Molinari Applies Economic Laws to the State and Concludes that the Market Can Replace the State Monopoly of Police

Molinari's most original contribution to political and economic thought is his thesis that the market can provide more cheaply and more efficiently the service of police protection of life, liberty and property. Hitherto, this had been considered to be the monopoly of the state, and it was Molinari's insight that the laws of political economy could and should be applied to the management of state functions. His attempt to apply economic laws to the state led him to conclude that the market could in fact replace the state monopoly of police as well as the provision of roads, lighting, garbage collection, sewerage and education. Molinari argues, in summary, that if the market was more efficient in providing people with shoes or bread then, for exactly the same reasons, it would be better to hand over the monopoly-state functions to the market. Thus the argument is tacitly made that "proprietary anarchism" is inherent in the logic of the free market and that consistency requires that one pursue the minimization of the state power to its logical conclusion, i.e., no government at all.

--David Hart, "Gustave de Molinari and the Anti-statist Liberal Tradition (excerpts)," in Anarchy and the Law: The Political Economy of Choice, ed. Edward P. Stringham (New Brunswick, NJ: Transaction Publishers, 2007), 386.

The Grocer Philosophy of Inflation Was Exploded by Adam Smith and Jean-Baptiste Say But Revived by Lord Keynes as the Full-Employment Policy

The inflationist or expansionist doctrine is presented in several varieties. But its essential content remains always the same.

The oldest and most naive version is that of the allegedly insufficient supply of money. Business is bad, says the grocer, because my customers or prospective customers do not have enough money to expand their purchases. So far he is right. But when he adds that what is needed to render his business more prosperous is to increase the quantity of money in circulation, he is mistaken. What he really has in mind is an increase of the amount of money in the pockets of his customers and prospective customers while the amount of money in the hands of other people remains unchanged. He asks for a specific kind of inflation; namely, an inflation in which the additional new money first flows into the cash holdings of a definite group of people, his customers, and thus permits him to reap inflation gains. Of course, everybody who advocates inflation does it because he infers that he will belong to those who are favored by the fact that the prices of the commodities and services they sell will rise at an earlier date and to a higher point than the prices of those commodities and services they buy. Nobody advocates an inflation in which he would be on the losing side.

This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptiste Say. In our day it has been revived by Lord Keynes, and under the name of full-employment policy is one of the basic policies of all governments which are not entirely subject to the Soviets.

--Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 463-464.

The Most “Successful” Political “Entrepreneurs” Are the Ones Who Are Most Adept at Convincing the Public That They Can Offer Them Something for Nothing

Private property entrepreneurs succeed by discovering ways to reduce costs and prices, improve product or service quality, or by inventing new products that meet the approval of consumers. They succeed, in other words, by catering to consumers. If they fail to please consumers, they lose money or go bankrupt.

In politics, the opposite is often true: “entrepreneurial” politicians “succeed” by avoiding the minor constraints imposed on their behavior by the elections that are held every two or four years. The most “successful” political “entrepreneurs” are the ones who are most adept at convincing a gullible, public-school-educated, rationally ignorant public that they can offer them something for nothing. They are the slickest liars and propagandists. Bill Clinton was arguably the biggest and best liar in American politics over the past half century, and was one of the most successful politicians as well. As discussed above, successful political “entrepreneurs” are good at

• telling official lies about government policy,
• hiding the costs of government with fiscal illusions created by excise taxation and debt finance, 
• creating off-budget government enterprises to further hide the true costs of government from the public,
• and allocating large amounts of taxpayer dollars to nonprofit sector special interest groups which grossly exaggerate the benefits and understate the costs of special-interest legislation.

--Thomas J. DiLorenzo and Walter E. Block, An Austro-Libertarian Critique of Public Choice, Economy and Society (New York: Addleton Academic Publishers, 2016), Kindle e-book.

On the Missing Curve in Usual Laffer Curve Analysis

The failure to include the Y(T) curve in the usual Laffer curve analysis makes it easy to overlook an important point. It is that the tax rate at which national income is maximized is necessarily lower than that at which tax revenues are maximized because the only way for tax revenues to peak (and then decline) as tax rates increase is for income to decline (in percentage terms; i.e., it is a matter of the tax rate elasticity of income) at the same (a faster) rate than that at which the tax rates increase.

--William Barnett II and Walter E. Block, "On the Use and Misuse of the Laffer Curve," in Essays in Austrian Economics (Bronx, NY: Ishi Press International, 2012), Kindle e-book, 90.

Protectionism and the Theory of Collective Action: Better-Organized and Better-Financed Interests Win in the Political Process

Now comes the puzzle: If free trade is so beneficial, why has protectionist sentiment remained alive and well in government circles and in most historical periods? Why is it so difficult to reduce barriers to international trade?

The answer is that, in political reality, protectionism does not aim to maximize income or welfare but to protect the special interests of certain producers. Even if free trade benefits consumers across the board, it hurts some producers’ interests. Protectionism has the opposite effect—it hurts most people but benefits special interests among producers. Why do special interests win against the interests of most people, and why are policies enacted if they have higher costs than benefits? These phenomena are explained by what economists call the theory of collective action: small, concentrated interests have greater ability and incentives to organize for lobbying and other political action than large, diffuse interests do. In general, the better-organized and better-financed interests win in the political process.

--Pierre Lemieux, What's Wrong with Protectionism? Answering Common Objections to Free Trade (Lanham, MD: Rowman and Littlefield, 2018), Kindle e-book.

The Quest for General Laws of Capitalism Is Misguided because It Ignores the Key Forces Shaping How an Economy Functions

Economists have long been drawn to the ambitious quest of discovering the general laws of capitalism. David Ricardo, for example, predicted that capital accumulation would terminate in economic stagnation and inequality as a greater and greater share of national income accrued to landowners (1817). Karl Marx followed him by forecasting the inevitable immiseration of the proletariat. In his tome, Capital in the 21st Century, Thomas Piketty emulates Marx in his title, his style of exposition, and his critique of the capitalist system (2014). Piketty is after general laws that demystify our modern economy and elucidate the inherent problems of the system—and point to solutions.

But the quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions: the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various economic arrangements are distributed. Despite his erudition, ambition, and creativity, Marx was led astray because of his disregard of these forces. The same is true of Piketty’s sweeping account of inequality in capitalist economies.

--Daron Acemoglu and James A. Robinson, "The Rise and Decline of the General Laws of Capitalism," in Anti-Piketty: Capital for the 21st Century, ed. Jean-Philippe Delsol, Nicolas Lecaussin, and Emmanuel Martin (Washington, DC: Cato Institute, 2017), Kindle e-book.

The Government's Assault on the Supply of Capital Has Begun to Transform the Economy into One of Stagnation and Decline Causing Anger over “Economic Inequality”

The government’s massive assault on the supply of capital has begun to transform the American economic system from one of continuous economic progress and generally rising living standards into one of stagnation and outright decline. People are shocked and outraged as they see the standard of living fall. They had believed that while physical nature might be fragile and damaged by the loss even of a single species of plant or animal life, the economic system was indestructible. No tax, no regulation, was ever too much for it. The cost would always somehow come out of the profits of the rich, not the standard of living of the average wage earner, even if the ever-repeated additional costs came quickly to exceed all the profits of the economic system.

As people have learned that the economic system is not indestructible, they have turned in anger and resentment against “economic inequality,” as though it were the surviving wealth of others that was the cause of their poverty, rather than the fact that, thanks to the government, others do not have sufficient capital to supply and employ them in the manner they would like.

--George Reisman, Piketty's Capital: Wrong Theory / Destructive Program (Laguna Hills, CA: TJS Books, 2014), Kindle e-book.

The Federal Reserve Replaced Open-Market Operations with a Floor-Type Operating System as Its Chief Instrument of Monetary Control

Federal Reserve authorities responded to the 2007-8 financial crisis with a sequence of controversial monetary policy experiments aimed at containing the crisis and, later on, at promoting recovery. One of those experiments consisted of the Fed's decision to start paying interest on depository institutions' balances with it, including both their legally required balances and any balances they held in excess of legal requirements. Because the interest rate on excess reserves was high relative to short-term market rates, the new policy led to the establishment of a "floor"-type operating system, meaning one in which changes in the rate of interest paid on excess reserves, rather than open-market operations, became the Fed's chief instrument of monetary control.

Although it has attracted less attention, and generated less controversy, than many of the Fed's other crisis-related innovations, the Fed's shift to a floor system has also had more profound and enduring consequences than many of them. And despite Fed officials' intentions, those consequences, including a radical change in the Fed's methods of monetary control, have mostly been regrettable. While Fed officials hoped that the new floor system would assist them in regulating the flow of private credit in the face of extremely low and falling interest rates, a close look at the workings of the system, and at its record, shows that those hopes have been disappointed.

--George Selgin, introduction to Floored! How a Misguided Fed Experiment Deepened and Prolonged the Great Recession, Cato Working Paper 50 (Washington, DC: Cato Institute, 2018), 1.

The Impotence of Central Banks Operating under the Classical Gold Standard’s Constraints

Indeed, many of the countries that were part of the classical gold standard did not even have central banks at the time. These included the United States, which was the largest participant, and Canada, Australia, and Switzerland, all of which were among those most successful in adhering to the standard. Central banks were, on the other hand, behind some of the least robust gold standards of Latin America and Asia.

When central banks did seek to exert some influence, they generally sought, not to expedite, but to forestall the gold standard’s normal operation, avoiding adjustments needed to preserve or restore international equilibrium. In particular, instead of managing their discount rates as if to mimic the response of decentralized arrangements, central banks attempted to take advantage of the ability their monopoly privileges gave them to defy the gold standard “rules” by sterilizing gold transfers. But while such attempts might succeed for a time in deferring needed adjustments, more often they proved entirely futile. Under the classical gold standard, Trevor Dick and John Floyd (1992) conclude, “central banks face[d] constraints, not rules,” and could not sterilize the effects of gold flows or control their domestic money stocks even if they wanted to.

For some, of course, the impotence of central banks operating under the classical gold standard’s constraints is a reason for condemning that arrangement as a barbarous relic. For others, though, it was a key to the classical gold standard’s success in stabilizing both money’s long-run purchasing power and international exchange rates—a success that, as we shall see, twice inspired government attempts to replicate the former system’s success.

--George Selgin, Money: Free and Unfree (Washington, DC: Cato Institute, 2017), e-book.

Under Free Banking, It Is Unlikely That the Public Would Accept Inconvertible Notes and Abandoning the Gold Standard Becomes Inconceivable

"Free banking" denotes a régime where note-issuing banks are allowed to set up in the same way as any other type of business enterprise, so long as they comply with the general company law. The requirement for their establishment is not special conditional authorisation from a Government authority, but the ability to raise sufficient capital, and public confidence, to gain acceptance for their notes and ensure the profitability of the undertaking. Under such a system all banks would not only be allowed the same rights, but would also be subjected to the same responsibilities as other business enterprises. If they failed to meet their obligations they would be declared bankrupt and put into liquidation, and their assets used to meet the claims of their creditors, in which case the shareholders would lose the whole or part of their capital, and the penalty for failure would be paid, at least for the most part, by those responsible for the policy of the bank. Notes issued under this system would be "promises to pay," and such obligations must be met on demand in the generally accepted medium which we will assume to be gold. No bank would have the right to call on the Government or on any other institution for special help in time of need. No bank would be able to give its notes forced currency by declaring them to be legal tender for all payments, and it is unlikely that the public would accept inconvertible notes of any such bank except at a discount varying with the prospect of their again becoming convertible. A general abandonment of the gold standard is inconceivable under these conditions, and with a strict interpretation of the bankruptcy laws any bank suspending payments would at once be put into the hands of a receiver. 

--Vera C. Smith, The Rationale of Central Banking and the Free Banking Alternative (Indianapolis: Liberty Fund, 1990), 169-170.

In reality, Many Governments Were Already Insolvent before the Great Recession of 2007-2008, and Default Was Only a Matter of Time

The sovereign debt crisis that followed the Great Recession looked very serious because it involved developed Europe. The implicit story in the public discourse seemed to go as follows: the Great Recession has reduced GDP and, consequently, incomes and tax revenues; the crisis also has increased government expenditures; the result is that government deficits have increased, pushing up the public debt to dangerous territory. This story is misleading. In reality, many governments were already insolvent before the Great Recession, and default was only a matter of time. The economic crisis only revealed and exacerbated the problem and brought the day of reckoning earlier.

The Great Recession started in America at the end of 2007. . . . The recession rapidly spread to Europe. . . . The causes of the Great Recession are still a matter of debate, and will probably remain so for a long time, as economists are still debating the causes of the Great Depression which took place 80 years ago. I have argued that one should first look at the crime scene, which is the government-supported residential mortgage market in America; a second cause can be found in the loose monetary policy of the Fed (and other central banks) from 2001 to 2004.

The Great Recession was barely over when the European sovereign debt crisis struck.

--Pierre Lemieux, The Public Debt Problem: A Comprehensive Guide (New York: Palgrave Macmillan, 2013), 32-33.

It Is Unsound to Allow a Country Like the United States to Secure Automatic Financing of Its Deficits

RUEFF. This situation is the result of the use, over an extended period, of a well-known system, the gold-exchange standard. The result of the operation of this system is that, when the United States, for example, has a deficit, it pays dollars that are returned the same day to New York, where they are reinvested.

The deficit therefore does not affect the abundant supply of funds in New York; in this way, the deficits can continue indefinitely.

TRIFFIN. I agree entirely. Mr. Rueff has expressed, in a way to which I subscribe 99 percent, our two essential points of agreement. It is unsound to allow a country to secure automatic financing of its deficits.

--Jacques Rueff, The Monetary Sin of the West, trans. Roger Glémet (New York: The Macmillan Company, 1972), 108.

The Ever-Present Threat of Bankruptcy Subjected All Persons to the Law of Prices; Bankruptcy Is Primarily the Condition for the Efficiency of the Price Mechanism of Capitalism

The truth is that the public interest is not, as is widely believed, the sum of private interests, but its opposite. Consequently, the real political problem consists in finding a system whereby the general interest can prevail over the aggregate of individual wills. There was such a system before the war, and bankruptcy was its decisive instrument. Any community which tried to resist needed adjustments of prices or wages was doomed to self-destruction because it would exhaust its resources; and the same fate could be expected by a central bank which would not adapt its monetary policy to the fluctuations of its balances. The ever-present threat of bankruptcy subjected all persons, even the most unwilling, to the harsh law of prices, and made short shrift of those who, through inability or dissipation, had not managed to subordinate their own interests or those of their associates to the higher interests of the community to which they belonged.

Bankruptcy is not merely a moral device or a way to achieve equity; it is primarily and especially the condition for the efficiency of the price mechanism, of the economic system which is usually called capitalism. The system would collapse without it, deprived of the sole compulsion which obliges the individual to bring his otherwise unimpeded activities into conformity with the conditions necessary for the survival of the system.

--Jacques Rueff, The Age of Inflation, trans. A. H. Meeus and F. G. Clarke (Chicago: Henry Regnery Company, 1964), 43-44.

The Gold Standard Produces a Depoliticized Macroeconomy

The depoliticized macroeconomy of the gold standard had various consequences for the adjustment mechanism. Political non-involvement in the macroeconomy meant that the synchronous outcomes created by international market forces across economies could go uninterrupted. Monetary authorities found no political obstacles in the orthodox maintenance of a metallist system. There was little pressure to monetize deficits or inflate economies out of recession, both of which would have led to an overexpansion of money supplies which made the maintenance of convertibility more difficult. Strictly on the fiscal side, the manifestations of the depoliticized macroeconomy were small government sectors, typically balanced budgets, and the resilience of a prevailing norm of fiscal restraint. That fiscal prudence had such a strong normative foundation (both in itself and in the norms which depoliticized economic policy) relieved the gold standard from the inflationary pressures that have historically been inimical to metallist regimes. The period of the gold standard appeared to feature just as strong a form of fiscal orthodoxy as monetary orthodoxy. Finally, the limited political rewards to economic performance also minimized the tendencies for economic nationalism resulting in beggar-thy-neighbor policies. Manipulating exchange rates, trade barriers, and interest rates to redistribute or protect external surpluses and employment opportunities was less necessary in a world where the burden of inferior macroeconomic outcomes did not fall on political leaders. In the prewar world of laissez-faire, the domestic political incentives to exploit others was generally absent.

--Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880-1914 (New York: Oxford University Press, 1995), 209.

Metallist Rules of the Gold Standard Achieved a Fundamental Liberal Objective by Removing Economic Processes from Discretionary Manipulation

At the very heart of the metallist orthodoxy lay a strong laissez-faire ethic, and this was embodied in the central injunctions calling for the preservation of the purchasing power of the national monetary unit through some rule dictating money creation. It was this metallist injunction, by which inflation was to be controlled, that gave the preference for stable money a liberal character. The alternative to a metallist rule was a discretionary manipulation of the money supply. This made the purchasing power of money subject to the idiosyncrasies and whims of public authorities. There was no certainty that these authorities would use this discretion in a capricious manner, but similarly there was no guarantee against it. Metallist rules essentially effected a fundamental liberal objective: removing economic processes from central, public, discretionary manipulation. Moreover, that growth in the money supply was dictated by changes in the stock of gold fundamentally subjected the value of money to market processes: the supply and demand for metal. This in turn prevented any artificial elements from influencing the purchasing power of money, since the value of one set of commodities (i.e., consumable goods) was indexed to the value of another set of commodities (metal). Hence money creation was to be an outcome of the impersonal forces of the market, and whatever outcomes (good or bad) resulted from these forces were deemed preferable to outcomes deriving from central management under a fiat regime where the value of money was established by the decree of some central authority (i.e., had an artificial or contrived value).

--Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880-1914 (New York: Oxford University Press, 1995), 55-56.

Under the Gold Standard, Inflation for the Purpose of Monetizing Debt is Prohibited, Thus Holding Government Size and Power in Check and Preventing Significant Deficits

During the time we were on a gold standard federal deficits were very small or nonexistent. Money that the government did not have, it could not spend nor could it create. Taxing the people the full amount for extravagant expenditures would prove too unpopular and a liability in the next election.

Justifiably, the people would rebel against such an outrage. Under the gold standard, inflation for the purpose of monetizing debt is prohibited, thus holding government size and power in check and preventing significant deficits from occurring. The gold standard is the enemy of big government. In time of war, in particular those wars unpopular with the people, governments suspend the beneficial restraints placed on the politicians in order to inflate the currency to finance the deficit. Strict adherence to the gold standard would prompt a balanced budget, yet it would still allow for "legitimate" borrowing when the people were willing to loan to the government for popular struggles. This would be a good test of the wisdom of the government's policy.

Finally, the inflationary climate has encouraged huge deficits to be run up by governments at all levels, as well as by consumers and corporations. The unbelievably large federal contingent liabilities of over $11 trillion are a result of inflationary policies, pervasive government planning, and unwise tax policies.

--Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 155.

The Discovery of "Open-Market Operations" in 1922 Caused a Six-Year Bank Credit Inflation with New Money Pouring into the Stock Market and Real Estate

With the "discovery" of open-market operations around 1922, the Federal Reserve thought it had found a way to smooth out business cycles. In practice, it caused a substantial six-year bank credit inflation by buying securities on the open market and printing the money to pay for them. This money--bank reserves--was pyramided several-fold by means of the fractional reserve banking system. This policy of stabilizing the price level was deliberately engineered by the leader of the Federal Reserve System, Benjamin Strong, to follow the proto-monetarist theory of Yale economist Irving Fisher.

The 1920s are not often seen as an inflationary period because prices did not rise. But the money supply can rise even without prices rising in absolute terms. The 1920s saw such a burst of American technological advancement and cheaper ways of producing things that the natural tendency was for prices to fall (i.e., more goods chasing the same number of dollars). But the inflation caused prices to rise relative to what they would have done. So a "stable" price level was masking the fact that inflation was going on and creating distortions throughout the economy.

Between mid-1922 and April 1928, bank credit expanded by over twice as much as it did to help finance World War I. As with all inflations, this caused speculative excess; in this case, new money poured into the stock market and real estate. The cooling of this speculative fever in 1928 by officials who tightened the money supply because they were finally afraid of the overheated economy led to the Depression, which in turn led to the world's abandonment of the gold standard.

--Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 123-124.