It Is in Spain, in the School of Salamanca, that We Find the Intellectual Roots of the Austrian School of Economics

In short, the Scholastics of the Spanish Golden Age were able to articulate what would later become the key theoretical principles of the Austrian school of economics, specifically: first, the subjective theory of value (Diego de Covarrubias y Leyva); second, the correct relationship between prices and costs (Luis Saravia de la Calle); third, the dynamic nature of the market and the impossibility of realizing the equilibrium model (Juan de Lugo and Juan de Salas); fourth, the dynamic concept of competition understood as a process of rivalry between sellers (Castillo de Bovadilla and Luis de Molina); fifth, the principle of time preference (rediscovered by Martín de Azpilcueta); sixth, the profoundly distorting effect inflation exerts on the real economy (Juan de Mariana, Diego de Covarrubias and Martín de Azpilcueta); seventh, the critical analysis of fractional-reserve banking (Luis Saravia de la Calla and Martín de Azpilcueta); eighth, the recognition that bank deposits form part of the money supply (Luis de Molina and Juan de Lugo); ninth, the impossibility of organizing society via coercive commands, since the information necessary to give such commands a coordinating quality is lacking (Juan de Mariana); and tenth, the libertarian tradition that all unjustified intervention in the market constitutes a violation of natural law (Juan de Mariana).

Hence there are well-founded reasons to conclude that though the dynamic, subjectivist conception of the market was taken up again and given a definitive boost by Menger in 1871, it originated in Spain. It is there, namely in the School of Salamanca, that we find the intellectual roots of the Austrian economic tradition. Like the modern Austrian school, and in stark contrast to the neoclassical paradigm, the School of Salamanca is above all characterized by the great realism and rigor of its analytical premises.

—Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity (Cheltenham, UK: Edward Elgar, 2008), 33-34.

The North American Free Trade Agreement is a Managed-Trade Deal Sold to the Public as a “Free Trade” Deal

The North American Free Trade Agreement (NAFTA) is the quintessential managed-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier saw how 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTA weighs in at over 2,000 pages, 900 of which are tariff rates. (Under true free trade, there is one tariff rate — 0 percent). The agreement does have trade-liberalizing features, to be sure. Consisting of a 10 percent reduction in tariffs to be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes.

In the first place, the benefit from those tariff reductions are jeopardized by the agreement's “snap-back provisions.” Those permit pre-NAFTA tariff levels to be restored against imported items which “cause or threaten serious injury to domestic industry.” In other words, NAFTA supports free trade as long as it does not promote international competition which is too hot for favored domestic firms to handle. In addition, NAFTA's rules of origin are designed to divert trade from the world's most efficient suppliers to North America's most efficient suppliers. This hobbles the international division of labor instead of expanding it, as true free trade does.

The importance of NAFTA clauses that keep out foreign goods came to light as U.S. clothing manufacturers railed against the import of wool suits from our NAFTA partner Canada. The suits in question were made from third-country wool not covered by NAFTA rules of origin. Since Canadian tariffs on foreign wool were lower than U.S. tariffs (10 percent vs. 34 percent), Canadian suits sold for less and soon claimed a large share of the U.S. market. The fact that the entire discussion of this issue centered on closing this "loophole" in NAFTA rather than on lowering the injurious U.S. tariff on wool should prove how devoted NAFTA's supporters are to free trade.

Free trade does not depend on international bureaucracies, yet NAFTA creates several of them. Its Commission for Environmental Cooperation was set up to enforce the environmental aim of sustainable growth. One tactic it uses is to prevent countries from trying to create a friendlier environment for investors by relaxing any extant environmental regulations. Such rules are to be enforced by trade sanctions and fines, with the latter to go into a slush fund for “environmental law enforcement.”

—Robert Batemarco, “Why Managed Trade Is Not Free Trade,” The Freeman: Ideas of Liberty 47, no. 8 (August 1997): 489.

Economics Relies On Deductive Logic to Answer Titillating Questions Like “Was Karl Marx a Two-Headed Monster?”

In economics, we operate with deductive logic. (Bertrand Russell, a twentieth-century English philosopher, once said that there are two kinds of logic, deductive and bad).

Deductive logic is a tool of amazing power. Given a true statement, we can, by using deduction, obtain other true statements from it. These new statements not only are true—their truth is guaranteed! If the statements we started with are true, then our conclusions are also true.

Let’s look at a few examples:

• ALL COMMUNISTS ARE TWO-HEADED MONSTERS
• KARL MARX WAS A COMMUNIST
• THEREFORE, KARL MARX WAS A TWO-HEADED MONSTER

Does the conclusion, “Karl Marx was a two-headed monster,” follow from the premises (the statements it was deduced from)? Yes, it does. Then, if the premises are true, so is the conclusion. 

Have we proved that Karl Marx was a two-headed monster? Not so fast. All we know is that if the premises are true, then so is the conclusion. Unless both premises are in fact true, we can’t claim that they show the conclusion to be true.

What good is logic, then? Well, let’s go over the basic point again. We know that whenever the premises are true, the conclusion is true. An argument in which the conclusion is correctly deduced from the premises is called a valid argument. If we can (somehow) arrive at true premises, then we are guaranteed true conclusions. And, as you will discover in this book, sometimes obvious truths can have very startling consequences.

—David Gordon, An Introduction to Economic Reasoning (Auburn, AL: Ludwig von Mises Institute, 2000), 1-2.

Consumer Protection Laws Are Like the Government Providing Cushions for All the Children Who Might Fall Down!

As for the first object, that in trade no one should injure another, it is evidently sufficient that the government should always protect the natural liberty of the buyer to buy, and of the seller to sell. For if the buyer is always the one who decides whether to buy or not, it is certain that he will select among all the sellers the man who will give him at the best price the merchandise that suits him best. It is no less certain that every seller, it being his chief interest to gain preference over his competitors, will sell in general the best merchandise at the lowest possible price, in order to attract customers. It is not true therefore that a merchant may be interested in deception—unless he has some exclusive privilege.

But if the government limits the number of sellers by exclusive privileges or otherwise, it is certain that the consumer will be wronged and that the seller, certain of selling, will compel him to buy bad articles at a high price.

If, on the contrary, it is the number of buyers which is diminished, by the exclusion of foreigners or of certain other persons, then the seller is wronged, and, if the injury is carried to the point where the price does not compensate him, with profit, for the costs and risk, he will cease to produce the commodity in such abundance, and scarcity will result.

The general freedom of buying and selling is therefore the only means of assuring, on the one hand, the seller of a price sufficient to encourage production, and on the other hand, the consumer, of the best merchandise at the lowest price. This is not to say that in particular instances we may not find a cheating merchant and a duped consumer; but the cheated consumer will learn by experience and will cease to frequent the cheating merchant, who will fall into discredit and thus will be punished for his fraudulence; and this will never happen very often, because generally men will be enlightened upon their evident self-interest.

To expect the government to prevent such fraud from ever occurring would be like wanting it to provide cushions for all the children who might fall. To assume it to be possible to prevent successfully, by regulation, all possible malpractices of this kind, is to sacrifice to a chimerical perfection the whole progress of industry; it is to restrict the imagination of artificers to the narrow limits of the familiar; it is to forbid them all new experiments; to renounce even the hope of competing with the foreigners in the making of the new products which they invent daily. . .

Thus, with obvious injustice, commerce, and consequently the nation, are charged with a heavy burden to save a few idle people the trouble of instructing themselves or of making enquiries to avoid being cheated. To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community.

—Anne Robert Jacques Turgot, “In Praise of Gournay: Letter from Turgot to Marmontel,” in The Turgot Collection: Writings, Speeches, and Letters of Anne Robert Jacques Turgot, Baron de Laune, ed. David Gordon (Auburn, AL: Ludwig von Mises Institute, 2011), 107-108.

Socialism's Aim Is to Use “the State” to Save Individuals from the Struggle for Existence and from the Competition of Life

When I say that protectionism is socialism I mean to classify it and bring it not only under the proper heading but into relation with its true affinities. Socialism is any device or doctrine whose aim is to save individuals from any of the difficulties or hardships of the struggle for existence and the competition of life by the intervention of “the State.” Inasmuch as “the State” never is or can be anything but some other people, socialism is a device for making some people fight the struggle for existence for others. The devices always have a doctrine behind them which aims to show why this ought to be done.

The protected interests demand that they be saved from the trouble and annoyance of business competition, and that they be assured profits in their undertakings, by “the State,” that is, at the expense of their fellow-citizens. If this is not socialism, then there is no such thing. If employers may demand that “the State” shall guarantee them profits, why may not the employees demand that “the State” shall guarantee them wages? If we are taxed to provide profits, why should we not be taxed for public workshops, for insurance to laborers, or for any other devices which will give wages and save the laborer from the annoyances of life and the risks and hardships of the struggle for existence? The “we” who are to pay changes all the time, and the turn of the protected employer to pay will surely come before long.

—William Graham Sumner, “Protectionism: The –Ism Which Teaches that Waste Makes Wealth,” in The Forgotten Man and Other Essays, ed. Albert Galloway Keller (New Haven: Yale University Press, 1918), 79.

In Addition to His Famous “Law of Markets,” Jean-Baptiste Say Was a Pioneer in Praxeological Methodology

The praxeological tradition has a long history in economic thought. We will indicate briefly the outstanding figures in the development of that tradition, especially since these economic methodologists and their views have been recently neglected by economists steeped in the positivist world view.

One of the first self-conscious methodologists in the history of economics was the early-nineteenth-century French economist Jean-Baptiste Say. In the lengthy introduction to his magnum opus, A Treatise on Political Economy, Say laments that people

are too apt to suppose that absolute truth is confined to the mathematics and to the results of careful observation and experiment in the physical sciences; imagining that the moral and political sciences contain no invariable facts of indisputable truth, and therefore cannot be considered as genuine sciences, but merely hypothetical systems.

Say could easily have been referring to the positivists of our day, whose methodology prevents them from recognizing that absolute truths can be arrived at in the social sciences, when grounded, as they are in praxeology, on broadly evident axioms. Say insists that the “general facts” underlying what he calls the “moral sciences” are undisputed and grounded on universal observation.

—Murray N. Rothbard, “Praxeology as the Method of the Social Sciences,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 42.

The Communist Doctrine Ignores the Essential Difference between a Status/Caste Society and a Capitalist Society

Marx obfuscated the problem by confusing the notions of caste and class. Where status and caste differences prevail, all members of every caste but the most privileged have one interest in common, viz., [namely] to wipe out the legal disabilities of their own caste. All slaves, for instance, are united in having a stake in the abolition of slavery. But no such conflicts are present in a society in which all citizens are equal before the law. No logical objection can be advanced against distinguishing various classes among the members of such a society. Any classification is logically permissible, however arbitrarily the mark of distinction may be chosen. But it is nonsensical to classify the members of a capitalistic society according to their position in the framework of the social division of labor and then to identify these classes with the castes of a status society. . . .

This socialist or communist doctrine fails entirely to take into account the essential difference between the conditions of a status or caste society and those of a capitalistic society. Feudal property came into existence either by conquest or by donation on the part of a conqueror. It came to an end either by revocation of the donation or by conquest on the part of a more powerful conqueror. It was property by “the grace of God,” because it was ultimately derived from military victory which the humility or conceit of the princes ascribed to special intervention of the Lord. The owners of feudal property did not depend on the market, they did not serve the consumers; within the range of their property rights they were real lords. But it is quite different with the capitalists and entrepreneurs of a market economy. They acquire and enlarge their property through the services they have rendered to the consumers, and they can retain it only by serving daily again in the best possible way. This difference is not eradicated by metaphorically calling a successful manufacturer of spaghetti “the spaghetti king.”

—Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (Auburn, AL: Ludwig von Mises Institute, 2007), 113, 115-116.

Individualists Are Antiegalitarian, Believing in Human Differences and “Natural” (Not “Artificial”) Inequalities

In one sense, the “conservative” label for Nock and Mencken was, and had been, correct, as it is for all individualists, in the sense that the individualist believes in human differences and therefore in inequalities. These are, to be sure, “natural” inequalities, which, in the Jeffersonian sense, would arise out of a free society as “natural aristocracies”; and these contrast sharply with the “artificial” inequalities that statist policies of caste and special privilege impose on society. But the individualist must always be antiegalitarian. Mencken had always been a frank and joyous “elitist” in this sense, and at least as strongly opposed to democratic egalitarian government as to all other forms of government. But Mencken emphasized that, as in the free market, “an aristocracy must constantly justify its existence. In other words, there must be no artificial conversion of its present strength into perpetual rights.” Nock came by this elitism gradually over the years, and it reached its full flowering by the late 1920s. Out of this developed position came Nock’s brilliant and prophetic, though completely forgotten, Theory of Education in the United States, which had grown out of 1931 lectures at the University of Virginia.

—Murray N. Rothbard, The Betrayal of the American Right, ed. Thomas E. Woods Jr. (Auburn, AL: Ludwig von Mises Institute, 2007), 28.