The Eight Standard Criticisms Raised in Opposition to Private Money and Laissez-Faire Banking

The body of conventional literature on monetary matters has, for many years, included several propositions that explicitly challenge the viability and/or desirability of free banking. Chapters 2, 3, and 4 presented a detailed theoretical case for free banking on the grounds that it would maintain nominal national income, reflect consumer preferences in the time and money markets, keep the market rate of interest equal to the natural rate, achieve continuous monetary equilibrium, and avoid business cycles. Despite those arguments, in order to complete the discussion, one must address the standard criticisms. That is, one must examine the key points in the case against free banking. The issues so often raised in opposition to private money and laissez-faire banking include the following claims: (1) that money is a "public good" and thus cannot be profitably produced in a free market; (2) that there exist significant "external effects" such that private money balances would be suboptimal; (3) that money production is a natural monopoly, that is, that marginal and average costs decline over the relevant range of output; (4) that competition in money will lead to massive inflation; (5) that free banking is inefficient in that it represents a waste of resources; (6) that privately produced moneys suffer from serious counterfeiting problems; (7) that central banking arose in response to true consumer needs, that is, that it is central banking rather than free banking that represents the natural evolution of money markets; and (8) that a lender of last resort (a central bank) is necessary in order to prevent or mitigate financial crises.

--Larry J. Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (Auburn, AL: Ludwig von Mises Institute, 2008), 157.

Party Members Were Supposed to be a New Type of "Homo Soveticus" Dedicated to Building Socialism in a Planned Economy Where All Exchanges Were Planned

This chapter analyzes the efforts of Soviet authorities to deter and prosecute "illegal" economic activities in the 1930s through the party's top control commission. Major economic positions were filled by the Politburo itself, where appointments dominated its agenda. Party members were supposed to be a new type of homo soveticus, dedicated to building socialism. According to official Soviet descriptions of the planned economy, all exchanges were planned, managers were loyal, and everyone was motivated by the goal of building socialism. There was no room for economic crimes and misdemeanors. We show, to the contrary, that economic agents, most of them party members, regularly broke the rules of the leadership, in spite of the real threat of punishment. Why would a planned economy managed by party members be so prone to violations of economic rules and laws?

The opening of the Soviet state and party archives provides an opportunity to study the "unofficial" behavior of the managers of the economy's resources; namely, factory managers, industrial ministry officials, and regional authorities. Such "managers of production" were judged by concrete economic results--production, adherence to labor plans, fulfillment of production assortments, cost reduction plans, and the like. Their goal was to fulfill their plans, using any means at their disposal, even if that meant violating rules and laws. The pioneering work of Joseph Berliner (1957) provided the first conclusive insights into the real life of Soviet managers. Using interviews with former Soviet managers to pierce the veil of official secrecy, Berliner found routine falsification, the use of unofficial resources, and the trading of resources by enterprise "pushers"--all of which violated Soviet law.

--Eugenia Belova, "Economic Crime and Punishment," in Behind the Façade of Stalin's Command Economy: Evidence from the Soviet State and Party Archives, ed. Paul R. Gregory (Stanford, CA: Hoover Institution Press, 2001), 131-132.

The Infamous Decree of June 4, 1947: "About Criminal Responsibility for Theft of State and Socialist Property"

A distinctive feature of Stalin's criminal justice system was its more severe punishment of theft of state and collective property than of private property. Even the most petty of thefts carried mandatory Gulag sentences. The Law of August 7, 1932, "About the Protection of Social Property," was enacted as the famine of 1932-33 was ravaging Ukraine, Kazakhstan, and parts of Russia, and it punished the theft of small amounts of grain with death sentences or ten years in the Gulag. Collective farmers who took small amounts of grain from the fields or milk from "socialist" cows found themselves toiling in the mines and timber fields of Siberia, or worse.

The "mild" Law of August 10, 1940, punished petty theft from state enterprises with only one year in prison. The harsh anti-theft law, the infamous Decree of June 4, 1947, "About criminal responsibility for theft of state and socialist property," mandated minimum sentences of five to seven years for theft of state or socialist property. Under the June 1947 decree, stealing was punished with long prison terms whether one kilogram or one ton of grain was taken. Repeat offenders, thefts organized by groups, and thefts in large quantities were punished by sentences up to twenty years.

--Paul R. Gregory, Lenin's Brain and Other Tales from the Secret Soviet Archives, Hoover Institution Press Publication 555 (Stanford, CA: Hoover Institution Press, 2008), 99.

The Day of the Manchester School and Laissez Faire Is Gone Because American Railroad Leaders Strongly Favor Federal Regulation

With the notable exception of Howard Elliott, president of the Northern Pacific and a militant advocate of near laissez-faire in the railroad system, American railroad leaders strongly favored federal regulation at this time despite the setbacks administered by the Insurgents of Congress and the failure of the rate advance of 1910. . . .

"The principle of regulation we accept," William Sproule of the Southern Pacific told the San Francisco Chamber of Commerce in late 1912. Seeing history somewhat hazily, H. U. Mudge, president of the Rock Island, announced, "I believe most railroad men now think that it would have been better for the railroads if the federal government had claimed the right to regulate all freight rates and that the railroads had conceded this from the start. . . ."

"The day of the Manchester school and laissez faire is gone," Fairfax Harrison announced to a group of businessmen. The Commission assured the railroads that they would use the power of the law to "permit such advances of rates as may be necessary to maintain the sound financial condition which they certify now exists." Could untrammeled competition assure the railroads that rates would go up when profits were low? Only the Commissioners, who "are increasingly willing to be fair, even when there are strong evidences of momentary popularity to be derived from doing the thing which is unfair," could provide such guarantees. Railroad men reflected on the alternatives to national regulation, considered the cutthroat competition of the past and the less considerate state legislatures and commissions of the present, and concluded that the federal government was indeed a blessing. Harrison spoke for the larger part of the American railroad leadership when he admitted, "The day of the Manchester school and laissez faire is gone. . . . Personally, I do not repine at the change. . . ."

--Gabriel Kolko, Railroads and Regulation, 1877-1916 (New York: W.W. Norton and Company, 1970), 204, 206-207.

The Idea That the 2007-2008 Financial Crash Demonstrates That Banks Need Regulating More Tightly Is Certainly Contestable

Following the financial crash of 2008, central banks and financial regulators have accrued many new powers. The consensus following the crash was that commercial banks, unless more tightly controlled, were a potential danger to financial stability and the wider economy. Banks in most developed countries have had structural changes imposed upon them and have had their capital more tightly regulated. There has also been a huge increase in the regulation of the conduct of banks. In addition, central banks have adopted so-called 'macro-prudential' policy instruments which attempt to reduce the supply of credit to particular areas of the economy.

The idea that the crash demonstrates that banks need regulating more tightly is certainly contestable. For example, it is clear that there was very little that central banks and financial regulators did in the 2000s that made the crash less likely or its effects more benign. Indeed, much that they did made things worse. Monetary policymakers in the US held interest rates down and stoked the boom. Many of the approaches to regulation encouraged the development of the kind of financial instruments that many believe were at the heart of the crisis. In addition, especially in the US, the government underwriting of financial risk in a number of areas of the financial system encouraged risk taking and lending to risky counterparties. Central bankers and regulators also did not have unique foresight into the events that would unfold. This should call into question approaches to promoting financial stability that involve more regulatory and central bank control of the financial system. For example, the first sentence of the last Bank of England Financial Stability Report issued before the financial crisis started in the UK read: 'The UK financial system remains highly resilient.' Paul Tucker, head of market operations at the Bank of England said in April 2007: 'So it would seem that there is a good deal to welcome in the greater dispersion of risk made possible by modern instruments, markets and institutions.' They were the very instruments that were at the seat of the crisis (though they did not, as such, cause the crisis) and which were encouraged by regulatory and other interventions, especially in the US.

--Philip Booth, foreword to Financial Stability without Central Banks, by George Selgin (London: Institute of Economic Affairs, 2017), ix-x.

To Invalidate Real Business Cycle (RBC) Theory, We Must Refute the Fundamental Causal Factors that RBC Theory Claims to be at Work

I show that RBC (Real Business Cycle) theory, in all of its variations, is not a valid theory of the business cycle. Hence, it does not provide a valid explanation of recessions and depressions. This is the case primarily because it does not explain the type of economy-wide fluctuations we see and the events that occur on the side of money during the business cycle. These observations, in essence, were made long ago by the great Austrian economist Ludwig von Mises in his comments on nonmonetary explanations of the business cycle. He showed that they are all invalid. My analysis goes much farther than Mises's analysis because I go into much more detail to show why RBC theory is invalid. I also cover a far broader range of topics than Mises. However, his analysis does serve as a guide for my analysis.

In considering my critique of RBC theory, one should keep in mind that there are many RBC theories. The critiques I provide below can be used to refute all of them. This is the case because all the different RBC theories are fundamentally the same; they are all based on some nonmonetary explanation of the business cycle. Hence, in order to refute RBC theory, one does not have to refute every specific RBC theory. One can generalize from the specific versions of RBC theory addressed below to refute other versions not mentioned here. Hence I focus on the more prominent RBC theories.

The most important task in showing that RBC theory is invalid is to refute the fundamental causal factors that RBC theory claims to be at work. Once the fundamental claims are shown to be invalid, no version of it will be tenable. As an analogy, think of it this way: once the foundation of a skyscraper is shown to be weak, one does not have to show that the structure of a particular floor of the building is weak to be sure that the floor is in danger of collapsing. That floor, and every other floor, will collapse because of the weak foundation. The same is true of different RBC theories.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 80-81.

Some of the Serious Questions about the Validity of the Austrian Business Cycle Theory (ABCT)

Many criticisms of ABCT (Austrian Business Cycle Theory) have been made over the last several decades by various people. All of them are invalid. The theory provides the only comprehensive and logically consistent explanation of the cycle. It is the only theory that is consistent with all the facts of the cycle. Nonetheless, since many criticisms have been made, they need to be addressed. I will not address all of the criticisms in this chapter. Many of the criticisms are shown to be invalid in other chapters, such as the claim that ABCT does not explain the contraction phase of the cycle (chapter 3) and the claim that the theory is not based in reality (chapters 3 and 6-9). In addition, some of the criticisms are devoid of intellectual content or are incoherent and therefore require no response.

The only criticisms of ABCT I will address in this chapter are those that are not addressed elsewhere in this book and that raise serious questions about the validity of ABCT. One criticism, on whether ABCT is consistent with what contemporary economists call rational expectations, requires significant treatment to show that this, in fact, is not a valid criticism. Others pertain to claims that ABCT is too complex and that ABCT commits errors in regard to its use of interest rates. Still others criticize ABCT for allegedly requiring full employment at the start of the expansion to generate the harmful effects of the cycle. And there are many more. I address the "rational expectations" criticism last, since it requires a more lengthy treatment.

--Brian P. Simpson, Integrating Theory and Practice, vol. 1 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 87.

The Economics of Illusion in the Soviet Administrative-Command System: Gosplan and Industrial Ministries Clashed Regularly over Information

One constant of the Soviet administrative-command system is that information was almost exclusively generated by the producers themselves. Peter Boettke wrote of the "economics of illusion" that apply in this situation; namely, the proclivity of producers to conceal or to distort information to pull the wool over the eyes of superiors. The ministries were required to submit a voluminous amount of reporting (otchetnosti): all reporting forms were confirmed by Gosplan's statistics office with agreement by the affected ministries, the Ministry of Finance, and Gosbank. These formal reports were also supplemented by numerous ad hoc requests for information and for special reports. "They" (the industrial ministries) controlled the flow of information. "We" (the Politburo/SNK/Gosplan) did not gather its own independent information, although it did receive ad hoc information from its control commissions, the interior ministry, and military inspectors. The ministries had a strong information advantage relative to their superiors. Clearly, the administrative-command system could not be effectively administered with incorrect information. Thus, Gosplan and industrial ministries clashed regularly over information.

--Paul R. Gregory, The Political Economy of Stalinism: Evidence from the Soviet Secret Archives (New York: Cambridge University Press, 2004), 140.

The Intentional Explanation of "Racism" May Be More Moralistically Satisfying, but the Systemic Explanation Fits the Facts

There is no inherent reason why low-skill or high-risk employees are any less employable than high-skill, low-risk employees. Someone who is five times as valuable to an employer is no more or less employable than someone else who is one-fifth as valuable, when the pay differences reflect their differences in benefits to the employer. This is more than a theoretical point. Historically, lower skill levels did not prevent black males from having labor force participation rates higher than that of white males for every U.S. Census from 1890 through 1930. Since then, the general growth of wage fixing arrangements--minimum wage laws, labor unions, civil service pay scales, etc.--have reversed that and made more and more blacks "unemployable," despite their rising levels of education and skill, absolutely and relative to whites. In short, no one is employable or unemployable absolutely, but only relative to a given pay scale. Increasingly, blacks have been priced out of the market. This is particularly apparent among the least experienced blacks--that is, black teenagers, who have astronomical unemployment rates.

The alternative explanation of high black teenage unemployment by "racism" collides with two very hard facts: (1) black teenage unemployment in the 1940s and early 1950s was only a fraction of what it was in the 1960s and 1970s (and was no different from white teenage unemployment during the earlier period), despite the obvious fact that there was certainly no less racism in the earlier period, and (2) unemployment rates among blacks in their mid twenties drop sharply to a fraction of what it was in their teens, even though the workers have not changed color as they aged, but only become more experienced. The intentional explanation--"racism"--may be more moralistically satisfying, but the systemic explanation fits the facts.

--Thomas Sowell, Knowledge and Decisions (New York: BasicBooks, 1996), 174-175.

Under These Circumstances the Power of a Giant Corporation Is Based on Transitory or Variable Factors

The failure of the merger movement to attain control over the economic conditions in the various industries was brought about by the inability of the consolidated firms to attain sufficient technological advantages or economies of size over their smaller competitors--contrary to common belief and the promises of promoters. The consolidations were formed not because of technological considerations but primarily to create profits for promoters and incidentally because of the desire to eliminate competition. The amalgamation of industrial facilities and resources on a massive scale often has the sort of "efficiency" in a capitalist economy which is guided less by purely technological considerations than by uniquely capitalist ones--economic warfare, private profit, market instabilities. But such considerations are insufficient to prevent the entry of competitors who often can operate successfully at levels of production well below those of the larger combinations, and can exploit new opportunities for profit more ably. In these circumstances the power of a giant corporation is based on transitory or variable factors, and the decentralization movement within many large corporations is a concession to the efficiency of the successful smaller competitors.

--Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916 (New York: The Free Press, 1977), 55.

Economic versus Political Monopoly

There are two concepts of monopoly that exist and one provides a good understanding of monopoly while the other provides a poor understanding of monopoly. The concept accepted by most people today is the one that is deficient, and it is the acceptance of this invalid concept of monopoly that leads people to (incorrectly) believe that monopolies arise out of the free market. The concept of monopoly accepted by most people today is known as the economic concept of monopoly. This concept says a monopoly exists when there is only one supplier of a good in a given geographic region. The concept that provides a sound understanding of monopoly is known as the political concept of monopoly. This says that monopolies arise when the government initiates physical force to reserve a market or a portion of a market to one or more sellers.

The economic concept of monopoly focuses on the number and size of firms in an industry. It says the smaller the number of firms in an industry, and the larger those firms are, the more monopoly power that exists in that industry. It says monopoly power can arise naturally out of the market simply by firms becoming big. The political concept focuses on the restriction of competition by the government and says monopoly power can be held by many small producers against just one or a few large producers, or can be held by one large producer against other, smaller producers. It says as long as a firm is being helped by the government in some way--no matter what its size--then that firm has monopoly power.

The problem with the economic concept is that it leads to confusion because it can be used to say that no firm is a monopoly or all firms are monopolies, depending on how broadly or narrowly one defines a good. It can also be used to say a firm both is and is not a monopoly. It other words, the economic concept of monopoly leads to blatant contradictions. Based on this concept, it is arbitrary whether a firm is a monopoly or not.

--Brian P. Simpson, Markets Don't Fail! (Lanham, MD: Lexington Books, 2005), Adobe Digital Editions, 31-32.

The Social Security Act Was Created by Industrial Relations Experts Working for Foundations, Consulting Firms, and Corporate Think Tanks

As for the Social Security Act, it was not the work of liberals and labor leaders, as currently believed due to the fact that they defend it and conservatives dislike it. Instead, it was created by industrial relations experts who worked for foundations, consulting firms, and think tanks funded by several of the largest corporations of the 1930s, including some of those that also backed the subsidy program for agricultural interests. True enough, the Social Security Act was opposed in testimony before Congress by a wide range of ultraconservative corporate leaders, but their objections on this particular issue primarily reflected their growing animosity toward Roosevelt for some of the New Deal’s other policies, particularly in relation to unions and collective bargaining, not substantive objections to the plans for social security created by the moderate conservatives of the corporate world.

--G. William Domhoff and Michael J. Webber, introduction to Class and Power in the New Deal: Corporate Moderates, Southern Democrats, and the Liberal-Labor Coalition, Studies in Social Inequality (Stanford, CA: Stanford University Press, 2011), Kindle e-book, 6.

If Formerly Parliaments Were the Guardians of Thrift, They Are Today Far More Like Its Sworn Enemies

In January 1914, just a little more than six months before the start of the First World War, Böhm-Bawerk said . . . that the Austrian government was following a policy of fiscal irresponsibility. During the preceding three years, government expenditures had increased by 60 percent, and for each of those years the government’s deficit had equaled approximately 15 percent of total spending.

The reason, Böhm-Bawerk said, was that the Austrian parliament and government were enveloped in a spider’s web of special-interest politics. Made up of a large number of different linguistic and national groups, the Austro-Hungarian Empire was being corrupted through abuse of the democratic process, with each interest group using the political system to gain privileges and favors at the expense of others.

Böhm-Bawerk explained,

We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies.

Nowadays the political and nationalist parties ... are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one [group] has also to be conceded to others — from a single costly concession springs a whole bundle of costly concessions.

--Richard M. Ebeling, "Eugen von Böhm-Bawerk: Leading Austrian Economist and Finance Minister of Fiscal Restraint," in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

Money Control Is the Supreme and Most Comprehensive of All Government Controls Short of Expropriation

In his 1942 book, This Age of Fable, German free-market economist Gustav Stolper pointed out:

Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system.… A "free" capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.

Even in the high-water mark of classical liberalism in the 19th century, practically all advocates of the free market and free trade believed that money was the one exception to the principle of private enterprise. The international monetary order of the 19th century, of which Wilhelm Roepke spoke in such glowing terms, was nonetheless the creation of a planning mentality. The decision to "go on" the gold standard in each of the major Western nations was a matter of state policy.

--Richard M. Ebeling, "The Gold Standard as Government-Managed Money," in Monetary Central Planning and the State (Fairfax, VA: The Future of Freedom Foundation, 2015), Kindle e-book.

The Greek and European Union Crisis Is the Result of Collectivism

The fiscal- and other economic-policy problems that are plaguing Greece are simply the highly magnified and intensified problems that are affecting many of the other European nations.

Many of them have accumulated large national debts that press upon the fiscal capacities of their taxpayers. They all have highly regulated markets and restricted labor markets. They all have aging populations expecting generous government-funded pensions as the years go by. They all have costly welfare-state entitlement programs that must be financed through taxes and deficit financing.

They also share a generally anti-capitalistic mentality. Intellectuals, politicians, many in the electorates, and most certainly the national and EU bureaucrats neither understand nor advocate the classical liberal ideal of truly free markets or the wider political philosophy of individualism and individual rights to life, liberty, and honestly acquired property.

The market-oriented entrepreneur is neither trusted nor valued. Rather than being seen as an innovator and creator of new, better, and less-expensive products serving the betterment of the general consuming public, the business enterpriser is considered an exploiter, a manipulator, and selfish profit-seeker, only doing damage to the society in which he operates.

The free enterpriser must be either heavily controlled or regulated, or he must be put out of business. The only good businessman is one who works hand in hand with politicians and bureaucrats to manipulate and restrict markets for their mutual advantage.

--Richard M. Ebeling, "An Austrian Economist's Advice for Greece and the European Union," in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

Those in Political Authority and Power Assume They Can Micro- and Macro-Manage Social and Economic Affairs Better Than the Free Market

Over the last 100 years, governments have attempted to replace people’s own free actions for mutual betterment with systems of government regulation, planning, redistribution and control. These have gone under the names of socialism, communism, fascism, National Socialism (Nazism) interventionism, welfare statism, “progressivism,” the “third-way,” social democracy, Keynesianism and many others.

Their common premise is that those in political authority and power can micro- and macro-manage the social and economic affairs of human society in ways better and more socially just than the free market. Austrian Economics shows why and how it is that all these attempts at government social engineering have failed and often with disastrous consequences.

--Richard M. Ebeling, introduction to Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

Keynes May Only Succeed in Becoming the Academic Idol of Our Worst Cranks and Charlatans; His Book May Become the Economic Bible of a Fascist Movement

Especially critical of The General Theory were many of the leading members of the Chicago school of economics. Henry Simons, for instance, writing in the Christian Century (July 22, 1936) argued that Keynes "gives us a theory of unemployment, interest and money which attains generality by being about nothing at all." His solutions to the problem of economic depressions ran "in terms of a great and curious variety of expedients … intended to demonstrate that wise governmental policy must deal directly with many particular [market] relationships," with little thought as to whether government has the ability to actually master all the problems involved. He concluded that Keynes "may only succeed in becoming the academic idol of our worst cranks and charlatans — not to mention the possibilities of the book as the economic bible of a fascist movement."

--Richard M. Ebeling, "The Keynesian Revolution and the Early Critics," in Monetary Central Planning and the State (Fairfax, VA: The Future of Freedom Foundation, 2015), Kindle e-book.

The Hayekian Triangle Is a Faulty Analytical Tool with 14 Fundamental Problems

In this paper we maintain that because of 14 fundamental problems considered below, though not necessarily in the order of importance, the “Hayekian triangle” is a faulty analytical tool. First, at the conceptual level regarding all consumers’ goods collectively, the aggregative nature of the triangle is problematical. Second, again re all consumers’ goods collectively, as with most other aggregative concepts in economics, there is no coherent way to construct a measure thereof. Third, more “round-aboutness” is confounded with more time consuming; i.e., a structure of production with more stages is confounded with a lengthier period of production. Fourth, the period of production inherent in a more complex structure of production is confounded with the period of production that exists during the transition from a less to a more complex structure of production. Fifth, the concept “stages of production” is incoherent. Sixth, the vertical axis represents the value of consumer goods, not consumption. Therefore, what is needed is not a time-structure of production, which is but one of the two types of actions, but rather a time-structure of action, to include both types of action; to wit: production and consumption. Seventh, the triangle can be used to account either for goods in process (or circulating capital) or, or for fixed capital. It cannot account for both simultaneously, a serious shortcoming as it is intended to be used to explicate the time consuming process of producing consumption goods using heterogeneous fixed capital goods at different points in the process. Eighth, re goods in process, the triangle cannot handle post- initiation-of-production infusions of resources. Ninth, when “shifting triangles” are used the time dimension is confused, and this has two baleful consequences. Tenth, the implicit assumption of differentiability regarding the hypotenuse of the triangle is anathema to Austrianism. Eleventh, the triangle model cannot incorporate leisure. Twelfth, the triangle has not been mathematized. As a consequence of these errors, the “triangle” does not demonstrate that which it purports to show. Thirteenth, the triangle is the wrong geometrical figure for these purposes; if one must be used, arguendo [for the sake of argument], the trapezoid is preferable. Fourteenth, the triangle ignores durable capital goods.

--William Barnett II and Walter E. Block, "On Hayekian Triangles," in Essays in Austrian Economics (Bronx, NY: Ishi Press International, 2012), Kindle e-book, 237-238.

The Keynesian Solution to the Alleged Unemployment Equilibrium of Capitalism Is Government Budget Deficits (Euphemistically Called “Fiscal Policy”)

To describe matters verbally, one could say this: The alleged problem of capitalism, according to the Keynesians, is that full employment results in a volume of saving that the economic system cannot profitably invest. In effect, such saving is a destructive by-product of full employment under capitalism, and thus prevents the existence of full employment. It is a kind of toxic excrescence—a veritable boil on the economic body that interferes with its vital functioning. Fortunately, however, there is a doctor, and he has a cure for the problem. The doctor is the government, and the cure is a deficit in its budget. As Keynes has explained matters, the government doctor will lance the savings boil and allow its destructive juices to flow into the waiting pan of the government’s deficit rather than into private investment, where it would reduce the rate of return on capital to an intolerably low level.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 878.

Adam Smith's "Invisible Hand" of the Free Market Is Actually the Uniformity-of-Profit Principle

In just this way, initially higher rates of profit are brought down and initially lower rates of profit are raised up. The logical stopping point is a uniform rate of profit in all the various industries.

This principle of the tendency of the rate of profit toward uniformity is what explains the amazing order and harmony that exists in production in a free market. It was largely the operation of this principle that Adam Smith had in mind when he employed the unfortunate metaphor that a free economy works as though it were guided by an invisible hand. . . .

The uniformity-of-profit principle explains how the activities of all the separate business enterprises are harmoniously coordinated, so that capital is not invested excessively in the production of some items while leaving the production of other items unprovided for. The operation of the uniformity-of-profit principle is what keeps the production of all the different items directly or indirectly necessary to our survival in proper balance. It counteracts and prevents mistakes leading to the relative overproduction of some things and the relative underproduction of others.

--George Reisman, The Government Against the Economy: The Story of the U.S. Government's On-going Destruction of the American Economic System through Price Controls (Ottawa, IL: Jameson Books, 1979), 6.

The Glass-Steagall Act Did Not Change the Most Important Weakness of the American Banking System

While breaking up big universal banks, the Glass-Steagall Act had no impact on the small unit banks that failed by the thousands. These banks typically didn't engage in corporate underwriting. Incredibly, as Benston noted, the Glass-Steagall Act "did not change the most important weakness of the American banking system—unit banking within states and the prohibition of nationwide banking." In fact, he says, "This structure is considered the principal reason for the failure of so many U.S. banks, some 90 percent of which were unit banks with under $2 million of assets."

--Jim Powell, FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Crown Forum, 2003), 64.

Today's China Has Much in Common with the NEP (New Economic Policy)-Era Soviet Union

The state’s dominant role in investment is evidence of a desire to “occupy the commanding heights.” This is a strategy originally described by Lenin in a 1922 address to the Fourth Congress of the Communist International on his New Economic Policy. The NEP, introduced in the previous year, was a retreat from earlier attempts to achieve a “direct transition to purely socialist forms,” as Lenin put it. These attempts, combined with the disastrous effects of the Russian Civil War, resulted in an economic collapse. The Soviet government had no choice but to restore a measure of private participation in the economy.

The fact that command economy methods had failed was not taken as a sign that they were unworkable. For Lenin, the problem was simply that their time had not yet come. He decided that a preliminary period of “state capitalism” would be necessary before “full communism” could be realized.

Retaining state control over key sectors was necessary to prevent a return to the prerevolutionary status quo during this transitional period. In his address, Lenin advocated (1) keeping the land and the “vital branches of industry” in the hands of the state, (2) leasing out “only a certain number of small and medium plants,” and (3) forming “mixed companies,” in which “part of the capital belongs to private capitalists—and foreign capitalists at that—and the other part belongs to the state.”

Surprisingly, despite being considerably more advanced economically, today’s China has much in common with the NEP-era Soviet Union. All land is state owned, as are many strategic sectors. The largest plants are almost all part of central government-controlled enterprises. Mixed companies, like those listed on the Hong Kong Stock Exchange, are quite common.

--Mark A. DeWeaver, Animal Spirits with Chinese Characteristics: Investment Booms and Busts in the World's Emerging Economic Giant (New York: Palgrave Macmillan, 2012), 24.

Only Free Banking Would Have Rendered the Market Economy Secure against Crises and Depressions

If banking were entirely “free,” meaning “capitalist” in the true sense of the word; if banks were not protected and regulated by the state; if they did not enjoy the privilege of a “lender of last” resort and, in particular, if that “lender of last resort” could not provide unlimited new reserves to the banks; if individual banks were under full risk of default just as any other true capitalist enterprise; and if the public knew this and acted accordingly, banking would be more limited and most certainly safer, not least for the economy as a whole. As Ludwig von Mises put it:

Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular—one is tempted to say normal—feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.

--Detlev S. Schlichter, Paper Money Collapse: The Folly of Elastic Money, 2nd ed. (Hoboken, NJ: John Wiley and Sons, 2014), 86.

Eminent Dutch Economist Nikolaas G. Pierson Wrote the First Exposition of the Economic Calculation Problem

Nikolaas G. Pierson was the most eminent Dutch economist of his day, and a sometime Prime Minister of Holland. His paper on ‘The Problem of Value in the Socialist Community’ was a direct reply to Kautsky’s celebrated speech at Delft in 1902, which Pierson had attended. Pierson’s paper, the first really clear exposition of the economic calculation problem, had very little influence until the 1920s, partly because it appeared in Dutch, and partly because its unassuming tone, its modest air of pointing out a few difficulties that would confront socialism, no doubt concealed from all but the most attentive readers the possibility that these difficulties might be intractable. The true significance of the piece was probably further obscured by the fact that Pierson begins it (after a somewhat rambling introduction) by concentrating on the problem of how a socialist nation-state would conduct its foreign trade. There were still Marxists who denied that there could be such a thing as a socialist nation-state, or that there could be ‘foreign trade’ under socialism, but Pierson takes Kautsky’s recent concessions as his point of departure. A further contribution to the piece’s obscurity is that Pierson’s textbook on economics (1912) briefly discusses socialism but makes no mention of the economic calculation problem.

--David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.

Keynes's Law That Marginal Propensity to Save Increases with Income Is False, Thus Invalidating the Justification for Highly Progressive Income Taxes

Friedman wasn't the only one who cast doubts on Keynes's theories. He verified Simon Kuznets's studies at NBER denying Keynes's "psychological law" that the "marginal propensity to save" increases with income, at least on a countrywide level. Kuznets, who later won a Nobel Prize, showed that since 1899 the percentage of income saved has remained steady despite a substantial rise in real income. This discovery was all the more important because the Keynesians used the idea of an increasing propensity to save by the wealthy to justify highly progressive income and estate taxes as a way to encourage a high-consumption society and avoid stagnation. According to the Keynesians, consumption was the key stimulant to short-term economic performance and progressive taxation would raise a country's propensity to consume. Now, under the weight of historical evidence, the Keynesian prescription appeared impotent.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

The Keynesian Consumption Function Is Fundamentally Flawed and the Expenditure Multiplier Is Closer to 1 Than the Textbook Version of 4 or 5

Friedman demonstrated that the Keynesian consumption function did not fit the historical evidence. Crucial to the Keynesian case for increased government spending to bring about full employment is the consumption function--the notion that there is a stable short-term relationship between household consumption spending and household current income. According to the Keynesian model, government spending would increase household incomes through a leveraged multiplier effect. However, using a massive study of consumption data in the United States, Friedman showed that households adjust their expenditures only according to long-term or permanent income changes, and pay little attention to transitory patterns. Therefore, the Keynesian consumption function was fundamentally flawed and any leveraging of government expenditures through the multiplier would be much smaller than expected. Friedman's diligent and comprehensive work set a new high standard of empirical scholarship, and later research by Franco Modigliani, James Tobin, and other Keynesians confirmed this "life-cycle" or "permanent income" hypothesis of consumption. Further studies over the years validated Friedman's conclusion that the expenditure multiplier is closer to 1 than the textbook version of 4 or 5.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

Gross Domestic Product (GDP) or Gross Output (GO): Measuring the "Use" Economy or the "Make" Economy

What is Gross Output? It is an attempt to measure total sales volume at all stages of production, what we might call the "make" economy. Most importantly, it includes all business-to-business (B2B) transactions that GDP leaves out. In the third quarter of 2014, GO hit $31.3 trillion, almost twice the size of GDP, which was $17.6 trillion.

GDP is the standard yardstick for measuring the value of final goods and services purchased by consumers, businesses, and government in a year, what we call the "use" economy. While GDP measures the "use" economy, now with GO we have a way to measure the "make" economy every quarter too. Finally, we have a full picture of the economy.

--Mark Skousen, introduction to the new revised edition of The Structure of Production, new rev. ed. (New York: New York University Press, 2015), Kobo e-book.

According to Menger, Income Is Not Distributed; It Is Produced

The Marginalist Revolution solved another quagmire in economic theory: Menger taught a new generation of economists that production and distribution could once again be linked together. The demand of consumers ultimately determines the final prices of consumer goods, which in turn sets the direction for productive activity. Final demand establishes the prices of the cooperative factors of production--wages, rents, and profits--according to the value they add to the production process. In short, income is not distributed, it is produced, according to the value added by each participant. Under this new brand of microeconomics, profits and use are directly connected through their marginal utility. Prices reflect the consumer's most highly valued (marginal) utility, and profit-driven production seeks to meet those needs.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

Hayek Does Not Claim That "Greed Is Good"; He Claims That Greed Can Have Good Consequences

His writings on markets bring out the way in which the liberal ‘great society’ that he favours rests upon actions which may be morally unlovely. It also involves the operation of rules which may generate consequences which are morally problematic. Hayek is not arguing that, in the phrase from Wall Street, ‘greed is good’. Rather, he is arguing, with Mandeville, that greed can have good consequences—which is a rather different matter. Similarly, Hayek argues, with Hume, that the system of justice upon which a ‘great society’ rests may also generate specific legal decisions which may look grim, from a moral point of view. . . .

Why this matters is brought out by the other theme in Hayek’s work with which we will again here be concerned: the way in which the kind of society that he favours—and which he argues is the best that we can attain—is maintained by the actions of individuals who are, for the most part, blind to the systematic consequences of their actions.

--Jeremy Shearmur, introduction to Hayek and After: Hayekian Liberalism as a Research Programme, Routledge Studies in Social and Political Thought 1 (London: Routledge, 2003), 10.