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.

Sound Money Is Key to Defending Our Liberties

By Thorsten Polleit from: Mises Institute

The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

And further:

It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.

Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.

Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.

Central Banking Is Marxist
It is certainly no coincidence that “the state” has been expanding ever since the world adopted an unfettered fiat money regime back in the early 1970s, and that as a result individual liberties and freedoms have been under pressure ever since. The state feeds itself on fiat money. It simply issues new debt, which is then monetized by the its central bank, which is at the heart of the fiat money regime.

Perhaps you will find it surprising that I believe that the concept of central banking is truly a Marxist concept. (I am not saying that central banking is only favored by Marxists. Not at all! There are also many other ideologies which approve of central banking.)

In their Communist Manifesto of 1848, Karl Marx (1818–83) and Friedrich Engels (1820–95) compiled a list of measures necessary to establish communism. Measure number 5 reads as follows:

Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

Against this backdrop there should be no doubt that once the state has become the absolute ruler of fiat money, the door is open for it to grow bigger and bigger, eventually turning into the dreaded deep state. And the deep state, as we know well from history, has little regard for individual freedoms and liberties.

Making Money Great Again: Returning to Sound Money
What needs to be done? Well, the challenge at hand is “Making Money Great Again”! This requires, first and foremost, ending the state’s money production monopoly and opening up a free market in money. A free market in money means that people have the freedom to choose the kind of money they wish to use and that people have the freedom to provide their fellow men with alternative goods that may serve them well as money.

As things stand, however, a final solution to the “money problem” has not arrived yet—even considering the emergence of the cryptocurrency space. This is because the financial intermediation problem is still unsolved in the cryptocurrency ecosystem; we will come back to this issue in a moment.

But first let us address the question: How can we get from a state-controlled fiat money regime to a free market in money?

The first strategy is monetary enlightenment—informing the widest possible audience about the evils of fiat money and how it affects their personal lives, families, and communities. This also includes explaining to people that there is a superior and practicable alternative to a fiat money regime, namely a free market in money.

The second strategy is making progress in the field of alternative currencies and payment systems, especially in terms of technological disruptions and their economic profitability. This is the activity space for those among us who are propelled by entrepreneurial spirit.

The Limits of Cryptocurrency
The cryptocurrency community, the bitcoin community in particular, and also precious metals–based payment system providers have been making some headway in this area in recent years, but unfortunately victory has not yet been achieved.

For instance, bitcoin still has some scalability and performance issues. Currently, the bitcoin network settles a peak of around 350,000 transactions worldwide every day, and given its present configuration, it is presumably running at almost full capacity. By comparison, the German fiat money payment system alone processes more than 75 million transactions on average every business day. From the payment processing viewpoint, bitcoin cannot outshine fiat currencies yet.

What is more, a currency in a modern economy must provide for the possibility of financial intermediation (an issue I mentioned earlier). People typically demand payment or storage services for their money, or they want to lend and borrow money—irrespective of the kind of money they actually use. Often peer-to-peer is not enough, a third party is required.

Providing intermediation services outside existing state regulation is difficult. In fact, it would put an upper limit on the financial sophistication of any cryptocurrency. This is a heavy drag on their competitiveness compared to fiat currencies. And if a cryptocurrency comes out into the open space, it will have the state breathing down its neck, drowning it in business-destroying regulations and restrictions. Because the financial intermediation problem is still unsolved, one has reason to remain skeptical that—given the current circumstances—existing cryptocurrencies will succeed in pushing aside the state and replacing its fiat currency just like that.

Precious metals suffer from similar problems. In many countries, the state subjects gold and silver to value-added taxes and/or capital gains taxes. This makes them uncompetitive versus fiat currencies in terms of using them in daily transactions.

The Key to Free Market Money Is Deconstructing the State
In fact, is it possible that a free market in money can ever emerge as long as there is the kind of state we know today? The state is, as most of you probably know, the territorial monopolist of ultimate decision-making with the right to tax its citizens. We can rightfully expect that this kind of state will do its best to crush any competitor to its fiat money and prevent a free market in money from emerging.

So if we want a free market in money, the sobering logical conclusion is this: we need to reform, to deconstruct, the state (as we know it today).

Now the uncomfortable truth is out, because the state is possibly the fiercest adversary you could choose. How can we hope to achieve victory?

Well, there is certainly no magic spell. One possible and straightforward strategy might be appealing to people’s inner self, and that is their right to self-determination.

The right to self-determination is inalienable and it is an indisputable truth. Each and every individual is the owner of his or her body and the owner of goods acquired in nonaggressive ways (without violating the physical integrity of someone else’s property). We cannot dispute these words without causing a logical contradiction.

The right to self-determination implies that the citizens of a state have the right (1) to make it known, by a freely conducted plebiscite, that they no longer wish to be members of the state and (2) to form an independent state or to attach themselves to some other state. In other words: the right to self-determination includes the right of secession, that is, people’s right to break up the big state and to deconstruct it into smaller units.

Smaller political units are less powerful, more peaceful, and free market oriented. They keep taxation low, or may even go without it and become wealthier. Just think of, e.g., Shanghai, Hong Kong, Switzerland, Liechtenstein, or Monaco. This is because small political units must compete for capital and talents with other political units. They must behave themselves nicely. Otherwise, people and capital will leave their territory. Given a great number of small political units, there is a good chance that some of them will allow for, even encourage, a free market in money, setting an example that creates emulators.

Conclusion
It is hard to say which route would be the most effective in “Making Money Great Again.”

Perhaps the cryptocurrency community will somehow succeed in ending the state (as we know it today), leaving a truly free market in money in its place.

In the meantime, however, it certainly would not hurt if we (1) kept educating the wider audience about what good money is and what bad money is and also (2) kept unmasking the state (as we know it today), showing that it is incompatible with and a violation of the inalienable right to self-determination of each and every human being.

In any case, it is of the utmost importance to wrest the money monopoly out of the hands of the state. Otherwise, there is indeed little hope that the free society (or what little is left of it) can survive.

(The complete article, with footnotes, is located here)

10 Myths About Government Debt

Antony Davies, Phd goes through a listing of 10 Myths about Government Debt. For future blog posts, I will attempt to expand on each of these 10 myths. This growing debt is a huge issue, not only for current generations, but for those to come in the future. As mentioned in the video, Dr. Davies does provide a “solution” to handle the Government Debt. It is a must see. Take copious notes.

Cheers,

Robert

A Quarter Of All Household Income In The US Now Comes From The Government

By Tyler Durden

Following today’s release of the latest Personal Income and Spending data, Wall Street was predictably focused on the changes in these two key series, which showed a modest slowdown in personal spending (to be expected one month after the savings rate in the US hit a record), coupled with a modest decline in personal income (as government benefits and stimulus checks slowed substantially).

But while the change in the headline data was indeed notable, what was far more remarkable was less followed data showing just how reliant on the US government the population has become.

We are referring, of course, to Personal Current Transfer payments which are essentially government sourced income such as unemployment benefits, welfare checks, and so on. In May, this number was $4.9 trillion annualized, and while it is down from the record $6.6 trillion hit in April when the US government activated the money helicopters to avoid a total collapse of the US economy, it was nearly $2 trillion above the pre-Covid trend where transfer receipts were approximately $3.2 trillion.

Even more striking, is that as of June when total Personal Income was just below $20 trillion annualized, the government remains responsible for over a quarter of all income.

Putting that number in perspective, in the 1950s and 1960s, transfer payment were around 7%. This number rose in the low teens starting in the mid-1970s (right after the Nixon Shock ended Bretton-Woods and closed the gold window). The number then jumped again after the financial crisis, spiking to the high teens.

And now, the coronavirus has officially sent this number into the mid-20% range, after hitting a record high 31% in April.

And that’s how creeping banana republic socialism comes at you: first slowly, then fast.

So for all those who claim that the Fed is now (and has been for the past decade) subsidizing the 1%, that’s true, but with every passing month, the government is also funding the daily life of an ever greater portion of America’s poorest social segments.

Who ends up paying for both?

Why the middle class of course, where the dollar debasement on one side, and the insane debt accumulation on the other, mean that millions of Americans content to work 9-5, pay their taxes, and generally keep their mouth shut as others are burning everything down and tearing down statues, are now doomed.

To read the complete article, with charts and graphs, click here…

Gold: The Protection Against Inflation?

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.”—Alan Greenspan “Gold and Economic Freedom

As I scan the various media outlets and listen to the financial experts discuss personal finance; the message is similar. The message of needing to beat inflation is a common theme. While on the surface this seems to be a sage and insightful thing to address, however, one must understand why inflation occurs in order to beat it.

When the monetary base is expanded, via the central bank, it is done mainly based upon deficit spending by the central government. The central government deficit spending occurs due to the fictional the tax revenues are unable to meet the expenses for a certain budgetary time period. When this short fall occurs, the central bank purchases government securities, primarily debt instruments, which gives the central government the cash to balance the budget. Over time, this process expands the money supply and causing inflation. Of course, the interest on the deb continues to grow, adding more of an expense to the citizens.

How does gold factor into this model? How is gold the solution in mitigating the effects of inflation? The answer can be found from an essay written by Alan Greenspan “Gold and Economic Freedom”(1966). The use of gold, as a medium of exchange, helps reduce the impact of governments overspending.Read more here: https://www.constitution.org/mon/greenspan_gold.htm

More On Repurchase Agreements: Excessive Government Spending and the Liquidity Crisis

My apologies are given in advance. Why? I’m presenting more information regarding repurchase agreements. As a reader, it is should be simple to deduce that recent extreme use of repurchase agreements is worthy of strong consideration and concern. If this your first time reading about these, feel free to read this article, written by me, describing repurchase agreements(repos). If needed, read that article first, then return back to this writing.

In this blog entry, “How Excessive Government Spending Sparked a Liquidity Crisis”, Craig Eyermann lists how the implementation of the use of repos makes, since September 2019, The Federal reserve is the largest holder of United States Government debt. Many of the points made in his article should raise some concerns; which is why I continue to repost articles related to this subject.

Regardless how the mainstream news media spins this, inflation is a monetary phenomenon. Of course, these individuals will state that inflation is low citing the Consumer Price Index as support of this spurious claim. Rising prices do not always constitute inflation, due to the fact the prices of all goods are not homogeneous.

The expansion of the monetary base(inflation)is directly correlated to the overspending by the federal government. With this over spending, deficits are generated, and debt is used to balance the budget. The budget never is balanced since the behavior is rewarded. The losers, in this scenario, are the individuals who are savers or on a fixed income stream. Also: The individuals who are lower income earners.