Positive and Negative Liberty

Negative liberty is the absence of obstacles, barriers or constraints. One has negative liberty to the extent that actions are available to one in this negative sense. Positive liberty is the possibility of acting — or the fact of acting — in such a way as to take control of one’s life and realize one’s fundamental purposes. While negative liberty is usually attributed to individual agents, positive liberty is sometimes attributed to collectivities, or to individuals considered primarily as members of given collectivities.

The idea of distinguishing between a negative and a positive sense of the term ‘liberty’ goes back at least to Kant, and was examined and defended in depth by Isaiah Berlin in the 1950s and ’60s. Discussions about positive and negative liberty normally take place within the context of political and social philosophy. They are distinct from, though sometimes related to, philosophical discussions about free will. Work on the nature of positive liberty often overlaps, however, with work on the nature of autonomy.

As Berlin showed, negative and positive liberty are not merely two distinct kinds of liberty; they can be seen as rival, incompatible interpretations of a single political ideal. Since few people claim to be against liberty, the way this term is interpreted and defined can have important political implications. Political liberalism tends to presuppose a negative definition of liberty: liberals generally claim that if one favors individual liberty one should place strong limitations on the activities of the state. Critics of liberalism often contest this implication by contesting the negative definition of liberty: they argue that the pursuit of liberty understood as self-realization or as self-determination (whether of the individual or of the collectivity) can require state intervention of a kind not normally allowed by liberals.

Many authors prefer to talk of positive and negative freedom. This is only a difference of style, and the terms ‘liberty’ and ‘freedom’ are normally used interchangeably by political and social philosophers. Although some attempts have been made to distinguish between liberty and freedom (Pitkin 1988; Williams 2001; Dworkin 2011), generally speaking these have not caught on. Neither can they be translated into other European languages, which contain only the one term, of either Latin or Germanic origin (e.g. liberté, Freiheit), where English contains both.

The rest of the analysis can be read here.

The Chinese Philosopher: Huang Zongxi. A Champion for Private Property Rights

by Paul Meany

Huang Zongxi argued for a constitutional model of government designed to benefit all people, not just the ruling class, and which stressed the importance of respecting private property rights.

Many libertarians admire the Enlightenment as the time when early liberals laid down the intellectual foundations on which were built our flourishing modern world. At times, this can lead some libertarians to believe that a system which emphasizes free enterprise, constitutional government, and personal liberty can only be achieved through what is often dubbed ‘western values.’ However, the truth is more complex. The concepts of personal and political freedom were not unique to Enlightenment Europe. People from different parts of the globe, a variety of religions, and across many eras have theorized about the value of freedom and how to best preserve its benefits.

One thinker belonging to this long list of non‐​western practitioners is the Chinese philosopher Huang Zongxi. He argued for a constitutional model of government designed to benefit all people, not just the ruling class, and which stressed the importance of respecting private property rights.

HUANG’S LIFE

Huang was born in 1610 in Zhejing province in China. His father Huang Zunsu was a high ranking official of the Ming Dynasty. Thanks to his father’s high ranking position, Huang was able to study history and philosophy extensively. He was introduced to the scholar Liu Tsung‐​chou, under whom he studied for a number of years. Zunsu’s works show that he was well versed in philosophical matters and did not wholly subscribe to any particular school dogmatically. Instead, he drew from different traditions as he saw fit.

Huang’s father, Zunsu, had opposed the unchecked authority of eunuchs at the Chinese royal court. Indeed, Zunsu died after being imprisoned by his political opponents in 1626. Huang boldly protested the death of his father, at the capital city of the Ming Dynasty, he then returned home to dedicate himself to his studies.

By 1644 the ascendant Manchu Qing dynasty had taken control of the former Ming territories. Huang spent many years as part of a guerilla resistance against the Manchu Qing dynasty which he regarded as foreign invaders. Eventually, Huang abandoned the fight against the Qing dynasty, although he refused to cooperate or take any government positions that he was later offered. Instead, Huang dedicated the rest of his life to studying history, politics, and philosophy. During his retirement from public life, Huang produced arguably his finest work in 1663, Waiting for the Dawn: A Plan for the Prince, an extensive criticism of the Ming regime and a comprehensive set of proposed reforms.

THE FIRST RULERS

Huang believed that before there was any government, people tended to their affairs with no acknowledgement of the common good. This was not an idealized state of nature, but nor was it complete anarchy. According to Huang, looking after one’s own interests is entirely natural, and he deemed selflessness to be a rare and fickle virtue.

For Huang, the primary issue which plagued the Ming regime was the excessive greed of those in power. To rule is to take into account the interests of others and to selflessly pursue what other people wish for; that, however, is difficult given that “to love ease and dislike strenuous labour has always been the natural inclination of man.” The first people who ruled did so with extreme reluctance knowing how difficult it would be to rule in the common interest of all. Some even tried to quit but were forced to continue. The first rulers understood that to rule correctly was an immense effort that was, for the most part, a thankless job.

However, as time passed, new rulers decided that since they did so much for their people, it was perfectly justifiable to rule for their own benefit. They began to use the state to benefit themselves, and because of their selfishness, these rulers made their subjects miserable and downtrodden. Therefore, according to Huang, “He who does the greatest harm in the world is none other than the prince.” The solution to this miserable state of affairs is for princes to rule justly with true laws.

WHAT IS LAW?

Huang states that there has not been true law since the end of the Three Dynasties over a thousand years previously. Since then, all rulers had cared about was preserving their dynasty, they had refused to look to the common good of the people. Huang referred to the laws established after the three dynasties as “dynastic law.” But he did not believe that dynastic law could be called true law as it was narrowly based upon the interests of the rulers, that “what they called ‘Law’ represented laws for the sake of one family.” For any law to be true law it must conform to the dictates of “all under heaven” (or what can be broadly termed the will of the people). Huang writes that “in ancient times all under heaven were considered the master and the prince was the tenant.” The state existed to serve the people, not vice versa. True laws, for Huang, must not favour any particular group over another. Instead, laws must conform to a higher standard of justice which had been originally embodied by the sage kings of the past. Laws are not just, simply because a ruler has established them. If law does not conform to a higher standard of justice, it can hardly be called true law.

GOVERNANCE BY LAWS

Huang believes that first and foremost we need laws before we need leaders. By contrast, earlier philosophers such as Xunzi in the third century BC had written: “There is only governance by men, not governance by law.” To which Huang replied, “Only if there is governance by law can there be governance by men.” However, law alone is not enough; Huang had seen how knowledgeable men like his father were ousted from government positions due to entrenched and unchecked power. We cannot count on virtuous rulers alone to guide us and to preserve true law. Thus Huang believes that we need institutions to put checks on power and to stop any individual dominating all others.

Huang had no time for the idea of divine rule, and he questioned those whom he called “petty scholars” who insisted that the duty of the subject to his prince is utterly inescapable.”The sage kings of the past deserve praise and respect but the princes of today deserve little if any praise,” Huang argues, further asking, “Could it be that Heaven and Earth, in their all‐​encompassing care, favor one man and one family among the millions of men and myriads of families?” While Huang did not wish to abolish the emperorship entirely, he strove to desacralize the state. The state is neither quasi‐​divine nor should it command the total obedience of its people. As we have already seen, the relationship for Huang between sovereign and citizen is actually inverted; the people are the masters, and the state is the tenant.

REINSTATING THE PRIME MINISTER

In theory, the Ming dynasty was ruled by an emperor and supported by a court which was composed of ministers and civil service members. The reality was a departure from this ideal. Emperors resented and resisted any check upon their power. To cement their position, emperors tended to promote only those civil servants who were wholly servile, especially eunuchs, who had long been a crucial part of the Chinese government. They tended to the emperors household and his personal needs, which gave them immense influence as they were naturally intimate with the emperor and increasingly infringed upon the administration of civil affairs.

To this end, Huang argues that the previously abolished office of prime minister should be reinstated. While one man should act as prime minister, he would have multiple vice premiers, all of whom are scholars with whom he would consult. Huang had three critical reasons for arguing for the reinstatement of the premiership:

Firstly, no matter how wise or hardworking, no one man can rule alone. While Princes may have been created initially to rule, “All under Heaven could not be governed by one man alone.” To remedy this, the prime minister aids the prince. Secondly, the emperor is decided by hereditary succession. Huang states that in ancient times “succession passed, not from father to son, but from one worthy man to another.” A person being handed a position based upon their lineage is no guarantee that they will rule justly. While Huang does not specify precisely how the prime minister will be chosen, he believes that the role will act as a buffer in case the emperor is not a competent ruler given that the Prime Minister’s power will be equal to that of the emperor. Thirdly, by reviving the position of the prime minister, the government affirms the principle that no man should hold supreme power and that instead, power should be divided and shared in order to serve the people best.

Huang’s reforms aim not only to make government more effective but, by putting qualified people in power, it also serves to check the power of the emperor who, without constraints, would have little stopping him from becoming tyrannical. Thus Huang’s approach can be described as constitutional in its fundamental nature. Constitutionalism, as a broad idea, is a set of rules, principles, and norms which define the limits of government authority to avoid arbitrary despotism.

HUANG AND PRIVATE PROPERTY

For Huang, it was essential that the government did not encroach upon property rights. According to Huang, during ancient times there was no private property. The sage kings distributed land through what was known as the well‐​field system. Huang explains that during this time “land was granted by the king to the people. Therefore, such land can be called the king’s land.”

However, after the sage kings subsequent rulers no longer distributed land to the people. Instead, people acquired land through sale and purchase. By the second century, private property had been established. Because the land was purchased by the people and not granted by a king, Huang concluded that “the land is the people’s land and not the king’s land.” For Huang “all land is either official or private.” The difference between the two is that official land is owned by the state and cannot be bought or sold, while private land can be traded and belongs to individuals.

Huang argues that that private property ought to be protected since people have a moral right to keep what they own. However, Huang does not stop there. He also argues that property rights set limits on government power. By protecting property, it underpinned the principle that emperors should not view “the world as an enormous estate to be handed on down to his descendants, for their perpetual pleasure and well‐​being.” Instead, emperors should respect the rights of their subjects and refrain from appropriating property.

AGAINST REDISTRIBUTION

Not all rulers in history were selfishly trying to expropriate property. Many genuinely wished to redistribute wealth in order to help the poor. To achieve this, some believed in limiting or equalizing the distribution of property. Huang replied to this proposition saying that “doing even one act that is not right” should not be allowed. People have a right to their property and this should not be violated even in the event that the motivation is to help those in need. Huang wonders why “should one needlessly make a big thing out of causing the well‐​to‐​do to suffer?” He proposes instead that the state should redistribute official property, which had been established for the emperor’s family and allies, and should be given to the poor. For Huang, it was perfectly natural to pursue one’s own self‐​interest and to accumulate property. He supported individuals autonomously pursuing their own interests.

SIMILARITIES BETWEEN HUANG & JOHN LOCKE

Huang’s political thought bears a striking resemblance to the influential English philosopher John Locke’s Second Treatise on Government. Locke has been referred to as the Father of Liberalism, his political thought centred on his arguments for natural rights, government by consent of the people and his theory of private property has been massively influential on classical liberalism.

As we have already seen, Huang was sceptical of the claims of divinity that emperors had made throughout history. Much later, Locke would argue against divine monarchy by saying that even if God had given the right to rule to someone, such as Adam from the bible, there would be no way of determining who are his rightful descendants. Thus Locke concluded, “that in the races of mankind and families of the world, there remains not to one above another the least pretence to be the eldest house, and to have the right of inheritance.”

Huang believed true law serves the common good and does not favor any particular group. Similarly, Locke argued that the principle of “let the welfare of the people be the ultimate law” is such a fundamental rule that “he, who sincerely follows it, cannot dangerously err.” Both Huang and Locke based the legitimacy of the law upon how it served the interests of the governed not the rulers.

Huang wished to see the position of the prime minister reinstated to check the power of the emperor. Locke proposed that government ought to be composed of legislative, executive, and federative powers. This separation of powers allowed not only for a more effective government but also one which would not quickly descend into tyranny.

Finally, Huang and Locke both argued that the government ought to protect the institution of private property. Locke, like Huang, believed that property was once commonly owned but that when people mixed their labour with the land they appropriated what belonged to nature and made it their own. While Huang’s theory of how land becomes privately owned is not exceptionally robust, it is clear that, akin to Locke, he believed that people have a moral right to hold onto what is rightfully theirs.

Despite living on opposite ends of the world, Huang and Locke came to very similar conclusions on the proper ends of the state. Possibly it is because both had fathers who fought against incumbent regimes and both men lived through civil conflicts which resulted in regime changes. Huang Xongxi is an excellent example of how quite different philosophical traditions have arrived at broadly classical liberal ideas without being part of the same so‐​called ‘western tradition’ or ‘western values.’

There is much to admire in the Western tradition of philosophy, but this does not mean we cannot praise and synthesize other traditions. Thinkers like Huang remind us that all cultures, religions, and peoples have traditions which advocate for the freedom of the individual.

What Pinochet Did for Chile

by Robert A. PackenhamWilliam Ratliff

Pinochet directed the coup of September 11, 1973, and presided until 1990 over a military regime that violated human rights, shut down political parties, canceled elections, constrained the press and trade unions, and engaged in other undemocratic actions during its more than 16 years of rule. These facts are important and widely recounted.

A number of other important truths about the Pinochet period and its legacy are equally well documented but less well known. Indeed, they are often not acknowledged at all. (A notable partial exception to this rule was the Washington Post editorial of December 12 that bore the headline “A dictator’s double standard: Augusto Pinochet tortured and murdered. His legacy is Latin America’s most successful country.”) We will focus on the generally neglected, discounted, distorted, and sometimes falsely denied or suppressed aspects of the Pinochet legacy that have truly made Chile, despite its continuing challenges, “Latin America’s most successful country.”

What Kind of Democracy Did the Coup Displace?

The 1973 coup is often represented as having destroyed Chilean democracy. Such characterizations are half-truths at best. In the late 1960s and early 1970s, Chile’s democracy was already well on the road to self-destruction. The historian James Whelan caught its tragic essence when he wrote that Chile’s was a “cannibalistic democracy, consuming itself.” Eduardo Frei Montalva, Chile’s president from 1964 to 1970, who helped to bring in Salvador Allende as his successor, later called the latter’s presidency “this carnival of madness.” Freedoms increasingly overwhelmed responsibilities. Lawlessness became rampant. Uncontrolled leftist violence had also been escalating during the government of Christian Democrat Frei Montalva, before Allende became president and long before Pinochet played any role whatsoever in Chilean politics.

In 1970, Allende won 36.2 percent of the popular vote, less than the 38.6 percent he had taken in 1964 and only 1.3 percent more than the runner-up. According to the constitution, the legislature could have given the presidency to either of the top two candidates. It chose Allende only after he pledged explicitly to abide by the constitution. “A few months later,” Whelan reports, “Allende told fellow leftist Regis Debray that he never actually intended to abide by those commitments but signed just to finally become president.” In legislative and other elections over the next three years, Allende and his Popular Unity (UP) coalition, dominated by the Communist and Socialist parties, never won a majority, much less a mandate, in any election. Still Allende tried to “transition” (his term) Chile into a Marxist-Leninist economic, social, and political system.

Allende’s closest UP allies were the Communists, the right wing of the UP, but both were pressed to move faster than they wanted by the left wing of the UP, mainly members of Allende’s Socialist Party, and by ultraleftists (the term used by the Communists) to the left of the UP. Violence escalated rapidly, with the extreme left, including many members of the president’s own party, seizing properties and setting up independent zones in cities and the countryside, often contrary to what Allende and the Communists thought prudent. In the process Allende, his supporters, and extremists they could not control virtually destroyed the economy, fractured the society, politicized the military and the educational systems, and rode roughshod over Chilean constitutional, legal, political, and cultural traditions. Thus by July 1973, if not earlier, Chile was looking at an incipient civil war.

Pinochet’s 1973 coup was supported by Allende’s presidential predecessor and by an overwhelming majority of the Chilean people.

Many on the left had long believed that capitalism and democracy were incompatible. In a brazen demonstration of its contempt for majority wishes, and for the institutions of what it called “bourgeois democracy,” the pro-Allende newspaper Puro Chile reported the results of the March 1973 legislative elections with this headline: “The People, 43%. The Mummies, 55%.” This attitude and the actions that followed from it galvanized the center-left and right, whose candidates had received almost two-thirds of the votes in the 1970 election, against Allende. On August 22, 1973, the Chamber of Deputies, whose members had been elected just five months earlier, voted 81–47 that Allende’s regime had systematically “destroyed essential elements of institutionality and of the state of law.” (The Supreme Court had earlier condemned the Allende government’s repeated violations of court orders and judicial procedures.) Less than three weeks later, the military, led by newly appointed army commander in chief Pinochet, overthrew the government. The coup was supported by Allende’s presidential predecessor, Eduardo Frei Montalva; by Patricio Aylwin, the first democratically elected president after democracy was restored in 1990; and by an overwhelming majority of the Chilean people. Cuba and the United States were actively involved on opposite sides, but the main players were always Chilean.

Authoritarian, Not Totalitarian

The Chilean military regime from 1973 to 1990 was authoritarian, certainly, but not totalitarian. This distinction is fundamental in comparative political analysis. Totalitarian regimes legitimize and practice very high degrees of penetration into all aspects of the economy, society, religion, culture, and family, whereas authoritarian regimes do not. Totalitarian regimes have dominant single parties; coherent, highly articulated, widely disseminated ideologies; very high levels of mass mobilization and participation directed and manipulated by the regime; and a strict control over candidates, when there are any, and policies. Authoritarian regimes have mentalities more than ideologies, low levels of political participation, and limited pluralism and competition of policies and political actors (including the press), with some constraints on regime control and manipulation of the polity, society, economy, family, religion, culture, and the press.

Consider also the two types of regimes’ different propensities to enable a transition to democracy. Totalitarian systems—once in place and short of external military conquest and occupation—are much harder to change than authoritarian ones. Pinochet’s authoritarianism in Chile ended after 16 years in a peaceful and constitutional transfer of power, permitted by a constitution passed in 1980; Castro’s totalitarian regime in Cuba has lasted 48 years so far. Chile’s democracy after 1990 has been vigorous and stable. As reported by Hector Schamis in the Journal of Democracy (October 2006), Chile’s current foreign minister, Alejandro Foxley, recognized early in the first post-Pinochet democratic government that “the constitutional rules left by Pinochet had ‘somewhat ironically fostered a more democratic system,’ for they forced major actors into compromise rather than confrontation and, by ‘avoiding populism,’ increased ‘economic governability.’”

The Economic Legacy

It has become fashionable in some quarters lately to claim that Chile’s successful record of economic development in recent decades actually began in 1990, during the first civilian government since 1973. That claim is false. The historical record is clear. President Pinochet and his civilian advisers, after an elaborate and lengthy process of deliberation and decision making in 1973–1975, in which various alternative courses of action were considered, put in place the radically new set of market-oriented structures and policies that have been and remain the foundations of Chile’s subsequent three decades of economic and social development. This new model, which we call social capitalism, was adjusted, revised, and supplemented during the Pinochet years, most importantly in response to an economic crisis in the early 1980s and also in the post-1990 civilian years. But its main elements have not changed, and thus far no post-1990 government has proposed or seriously considered going back to either of the two previous, failed models, namely, state capitalism (1938–70) or state socialism (1970–73).

As the then finance minister, Alejandro Foxley, said in a 1991 interview: “We may not like the government that came before us. But they did many things right. We have inherited an economy that is an asset.” All four civilian governments since 1990 have maintained the new, more market-oriented economic and social models inherited from the military regime. Although there were changes at the margins after 1990, the point of sharpest and deepest positive change was unquestionably 1973 and immediately thereafter, not 1970 or 1990.

The Neoliberalism Myth

It is often said and widely believed that Pinochet’s economic reforms eliminated any significant role of the state in the economy. The claim is that he introduced a neoliberal model, that is, raw, savage capitalism of the kind attributed to Chile in the nineteenth century. The facts are otherwise. Chile’s largest industry and biggest foreign-exchange earner by far is copper, which was nationalized in the late 1960s and early 1970s and has remained so ever since. Domestic banks were deregulated in the late 1970s but reregulated with vigor in the early 1980s. Poverty had increased enormously during and in the wake of the UP’s disastrous economic policies, and it decreased only as a result of the state-led stabilization policies, structural reforms, and targeted social programs of the Pinochet period. Major state expenditures for direct action social programs targeted to the poorest of the poor were initiated in the middle 1980s, not after 1990. Poverty levels, as high as 50 percent in 1984, were reduced to 34 percent by 1989. They continued to fall after 1990 to 15 percent in 2005. The Concertación, the alliance of political parties of the center and left that has won the past four presidential elections, deserves some credit for the post-1990 years, but so does the Pinochet government. It created the underlying economic policies and structures in the 1970s and 1980s that the Concertación maintained and that produced jobs for the poor and an economic surplus to enable targeted state antipoverty programs.

Legacies for the World

The innovations in economic and social policy of the Pinochet government had significant influences on, and implications for, not only subsequent governments in Chile but also the rest of Latin America and the wider world. Today almost the entire globe relies on the state less and on markets more than in 1973. The first country in the world to make that momentous break with the past—away from socialism and extreme state capitalism toward more market-oriented structures and policies—was not Deng Xiaoping’s China or Margaret Thatcher’s Britain in the late 1970s, Ronald Reagan’s United States in 1981, or any other country in Latin America or elsewhere. It was Pinochet’s Chile in 1975.

What once looked like a reactionary economic model is now the standard in much of the world.

At that time the Chilean economic model was considered anathema almost everywhere—partly because of its association with Chile’s military regime but also because it was viewed (wrongly, as it turned out) as an unthinkable, reactionary model per se, especially for developing countries. (Of the many military regimes in Latin America in the sixties, seventies, and eighties, the only one to break with state capitalism was Chile’s.) But global perceptions of the Chilean economic model changed, slowly at first, more rapidly and massively after the mid-1980s. By now, the economic policies of most countries of Latin America; North America; Western, Central, and Eastern Europe; China; India; Russia and its former republics; much of Africa; and many other places around the world have followed the Chilean lead rather than fled from it.

The autumn of Two Dictators

Pinochet’s death occurred just as Fidel Castro was lying gravely ill in Cuba. Have commentators described and evaluated them with equal accuracy and fairness over the decades?

Castro killed at least as many Cubans as Pinochet did Chileans. Pinochet’s government has been justly condemned for engaging in some terrorist activities abroad, from Argentina to the United States. Amnesty International strongly supported the Chilean leader’s extradition to Spain in 1998 for a trial it thought would enact justice. But Castro trained thousands of guerrillas from countries all over the world and sent hundreds of thousands of Cuban troops to many countries on at least three continents to launch and wage wars that brought untold death and destruction. We can’t recall human rights organizations agitating for his extradition, or for his being brought to justice even posthumously in Cuba. Finally, Chile is the most successful case of economic, social, and political development in Latin America and a pioneer in the global shift to enlightened social capitalism. Cuba is a dismal, impoverished, dynastic totalitarian anachronism.

All four civilian governments since 1990 have maintained the new, more market-oriented economic and social models inherited from the military regime.

How many nations a decade or century from now will aspire to the “successes” of Fidel Castro—or of Salvador Allende? A much more positive case can be made for major parts of Pinochet’s legacy. It’s time to acknowledge that the legacies of the Pinochet years are a much better mix than they are usually said to be.

What Drives Progress: The State or the Market?

Author: Ethan Yang
Date: November 11, 2020

Publication: American Institute for Economic Research

The famous American author, Mark Twain once said, “History never repeats itself, but it does often rhyme.”

A little over a hundred years ago President Woodrow Wilson kicked off a drastic expansion of government power and scope with the general assumption that the state can scientifically plan society. President Franklin Roosevelt greatly expanded on this idea with more government programs that promised to solve all sorts of societal ills and bring a level of centralized progress that the market couldn’t provide. This sparked caution and critique from those who favored market-based mechanisms advocated by economists such as Ludwig Von Mises.

Those like AIER argued that the market was far superior to the state in organizing society. This is the story of humanity, a struggle between the individual and the state. Those who believe in statism and those who believe in liberty.

Some thought that the free marketeers won the intellectual argument against the Keynesian statists in the 1970s. This is when stagflation completely upended the assumption that inflation and unemployment are always inversely related. It turned out that simply using expansionary monetary policy to drive economic growth was not as good of an idea as people thought. Post World War Two, Keynesian and big-state thinkers more generally braced for economic turmoil as spending dropped and people returned from war. The exact opposite happened as we learned again that the state does not drive economic growth. In the latter half of the 20th century, sweeping market reforms brought prosperity to countries all around the world. Another blow to the idea of state-run industry.

In 2013 Dr. Mariana Mazzucato, a leading economist of the Keynesian persuasion, published The Entrepreneurial State, which makes the case that the public sector can do far more than it is currently doing. That the private sector necessarily needs generous guidance and intervention from the state and in many cases is equal if not superior to the market in generating efficient and innovative services to society.

Well, here we go again.


Mazzucato and her allies posit that society can be so much better if we ditched market-based principles and delegated more responsibility to the state. Think people like Senator Elizabeth Warren.

This is why it is so necessary that economic heavyweights Dr. Deirdre McCloskey and Dr. Alberto Mingardi teamed up to write The Myth of the Entrepreneurial State. In a perfect world, one should read Mazzucato’s work as well, but doing so is not necessary to understand this book. The book can surely stand its own as the debate between the market and the state is a timeless conversation. The book also serves as an outstanding work of economic history and elaborates on many relevant economic topics, making it well worth anyone’s time, not just those closely following this debate.

The Idea of the Entrepreneurial State
The authors quote Mazzucato when they note that she remarked,

“Mainstream policy conceptions and prescriptions” are “normative postulations for a permanent state planning for more markets, mainly organizing ‘deregulation cum privatization’ rather than deliberate sets of conditional recommendations based on pondering alternatives and paths.”

Essentially this suggests that mainstream economic thought is dominated by ideas put forth by those like Milton Friedman who advocate for more privatization and deregulation to create growth. Mazzucato believes that this is unpredictable and suboptimal. Rather we should allow experts to ponder better alternatives with a scientific level of precision. Mazzucato likes to reference government programs like DARPA and The Manhattan Project as examples that the government can be very innovative.

This is an odd assertion, as I would agree that many economists hold the belief that privatization and markets are good. However, McCloskey and Mingardi point out that

“In the past century, government expenditure as a percentage of GDP drifted up towards 50 percent, compared with its pre-Keynesian level of 10 percent”… “ Democratically elected politicians, and behind them their constituents in the voting public were finally convinced that budget balance carried little or no normative weight.”

Contrary to Mazzucato’s point, there is no widespread consensus about the wonders of privatization amongst policymakers, just sloppy never-ending spending, and expansion.

This is how government works, especially democracies. It’s sloppy, it’s imprudent, it’s cumbersome and utterly desensitized to important market forces. If you empower the state to take on more and more planning of society, this problem will only exacerbate.

This is why the traditional economic consensus is that the government should stick to prescribed collective action problems and the private sector is where most activity should be conducted.

The authors are less shy about explaining their issue with Mazzucato’s grand idea when they write,

Mazzucato, a loyal daughter of the left, is suspicious of private gain, of the sort you pursue when you are shopping, say, and is therefore suspicious of people doing things for a private reward. She wants the State, advised by herself, to decide for you.

In essence that is what the idea of the entrepreneurial state ultimately boils down to. A rationalization of leftist political economy that has politicians and university professors jumping for joy. A very mild form of central planning that says that great things are possible as long as I am in charge.

What Drives Innovation
One of the main premises of those who believe in an entrepreneurial state is that public investment drives innovation. Mazzucato contends that the government should exert a sort of directionality over private businesses to drive them towards some optimal point determined by experts.

However, this is a false view of how innovation happens. Innovation comes from the bottom up, not from the top down. Free people acting in spontaneous and self-interested ways create the innovative products of tomorrow. Private firms jockeying for supremacy in handheld communication gave us the genius of the iPhone. Tesla produces some of the most advanced electric cars in the world available for mass consumption. Tesla CEO Elon Musk is the antithesis of the pondering bureaucrats that Mazzucato believes drive innovation. A man who offers four car models named S, 3, X, Y, sells flame throwers, privatized the space race, and now just launched a line of tequila.

If anything Elon Musk’s personality might be the ideal representation of how innovation happens. Not by deliberate planning by experts but by the rambunctious and oftentimes chaotic enterprise of free individuals.

Mazzucato and others like her contend that the state drives innovation. The authors disagree and state that

“The spring, we say, was the liberal idea and its emancipation of human creativity.”

As statists lament over the alleged “normative postulation” regarding privatization, McCloskey and Mingardi feel exactly the opposite. Getting the state out of the way of free individuals is the driving force behind innovation.

Does Government Investment Contribute to Innovation?
One of the convincing arguments made by Mazzucato and others like her is that the advanced military research agency known as DARPA invented things like the internet. Therefore, the state may be capable of impressive feats of innovation. If we invested more, then we would get better results.

The authors offer a rebuttal that can be summarized as “important if true.” They write

“The question is whether the American government envisioned anything like the internet. The answer is obvious: of course it didn’t. There was no “mission-oriented directionality.” The investments by the military look like Christopher Columbus’ voyages: the entrepreneurial State discovered the West Indies having left for the East Indies.”

Furthermore,

“In the 1960s the Air Force considered how a decentralized communications grid distinct from the traditional telephone might operate. But the Department of Defense then terminated the research and took no action.”

The authors also go on to point out that one of the leading developers of ARPANET, the technical foundation for the modern internet, observed that

“DARPA “would never have funded a computer network to facilitate email” because the telephone already served person-to-person communications perfectly.”

This shows that government contribution to creating things like the internet was not only unintentional, it may have been detrimental. Innovation is a chaotic endeavor that requires testing in the marketplace rather than the approval of experts. If invention and progress rested on the opinions of whether a room full of PhD’s thought it would be productive, we might not have made it past the horse-drawn plow.

One famous example is the advent of airborne flight, which government officials and many others understandably believed after a failed test that air travel was not obtainable. Looking back, these comments seem comedic but if we allow the state and its army of experts to impose “directionality,” innovation would grind to a halt.

In fact, in 1903 the New York Times predicted that flight was approximately 1-10 million years away. Then just a couple of months later two bicycle mechanics, Wilbur and Orville Wright made the first functional airplane in their garage, proceeding to change the world forever.

Innovation happens in the absence of state direction. It’s not innovative if it was completely planned.

The authors go even further to point out that oftentimes innovation takes place to outmaneuver the state as regulations bog down progress in various industries. This can partially explain things like the emergence of private equity over public equity in the world of finance. One of the key benefits of private equity is not having to abide by the cumbersome regulations that govern public financial markets.

Key Takeaways
This debate between whether or not the state can be a competent and worthy driver of innovation is a necessary one. Although the state continues to grow regardless of who wins this intellectual argument, it was thought that proponents of limited government had won this discussion in the late 20th century when the world experienced a sweeping wave of liberalization.

Today we find ourselves at a crossroads, with much of the Western world embracing or starting to consider a view of government that sees it as much more than just a steward of our rights. They see the state as a force of positive and competent change in a capacity that McCloskey and Mingardi believe is only possible through the market. That a more powerful and unrestricted government can reliably be a steward of society.

The idea of an entrepreneurial state as proposed by Mazzucato is a romantic one. It’s an idea that people can come together and through sheer will can make innovation happen. That some very smart people with fancy degrees and prestigious titles can steer society to an optimal location. The only problem with that is just about everything.

Mises Explains Why Socialism Fails

Author: Fabrizio Ferrari


One century ago, Mises began the socialist calculation debate, publishing his essay Economic Calculation in the Socialist Commonwealth (1920) and his subsequent treatise Socialism: An Economic and Sociological Analysis (1922). Later, Mises included his antisocialist arguments in Human Action 1949 , his magnum opus, especially in Sections III (about economic calculation) and V (about the economic impossibility of socialism).

Mises question on socialism is straightforward and simple: Can a socialist economy allocate resources efficiently as the free market does (cf. Mises [1949] 1999, p. 691)? In order to answer, we need to understand (1) how does a free market economy work, (2) the importance of economic calculation and entrepreneurship, and (3) the reason why socialism is intrinsically incompatible with the very idea of economy.

How does a free market economy work? It’s a system of human interactions wherein human beings make their choices of consumption and production—efficiently allocating different privately owned means (scarce resources with alternative uses) to satisfy different ends (consumptive wants). Since human ends (consumptive wants and desires) are subjectively valued, the means conducive to their satisfaction (production goods) are subjectively valued as well—according with the ends they satisfy, i.e., the consumptive goods and services they produce. Of course, a free market economy features human beings freely exchanging both consumptive and productive goods and services. Such exchanges occur at freely agreed ratios (prices), which express the essence of economy: satisfy (directly—via consumption—or indirectly—via production) chosen ends while giving up other less preferred ones.

It’s therefore clear that the concept of economy is linked with the idea of exchange—thus economics, the science concerned with economy, is more aptly labeled catallactics, i.e., the science of exchanges, from the Greek verb katallassein, meaning “to exchange” (cf. Mises [1920] 1990, pp. 15–16). But exchange requires previous estimation and calculation of pros and cons, assessing whether what we give up is actually worth less than what we gain (cf. Mises, [1949] 1999, p. 230).

In a free market economy, productive choices are governed by the profit and loss mechanism, whereby sovereign consumers signal—through their consumptive choices—which entrepreneurs they are willing to “reward” and which ones they are willing to “punish” (cf. Mises, [1949] 1999, pp. 295–97). When entrepreneurs supply consumers with desired consumptive goods (ends) at affordable prices (i.e., when they employ scarce productive means effectively and efficiently), they are rewarded by consumers with entrepreneurial profits—thus increasing entrepreneurs’ net worth, their capital (cf. Mises [1949] 1999, p. 231). Otherwise, consumers “punish” entrepreneurs through losses—decreasing entrepreneurs’ net worth, their capital, and turning their investments into malinvestments.

Thus, we understand the pivotal importance of entrepreneurship within a free market economy. Entrepreneurs, indeed, are the transmission belt between consumers’ wants (consumptive goods and services) and the means conducive to their satisfaction (production goods). Hence, entrepreneurs are the central cog of the economic choice mechanism. They (1) forecast, or speculate, which wants consumers are eager to satisfy, (2) perform the economic calculation establishing whether such wants can be efficiently satisfied, and (3) employ their own savings—skin in the game—while investing and buying production goods.

It’s hence evident that entrepreneurs are both speculators (they envisage future possible scenarios) and savers-capitalists (they save and accumulate the capital they later invest).

But speculation requires calculating tools—the price system. How does it emerge? Prices can emerge only while exchanging, buying, selling, purchasing, etc. (cf. Mises [1949] 1999, p. 202). Prices are, indeed, the ultimate expression of economic action—gaining something (say, a T-shirt) while foregoing something else in exchange (say, twenty dollars). Absent exchange, prices cannot originate: they would be not only impossible, but even inconceivable. Prices are, in fact, ratios (or tradeoffs) at which given exchanges are performed—if exchanges are abolished, prices will follow suit. Thus, were exchanges for particular goods (say, production goods) to be abolished, these same goods would cease to feature market prices.

Saving and capital accumulation , on the other hand, require private ownership to be in place: it’s indeed thanks to private ownership over their own capital—i.e., production goods—that entrepreneurs enjoy profits and suffer losses (cf. Mises [1949] 1999, pp. 254, 302–04, 704–05; and Mises [1920] 1999, p. 37), thus allowing the profit and loss mechanism to function properly and to steer productive activities on consumers’ behalf.

Here comes socialism: collectivizing production goods’ ownership, socialism abolishes entrepreneurship via two logical steps. First, entrepreneurs are “directly” abolished as capitalists, since they are legally forbidden from privately own and accumulate capital—i.e., production goods. Second, being all production goods now owned collectively, they can no longer be exchanged, bought, sold, etc.; hence, prices cannot emerge any more for these goods, and entrepreneurs can no longer compute costs of production while choosing what to produce and how to produce it—thus, entrepreneurs are “indirectly” abolished as speculators.

What about the fashionable critique of socialism proffered by Hayek and Robbins, i.e., that socialism is impossible because the central planner would lack (1) the knowledge and/or (2) the intelligence necessary to plan production? Hayek and Robbins, indeed, ground their critique of socialism on the central planner’s incapability of (1) obtaining all the relevant information necessary to plan production and/or (2) computing and calculating the optimal level of production (cf. Salerno 1990, pp. 57–64).

But central planner’s knowledge and intelligence are not the relevant argument for Mises. By means of abolition of entrepreneurs (the pivots of free market production choices), socialism itself gets incompatible with the very idea of economy—economize available means to attain desired ends.

If, indeed, production goods are collectively owned by a single entity (government, State, folk, etc.), how would it be possible to trade, to exchange, to sell and purchase them? It would be impossible—hence, there wouldn’t exist a market for them. But, without a market, how could prices emerge? Of course, they couldn’t (cf. Mises, [1920] 1990, p. 4). But again, without prices for production goods, how to compute costs of production? And profits and losses? Of course, it would be impossible as well (cf. Mises, [1949] 1999, p. 701). And, without profits and losses, a socialist economy has no tool conducive to efficient allocations of production goods.

Thus, without knowing whether revenues are higher or lower than costs (because costs cannot be computed), how would the socialist central planner know whether production is being carried out according to consumers’ desires? Of course, that would be impossible to know (cf. Mises, [1949] 1999, p. 209). A socialist central planner, in fact, even knowing which consumptive goods are desired most, would know neither which ones could be profitably produced, nor how to efficiently produce them (cf. Mises, [1920] 1990, p. 21). Absent market prices for production goods, no profit nor loss can be computed—hence, producers have no “compass” guiding them through production choices. Economic calculation is impossible for goods with no market (cf. Mises, [1949] 1999, pp. 215, 230).

So, why does socialism fail? It fails because it’s the very negation of the idea of economy—economizing man. Abolishing private ownership for production goods, socialism abolishes the market for them and makes it impossible for market prices to emerge and for costs of production to be computed—thus impairing the profit and loss mechanism. Socialism does not necessarily fail, as Hayek and Robbins thought, because the central planner lacks the knowledge and/or the intelligence needed to plan production; it fails, instead, because it abolishes entrepreneurship and economic calculation.

The US Dollar Collapse Is Greatly Exaggerated

The US Dollar Index has lost 10 percent from its March highs and many press comments have started to speculate about the likely collapse of the US dollar as world reserve currency due to this weakness.

These wild speculations need to be debunked.

The US dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the US Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3 percent in the same period, according to data compiled by Bloomberg.

The speculation about countries abandoning the US dollar as the reserve currency is easily denied. The Bank of International Settlements reports in its June 2020 report that global dollar-denominated debt is at a decade high. In fact, dollar-denominated debt issuances year-to-date from emerging markets have reached a new record.

China’s dollar-denominated debt has risen as well in 2020. Since 2015, it has increased 35 percent while foreign exchange reserves fell 10 percent.

The US Dollar Index (DXY) shows that the United States currency has only really weakened relative to the yen and the euro, and this is based on optimistic expectations of European and Japanese economic recovery. The Federal Reserve’s dovish announcements may be seen as a cause of the dollar decline, but the evidence shows that the European Central Bank (ECB) and the Bank of Japan (BOJ) conduct much more aggressive policies than the US while economic recovery stalls. Recent purchasing manager index (PMI) declines have shown that hopes of a rapid recovery in Europe and Japan are widely exaggerated, and the Daily Activity Index published by Bloomberg confirms it. Furthermore, at the end of August, the balance sheet of the ECB stood at more than 54 percent of the eurozone GDP and the BOJ’s at 123 percent versus the Federal Reserve’s 33 percent.

What we have witnessed between March and August has just been a move back from an overbought exposure to the DXY index due to the severity of the crisis, with investors increasing positions in safe havens in February and March, only to reverse as markets and the economy recovered.

The lesson most governments should learn is that economies do not become more competitive or deliver stronger growth and exports with a weak currency. Emerging markets have shown in the past years how a weak currency does not help, and the eurozone has had a weak euro versus the US dollar for years just as its economy delivered disappointing growth.

The reason why the US dollar’s world reserve currency status is not at risk is simple: there are no contenders. The euro has redenomination risk, and the constant political and economic concerns about the union’s solvency weaken the currency, as historical performance has shown. It tends to strengthen relative to the US dollar when investors place unjustified hopes on the eurozone growth only to weaken afterward, when poor growth adds to an overly aggressive ECB policy, with negative rates and massive money supply growth. The yuan cannot become a world reserve currency if the country maintains capital controls and concerns about legal and investor security remain. The Chinese central bank (PBOC) is also extremely aggressive for a currency that is only used in 4 percent of global transactions according to the Bank of International Settlements.

We are living a period of unprecedented financial repression and monetary expansion. The US Dollar reserve status grows in these periods where countries ignore real demand for their domestic currency and decide to copy the Federal Reserve policies without understanding the global demand for their currency. When the tide turns, most central banks find themselves with poor reserves and lower demand for domestic currency risk, and the position of the US dollar as reserve currency strengthens.

This is not a year of US Dollar weakness or the end of its supremacy as reserve currency, what we are witnessing is a generalized fiat currency debasement through extreme monetary policy. That is the reason why gold and silver continue to rise despite hopes of an economic recovery that seems to be stalling. The US Dollar will likely remain the most demanded fiat currency, but the excessive monetary stimulus will ultimately damage the confidence in most fiat currencies.

Author:
Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

The Myth of the Failure of Capitalism

By Ludwig Von Mises

Capitalism allegedly has failed, has proven itself incapable of solving economic problems, and so mankind has no alternative, if it is to survive, than to make the transition to a planned economy, to socialism.

This is hardly a new idea. The socialists have always maintained that economic crises are the inevitable result of the capitalistic method of production and that there is no other means of eliminating economic crises than the transition to socialism. If these assertions are expressed more forcefully these days and evoke greater public response, it is not because the present crisis is greater or longer than its predecessors, but rather primarily because today public opinion is much more strongly influenced by socialist views than it was in previous decades.

I
When there was no economic theory, the belief was that whoever had power and was determined to use it could accomplish anything. In the interest of their spiritual welfare and with a view toward their reward in Heaven, rulers were admonished by their priests to exercise moderation in their use of power. Also, it was not a question of what limits the inherent conditions of human life and production set for this power, but rather that they were considered boundless and omnipotent in the sphere of social affairs.

The foundation of social sciences, the work of a large number of great intellects, of whom David Hume and Adam Smith are most outstanding, has destroyed this conception. One discovered that social power was a spiritual one and not (as was supposed) a material and, in the rough sense of the word, a real one. And there was the recognition of a necessary coherence within market phenomena which power is unable to destroy. There was also a realization that something was operative in social affairs that the powerful could not influence and to which they had to accommodate themselves, just as they had to adjust to the laws of nature. In the history of human thought and science there is no greater discovery.

If one proceeds from this recognition of the laws of the market, economic theory shows just what kind of situation arises from the interference of force and power in market processes. The isolated intervention cannot reach the end the authorities strive for in enacting it and must result in consequences which are undesirable from the standpoint of the authorities. Even from the point of view of the authorities themselves the intervention is pointless and harmful. Proceeding from this perception, if one wants to arrange market activity according to the conclusions of scientific thought—and we give thought to these matters not only because we are seeking knowledge for its own sake, but also because we want to arrange our actions such that we can reach the goals we aspire to—one then comes unavoidably to a rejection of such interventions as superfluous, unnecessary, and harmful, a notion which characterizes the liberal teaching. It is not that liberalism wants to carry standards of value over into science; it wants to take from science a compass for market actions. Liberalism uses the results of scientific research in order to construct society in such a way that it will be able to realize as effectively as possible the purposes it is intended to realize. The politico-economic parties do not differ on the end result for which they strive but on the means they should employ to achieve their common goal. The liberals are of the opinion that private property in the means of production is the only way to create wealth for everyone, because they consider socialism impractical and because they believe that the system of interventionism (which according to the view of its advocates is between capitalism and socialism) cannot achieve its proponents’ goals.

The liberal view has found bitter opposition. But the opponents of liberalism have not been successful in undermining its basic theory nor the practical application of this theory. They have not sought to defend themselves against the crushing criticism which the liberals have leveled against their plans by logical refutation; instead they have used evasions. The socialists considered themselves removed from this criticism, because Marxism has declared inquiry about the establishment and the efficacy of a socialist commonwealth heretical; they continued to cherish the socialist state of the future as heaven on earth, but refused to engage in a discussion of the details of their plan. The interventionists chose another path. They argued, on insufficient grounds, against the universal validity of economic theory. Not in a position to dispute economic theory logically, they could refer to nothing other than some “moral pathos,” of which they spoke in the invitation to the founding meeting of the Vereins für Sozialpolitik [Association for Social Policy] in Eisenach. Against logic they set moralism, against theory emotional prejudice, against argument the reference to the will of the state.

Economic theory predicted the effects of interventionism and state and municipal socialism exactly as they happened. All the warnings were ignored. For fifty or sixty years the politics of European countries has been anticapitalist and antiliberal. More than forty years ago Sidney Webb (Lord Passfield) wrote: “it can now fairly be claimed that the socialist philosophy of to-day is but the conscious and explicit assertion of principles of social organization which have been already in great part unconsciously adopted. The economic history of the century is an almost continuous record of the progress of Socialism.”2 That was at the beginning of this development and it was in England where liberalism was able for the longest time to hold off the anticapitalistic economic policies. Since then interventionist policies have made great strides. In general the view today is that we live in an age in which the “hampered economy” reigns—as the forerunner of the blessed socialist collective consciousness to come.

Now, because indeed that which economic theory predicted has happened, because the fruits of the anticapitalistic economic policies have come to light, a cry is heard from all sides: this is the decline of capitalism, the capitalistic system has failed!

Liberalism cannot be deemed responsible for any of the institutions which give today’s economic policies their character. It was against the nationalization and the bringing under municipal control of projects which now show themselves to be catastrophes for the public sector and a source of filthy corruption; it was against the denial of protection for those willing to work and against placing state power at the disposal of the trade unions, against unemployment compensation, which has made unemployment a permanent and universal phenomenon, against social insurance, which has made those insured into grumblers, malingers, and neurasthenics, against tariffs (and thereby implicitly against cartels), against the limitation of freedom to live, to travel, or study where one likes, against excessive taxation and against inflation, against armaments, against colonial acquisitions, against the oppression of minorities, against imperialism and against war. It put up stubborn resistance against the politics of capital consumption. And liberalism did not create the armed party troops who are just waiting for the convenient opportunity to start a civil war.

II
The line of argument that leads to blaming capitalism for at least some of these things is based on the notion that entrepreneurs and capitalists are no longer liberal but interventionist and statist. The fact is correct, but the conclusions people want to draw from it are wrong-headed. These deductions stem from the entirely untenable Marxist view that entrepreneurs and capitalists protected their special class interests through liberalism during the time when capitalism flourished but now, in the late and declining period of capitalism, protect them through interventionism. This is supposed to be proof that the “hampered economy” of interventionism is the historically necessary economics of the phase of capitalism in which we find ourselves today. But the concept of classical political economy and of liberalism as the ideology (in the Marxist sense of the word) of the bourgeoisie is one of the many distorted techniques of Marxism. If entrepreneurs and capitalists were liberal thinkers around 1800 in England and interventionist, statist, and socialist thinkers around 1930 in Germany, the reason is that entrepreneurs and capitalists were also captivated by the prevailing ideas of the times. In 1800 no less than in 1930 entrepreneurs had special interests which were protected by interventionism and hurt by liberalism.

Today the great entrepreneurs are often cited as “economic leaders.” Capitalistic society knows no “economic leaders.” Therein lies the characteristic difference between socialist economies on the one hand and capitalist economies on the other hand: in the latter, the entrepreneurs and the owners of the means of production follow no leadership save that of the market. The custom of citing initiators of great enterprises as economic leaders already gives some indication that these days it is not usually the case that one reaches these positions by economic successes but rather by other means.

In the interventionist state it is no longer of crucial importance for the success of an enterprise that operations be run in such a way that the needs of the consumer are satisfied in the best and least expensive way; it is much more important that one has “good relations” with the controlling political factions, that the interventions redound to the advantage and not the disadvantage of the enterprise. A few more Marks’ worth of tariff-protection for the output of the enterprise, a few Marks less tariff-protection for the inputs in the manufacturing process can help the enterprise more than the greatest prudence in the conduct of operations. An enterprise may be well run, but it will go under if it does not know how to protect its interests in the arrangement of tariff rates, in the wage negotiations before arbitration boards, and in governing bodies of cartels. It is much more important to have “connections” than to produce well and cheaply. Consequently the men who reach the top of such enterprises are not those who know how to organize operations and give production a direction which the market situation demands, but rather men who are in good standing both “above” and “below,” men who know how to get along with the press and with all political parties, especially with the radicals, such that their dealings cause no offense. This is that class of general directors who deal more with federal dignitaries and party leaders than with those from whom they buy or to whom they sell.

Because many ventures depend on political favors, those who undertake such ventures must repay the politicians with favors. There has been no big venture in recent years which has not had to expend considerable sums for transactions which from the outset were clearly unprofitable but which, despite expected losses, had to be concluded for political reasons. This is not to mention contributions to non-business concerns—election funds, public welfare institutions and the like.

Powers working toward the independence of the directors of the large banks, industrial concerns, and joint-stock companies from the stockholders are asserting themselves more strongly. This politically expedited “tendency for big businesses to socialize themselves,” that is, for letting interests other than the regard “for the highest possible yield for the stockholders” determine the management of the ventures, has been greeted by statist writers as a sign that we have already vanquished capitalism.3 In the course of the reform of German stock rights, even legal efforts have already been made to put the interest and well-being of the entrepreneur, namely “his economic, legal, and social self-worth and lasting value and his independence from the changing majority of changing stockholders,”4 above those of the shareholder.

With the influence of the state behind them and supported by a thoroughly interventionist public opinion, the leaders of big enterprises today feel so strong in relation to the stockholders that they believe they need not take their interests into account. In their conduct of the businesses of society in those countries in which statism has most strongly come to rule—for example in the successor states of the old Austro-Hungarian Empire—they are as unconcerned about profitability as the directors of public utilities. The result is ruin. The theory which has been advanced says that these ventures are too large to be run simply with a view toward profit. This concept is extraordinarily opportune whenever the result of conducting business while fundamentally renouncing profitability is the bankruptcy of the enterprise. It is opportune, because at this moment the same theory demands the intervention of the state for support of enterprises which are too big to be allowed to fail.

III
It is true that socialism and interventionism have not yet succeeded in completely eliminating capitalism. If they had, we Europeans, after centuries of prosperity, would rediscover the meaning of hunger on a massive scale. Capitalism is still prominent enough that new industries are coming into existence, and those already established are improving and expanding their equipment and operations. All the economic advances which have been and will be made stem from the persistant remnant of capitalism in our society. But capitalism is always harrassed by the intervention of the government and must pay as taxes a considerable part of its profits in order to defray the inferior productivity of public enterprise.

The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.

Bastiat has not failed, but rather Marx and Schmoller.

1.[The translator wishes to gratefully acknowledge the comments and suggestions of Professor John T. Sanders, Rochester Institute of Technology, and Professor David R. Henderson, University of Rochester, in the preparation of the translation.]
2.Cf. Webb, Fabian Essays in Socialism….ed. by G. Bernard Shaw (American ed. edited by H.G. Wilshire. New York: The Humboldt Publishing Co., 1891), p. 4.
3.Cf. Keynes, “The End of Laisser-Faire,” 1926, see, Essays in Persuasion (New York: W.W. Norton & Co., Inc., 1932), pp. 314–15.
4.Cf. Passow, Der Strukturwandel der Aktiengesellcschaft im Lichte der Wirtschaftsenquente, (Jena 1939), S. 4.

GDP, Free Trade, and Prosperity

By Matthew Tanous

In my recent social media discussions on the subject of free trade, a certain thread of argument related to GDP has become more common. The argument, such as it goes, asserts that international trade is not very important as a component of GDP. The net impact of trade is a small impact on GDP, with imports and exports generally “balancing” each other out, leaving just a few percentage points either way. Trade (and immigration) restrictions seem like a small price to pay, economically, according to this framework.

Despite its superficial validity, this is a wholly erroneous way to look at the problem of generating prosperity and rests primarily on two economic fallacies. The first is the use of the GDP aggregate as a viable measure of national prosperity, which has been heavily criticized in other contexts.

Many criticisms of the concept of GDP focus on the concept’s formulaic assumption that government spending is inherently productive. This assumption has resulted in many errors, including economists and laymen alike in the 1970s and 80s looking at the growing GDP of the USSR and assuming the Soviets would economically overtake the West as a result. To a lesser degree, the same fallacy has driven concerns about China’s growing economy in the last couple of decades. However, in the context of international trade, the aggregate GDP fails to measure human welfare in yet another way. GDP’s focus on the supposed “net production” of a country fails to see the absolute production of a country and how much is involved in trade.

Read more here…

It Starts: Mortgage Delinquencies Suddenly Soar at Record Pace

By Wolf Richter

OK, it’s actually worse. Mortgages that are in forbearance and have not missed a payment before going into forbearance don’t count as delinquent. They’re reported as “current.” And 8.2% of all mortgages in the US – or 4.1 million loans – are currently in forbearance, according to the Mortgage Bankers Association. But if they did not miss a payment before entering forbearance, they don’t count in the suddenly spiking delinquency data.

The onslaught of delinquencies came suddenly in April, according to CoreLogic, a property data and analytics company (owner of the Case-Shiller Home Price Index), which released its monthly Loan Performance Insights today. And it came after 27 months in a row of declining delinquency rates. These delinquency rates move in stages – and the early stages are now getting hit:

Transition from “Current” to 30-days past due: In April, the share of all mortgages that were past due, but less than 30 days, soared to 3.4% of all mortgages, the highest in the data going back to 1999. This was up from 0.7% in April last year.

More information is here…

The Dangers Posed by State-Controlled Digital Currency

By Claudio Grass

It doesn’t require too dark an imagination to realize the gravity of the concerns over the digital yuan. China is a true pioneer when it comes to surveillance, censorship, and political oppression, and the digital age has given the state an incredibly efficient and effective arsenal. Adding money to that toolkit was a move that was planned for many years and it is abundantly clear how useful a tool it can be for any totalitarian regime. The ability to track citizens’ transactions, access their financial data, control and freeze the account of anyone that presents a potential threat, it all opens the door to the ultimate oppression: total control over private resources, over people’s livelihoods and their capacity to cover their basic needs.

But we don’t even have to wait for the first signs of abuse of the system. As part of the government’s COVID relief spending packages, digital vouchers were loaded to Chinese citizens’ smartphones to encourage them to spend in their local stores. According to Dr. Shirley Yu, visiting fellow at the London School of Economics: “Digital coupons allow the Chinese government to trace the usage of these coupons,” and they “allow the government to know which sector is most helped, who uses it and where money is actually spent.” Of course, if the government has access to data that allows them to check if their policies were well transmitted and if the money was spent as they intended, they can also use that data to check and trace any transactions for any other purpose.

Xu Yuan, a senior researcher with Peking University’s Digital Finance Research Cen­tre, highlighted the regulatory benefits of making all cashflow in society traceable. “In theory, following the launch of the digital yuan, there will be no transaction that regulatory authorities will not be able to see – cash flows will be completely traceable,” Xu said in an interview. Of course, this thought is scary enough on its own, but it becomes infinitely more terrifying when those who control the system have a very long track record of abuse and blatant disregard for basic rights and liberties.

Read the rest here…