For a while, the trend was toward loaning and spending, investment, and growth. But as the Federal Reserve has reset interest rates higher than before, it makes it difficult for those most in debt to keep up with interest rates and their payments. Whatever the cause, it is clear that the poor have been given false messages of easy money, en masse, and are now facing a bill that they can’t afford.
Two authors, with completely different perspectives, analyze the problem as follows:

Benjamin Barber, professor at the University of Maryland, full article here:

Highlights:

“The crisis in subprime mortgages betrays a deeper predicament facing consumer capitalism triumphant: The “Protestant ethos” of hard work and deferred gratification has been replaced by an infantilist ethos of easy credit and impulsive consumption that puts democracy and the market system at risk.

“Capitalism’s success, however, has meant that core wants in the developed world are now mostly met and that too many goods are chasing too few needs. Yet capitalism requires us to “need” all that it produces in order to survive. So it busies itself manufacturing needs for the wealthy while ignoring the wants of the truly needy.

“When we see politics permeate every sector of life, we call it totalitarianism. When religion rules all, we call it theocracy. But when commerce dominates everything, we call it liberty. Can we redirect capitalism to its proper end: the satisfaction of real human needs? Well, why not?

“To do this, we will require the assistance of democratic institutions and an adult ethos. Public citizens must be restored to their proper place as masters of their private choices. To sustain itself, capitalism once again will have to respond to real needs instead of trying to fabricate synthetic ones — or risk consuming itself. “

My response to this is that Prof. Barber makes a quick jump from subprime mortgage rates to a canned critique of capitalism. His tactic is the “this is but one more sign of X,” without ever showing how the this applies to X.

Mr. Barber quickly jumps on consumers, and rich consumers in particular, but it’s difficult to see how he got there. After all, what group of people has been over-consuming in the case of failing subprime mortgages? The answer is people who are generally not able to secure loans, unless the money is particularly easy to get ahold of. The poor. So why is capitalism at fault for these poor people trying to secure housing for themselves? I don’t know. There’s a possible answer here, but Barber quickly shifts away from this to his ‘core concerns’ with capitalism, and we never seem to get back to subprime loans. The answer, in other words, is: “Capitalism is at fault in this case. Don’t ask me why I think so in this case, but I can show you why I don’t like capitalism in general.”

While Mr. Barber’s critique of capitalism qua critique of capitalism might have some merit on its own (I don’t think that it does), nothing that he said really applies to subprime mortgage rates.

Analysis on Mises.org goes more directly to the heart of the matter, in my opinion (full article here):

Highlights:

“However, barring such an unexpected positive shock, it seems increasingly clear that we will see a US recession this year. The main reason for this is that the housing bubble that fueled the recovery of the last few years has essentially burst.

“So far, the economy has seemingly handled this fairly well and experienced what one might call a “soft landing,” with growth being slow but still well above zero. Yet there are increasing signs that the worst is yet to come. Much of the housing bubble was financed by so-called subprime mortgages, mortgages to people with a low credit rating. Subprime mortgages were encouraged greatly by the government, with the Federal Reserve providing a cheap source of credit and with Bush encouraging it as part of the “ownership society” that he envisioned. But after the Fed was forced to raise interest rates again, and as the introductory teaser offers expired, the cost of borrowing for the subprime borrowers increased sharply. And as subprime lenders almost by definition have weak personal finances, many have proven unable to handle that.”

::

The constant in both of these opinion / analysis pieces is credit. Too much credit fosters over-consumption beyond realistic means. The problem of over-consumption can only be ignored for so long before reality must be dealt with. Barber sees the main problem as a vague cultural value that “we” need to fix through politics; Karlson looks to the source of the credit and asks why the system has been set up this way.

::

I’ll close by drawing this analogy. Suppose that I’m in charge of a restaurant that provides dinner for 50 people every night, and that I have the legal rights to a monopoly on salad production. I discover that I can make a great-looking salad substitute with grass from the field behind our building. Lettuce costs money, but the grass is an abundant resource (and free!), so how much grass I stick into the salads is limited only by my own discretion. I am able to charge less for my salads the more grass I sneak in, and as time passes more people come to eat my cheap (and seemingly delicious) salad, since it’s so cheap here and they can’t get it anywhere else.

After a time, as always, reality kicks in, and it becomes readily apparent that people are getting quite sick after eating my salad. Word gets out that I’m committing fraud, that my salad was really grass, and that I “created” fake salad out of nothing in order to satisfy consumer demand without paying for more lettuce.

If you’re Professor Barber, the natural response would be: “Obviously capitalism has oversold itself on consuming. Producers created so much stuff that people had to believe that grass was good for them in order to fulfill wants that weren’t actually needs. We need to rethink our system of salad distribution so as to better meet the needs of the poor.” The implication, of course, is that the salad-producer needs more funds, or perhaps a change of personnel (which, unfortunately, doesn’t happen in the Federal Reserve).

If you’re Stefan Karlsson, the natural response is: “Let’s hold the salad-counterfeiter accountable. Fraud is no laughing matter.” The implication, of course, is that it was a bad idea to put one guy in charge of the salad, next to a field of grass and with immunity from punishment, in the first place.

The life of a libertarian

Rothbard is rather brilliant here in “For A New Liberty“, chapter 10. Any libertarian who has been so for more than 5 minutes will know this scenario all too intimately:

“PEOPLE TEND TO FALL into habits and into unquestioned ruts, especially in the field of government. On the market, in society in general, we expect and accommodate rapidly to change, to the unending marvels and improvements of our civilization. New products, new life styles, new ideas are often embraced eagerly. But in the area of government we follow blindly in the path of centuries, content to believe that what­ever has been must be right. In particular, government, in the United States and elsewhere, for centuries and seemingly from time immemorial has been supplying us with certain essential and necessary services, services which nearly everyone concedes are important: defense (includ­ing army, police, judicial, and legal), firefighting, streets and roads, water, sewage and garbage disposal, postal service, etc. So identified has the State become in the public mind with the provision of these services that an attack on State financing appears to many people as an attack on the service itself. Thus if one maintains that the State should not supply court services, and that private enterprise on the market could supply such service more efficiently as well as more morally, people tend to think of this as denying the importance of courts themselves[!].

“The libertarian who wants to replace government by private enter­prises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial. If the government and only the government had had a monopoly of the shoe manufacturing and retailing business, how would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, “How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? How would the shoe firms be capitalized? How many brands would there be? What material would they use? What lasts? What would be the pricing arrangements for shoes? Wouldn’t regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn’t have the money to buy a pair?[!!]“

“These questions, ridiculous as they seem to be and are with regard to the shoe business, are just as absurd when applied to the libertarian who advocates a free market in fire, police, postal service, or any other government operation. The point is that the advocate of a free market in anything cannot provide a “constructive” blueprint of such a market in advance. The essence and the glory of the free market is that individual firms and businesses, competing on the market, provide an ever-changing orchestration of efficient and progressive goods and services: continually improving products and markets, advancing technology, cutting costs, and meeting changing consumer demands as swiftly and as efficiently as possible. The libertarian economist can try to offer a few guidelines on how markets might develop where they are now prevented or re­stricted from developing; but he can do little more than point the way toward freedom, to call for government to get out of the way of the productive and ever-inventive energies of the public as expressed in voluntary market activity.

“How will the poor pay for defense, fire protection, postal service, etc., can basically be answered by the counter-question: how do the poor pay for anything they now obtain on the market? The difference is that we know that the free private market will supply these goods and services far more cheaply, in greater abundance, and of far higher quality than monopoly government does today. Everyone in society would benefit, and especially the poor[!]. And we also know that the mam­moth tax burden to finance these and other activities would be lifted from the shoulders of everyone in society, including the poor.”

(All emphasis and [!] are mine)

.. .and won’t someone please think of the children?!!?

books

I, Claudius by Robert Graves. A marvelous work of historical fiction woven together from the early days of the Roman emperors. Graves uses Claudius as a pair of sane eyes in an increasingly mad Roman world, and all of Rome’s great achievements and flaws are on display. At the beginning of the story, Claudius reflects on a prophecy given to him from the Oracle at Delphi, and its themes are carefully developed by Graves as the stuttering Cl – Cl – Claudius goes from family idiot and obscure historian to Roman Emperor (and eventually god). (I hope to read its sequel, Claudius the God, soon). A wholly satsifying and beautiful work.

On Memory and Recollection by Aristotle. A short tract (~8 pages) in which Aristotle further develops the faculties of the human soul (picking up where De Anima left off). It contains a key passage on abstraction and several helpful perspectives in understanding how it is that one recalls and remembers. As usual, his biology is a bit wanting; nevertheless the work has its moments of fascinating insight (e.g. Why is it that all animals have some kind of memory, yet only humans seem to be able to recollect?)

What Has the Government Done to Our Money? / The Case for a 100% Gold Dollar by Murray N Rothbard. Rothbard’s essays on money, collected in this volume, have been hailed as the greatest introduction to the subject of money ever written (this assessment is made by Austrians, of course!). The work embodies everything that is great about Rotbhard’s style: clear, concise, uncompromising, and well informed. I am now confident that I did not really know what money was until I read this work — shame on our educational system! For a short primer on money, banking, inflation, and (let’s not forget) government intervention in our money, there is probably no better work.