Archive for November 2013

Recent Posts of Interest

The NAFTA Myth by Murray Rothbard

Inflation, Shortages, and Social Democracy in Venezuela by Matt McCaffrey and Carmen Dorobat

The Fed Must Inflate by Chris Martenson

Robert Murphy on Teaching at Mises Academy by Robert Murphy

Argentina’s Politicians Should Read Mises by Iván Carrino

General Electric’s Crony Capitalism by Hunter Lewis 

Mises Explains the Santa Claus Principle by Ludwig von Mises

Team Player: Robert Shiller on Finance as Panacea by John Staddon

VIDEO: Napolitano, Higgs, Block, and More Discuss the Mises Institute

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The Capitalist Hero in Fiction and Film

2370005054987Edward Younkins has recently published Exploring Capitalist fiction: Business Through Literature and Film

Younkins’ new book examines the themes, plots, and conflicts in more than 20 novels, films and plays, and discusses the role of capitalism within each. According to Younkins’ introduction:

The use of works of imaginative literature to portray and explain the behavior of individuals in business is arguably a method that is richer and more realistic than what is presented in journal articles, textbooks, and even cases. Literature and films allow the asking of more complex questions than case studies do. Business cases can be complex, but not to the same extent as multifaceted novels, plays, and films. People can learn as much, if not more, about the nature and culture of business and effective management as from lectures, books, case studies, and so on.

Fiction provides a powerful teaching tool to sensitize business students without business experience and to educate and train managers in real businesses. Studying business literature and films can prepare students for future situations that they have not encountered before when they enter the workplace. Many works of imaginative fiction present ethical dilemmas that Introduction 3 young professionals may potentially encounter at some point in their careers.

Literary works and movies can play a significant role both in college classrooms and in management development programs. Not only is business fiction interactive, it portrays a more complete and more human picture of the business world than what is communicated through traditional teaching materials. Fiction brings values to life and is also useful i bridging the gap between theory and practice.

The overall literary and cinematic treatment accorded capitalism, business, and businessmen has been unkind, hostile, and unflattering over the years. The commercial world has received bad press at the hands of many novelists, playwrights, and filmmakers. Fortunately, there are also a number of sympathetic business portraits that depict commerce in a more favorable, even heroic, image. Viable capitalist heroes have appeared in a number of works that emphasize the virtues, positive traits, and accomplishments of businessmen. Some feature brilliant, thoughtful, and dauntless business leaders and employees, including King Vidor’s 1944 film An American Romance, William Dea Howells’ The Rise of Silas Lapham, and Cameron Hawley’s Cash McCall.

Other examples include of course Garet Garrett’s The Driver, Ayn Rand’s Atlas Shrugged, and Henry Hazlitt’s Time Will Run Back.

Giving Thanks for the State’s Imperialistic Wars

That was the purpose of Lincoln’s nationalization of “Thanksgiving,” which started out as a celebration by the Pilgrims of productivity and life, and later as a proclamation by George Washington to celebrate the ratification of the Constitution.  That’s why we have such spectacles today as Jay Leno’s “all military audience” tonight, and what will surely be a grotesque display of warmongering and imperialism with gigantic flags, mass singing of the national war anthem, and fighter jet fly-overs during the Thanksgiving day and night NFL games.

Mises Explains The Santa Claus Principle

6313Beginning on Sunday, December 1, Thomas DiLorenzo will be teaching “Santa Claus Economics: An Austrian Analysis of the Welfare State” at Mises Academy. This four-week online lecture course will cover the origins, effects, and myths of the welfare state. Readings include works by Murray Rothbard, Ludwig von Mises, Robert Higgs, George Reisman, Charles Murray, Ludwig Erhard, and Per Bylund, among others.

The Exhaustion of the Reserve Fund

From Human Action, Chapter XXXVI

by Ludwig von Mises

The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.

In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.

An illustrative example is provided by the methods applied in the operation of nationalized and municipalized enterprises. These enterprises very often result in financial failure; their accounts regularly show losses burdening the state or the city treasury. It is of no use to investigate whether the deficits are due to the notorious inefficiency of the public conduct of business enterprises or, at least partly, to the inadequacy of the prices at which the commodities or services are sold to the customers. What matters more is the fact that the taxpayers must cover these deficits. The interventionists fully approve of this arrangement. They passionately reject the two other possible solutions: selling the enterprises to private entrepreneurs or raising the prices charged to the customers to such a height that no further deficit remains. The first of these proposals is in their eyes manifestly reactionary because the inevitable trend of history is toward more and more socialization. The second is deemed “antisocial” because it places a heavier load upon the consuming masses. It is fairer to make the taxpayers, i.e., the wealthy citizens, bear the burden. Their ability to pay is greater than that of the average people riding the nationalized railroads and the municipalized subways, trolleys, and busses. To ask that such public utilities should be self-supporting, is, say the interventionists, a relic of the old-fashioned ideas of orthodox finance. One might as well aim at making the roads and the public schools self-supporting.

It is not necessary to argue with the advocates of this deficit policy. It is obvious that recourse to this ability-to-pay principle depends on the existence of such incomes and fortunes as can still be taxed away. It can no longer be resorted to once these extra funds have been exhausted by taxes and other interventionist measures.

This is precisely the present state of affairs in most of the European countries. The United States has not yet gone so far; but if the actual trend of its economic policies is not radically altered very soon, it will be in the same condition in a few years.

For the sake of argument we may disregard all the other consequences which the full triumph of the ability-to-pay principle must bring about and concentrate upon its financial aspects.

The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.

With the present height of income and inheritance tax rates, this reserve fund out of which the interventionists seek to cover all public expenditure is rapidly shrinking. It has practically disappeared altogether in most European countries. In the United States the recent advances in tax rates produced only negligible revenue results beyond what would be produced by a progression which stopped at much lower rates. High surtax rates for the rich are very popular with interventionist dilettantes and demagogues, but they secure only modest additions to the revenue.[1] From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by “soaking the rich,” but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending, have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will have to foot the bill themselves for the subsidies. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population.

The situation in the employer-employee nexus will be analogous. The popular doctrine contends that wage earners are reaping “social gains” at the expense of the unearned income of the exploiting classes. The strikers, it is said, do not strike against the consumers but against “management.” There is no reason to raise the prices of products when labor costs are increased; the difference must be borne by employers. But when more and more of the share of the entrepreneurs and capitalists is absorbed by taxes, higher wage rates, and other “social gains” of employees, and by price ceilings, nothing remains for such a buffer function. Then it becomes evident that every wage raise, with its whole momentum, must affect the prices of the products and that the social gains of each group fully correspond to the social losses of the other groups. Every strike becomes, even in the short run and not only in the long run, a strike against the rest of the people.

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.


[1]In the United States the surtax rate under the 1942 Act was 52 per cent on the taxable income bracket $22,000–26,000. If the surtax had stopped at this level, the loss of revenue on 1942 income would have been about $249 million or 2.8 per cent of the total individual income tax for that year. In the same year the total net incomes in the income classes of $10,000 and above was $8,912 million. Complete confiscation of these incomes would not have produced as much revenue as was obtained in this year from all taxable incomes, namely, $9,046 million. Cf. A Tax Program for a Solvent America, Committee on Postwar Tax Policy (New York, 1945), pp. 116–117, 120.

Daniel McAdams Examines the Prospects for Peace on Iran

Daniel McAdams, executive director of the Ron Paul Institute, and author of this piece on the Libya War at Mises Daily, injects some sound analysis into the debate at RT TV.

Bitcoin over $1000

9956884654_1ea657e615_qI was interviewed today on RT TV about Bitcoin and the reasons it has soared in price to over $1000 per Bitcoin. It is both greater acceptance by vendors and governments as well as the world wide currency war and worry of war in the Middle East, especially in Iran which is in a hyperinflation that is driving the price higher.

The Mises Institute can take donations in Bitcoin and you can also make purchases in our bookstore with Bitcoin.


Is the Norwegian Housing Bubble Popping?

Norway's Housing Bubble 2012

I have been talking about the Housing Bubble in Norway for a while and about one year ago I wrote an article here. The story was picked up in by a variety of publications including here. It turns out that the bubble has spread over the entire Nortic region.

It caused quite a stir in Norway and was reported on in the leading business publications of Norway here.

It now appears that they have entered the denial phase and that the Bubble maybe coming to an end.

VIDEO: A Thank You to Our Donors and Members

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Team Player: Robert Shiller on Finance as Panacea

imagesGuest Post

Team Player: Robert Shiller on  Finance as Panacea

 Book Review by John Staddon

Shiller, Robert J. Finance and the Good Society. PrincetonUniversity Press. 2012. 304 pp. 

Yale professor Robert Shiller is one of the most influential economists in the world.  Co-inventor of the oft-cited Case-Shiller index, a measure of trends in house prices, he is author or co-author of several influential books about financial crises.  He shared the 2013 Economics Nobel with Eugene Fama and Lars Peter Hansen.

In 2012 Professor Shiller published a full-throttle apologia for plutocracy: Finance and the Good Society.  FATGS is a reaction to the hostility to finance provoked by the 2007+ crisis.  But rather than being an effective defense, FATGS just underlines what is wrong with present arrangements.

Shiller sees the solution to our still-unfolding problems not as less financial invention, but more: “Ironically, better financial instruments, not less activity in finance, is what we need to reduce the probability of financial crises in the future.”  He adds “There is a high level of public anger about the perceived unfairness of the amounts of money people in finance have been earning, and this anger inhibits innovation: anything new is viewed with suspicion. The political climate may well stifle innovation and prevent financial capitalism from progressing in ways that could benefit all citizens.”

Is he right?  Is financial innovation always good?  Have the American people turned into Luddites, eager to crush creativity and settle into a life of simplistic poverty, uncorrupted by the obscure and self-serving creations of financial engineering?

Yes and yes, says Professor Shiller, who applauds what others deplore in the rise of ‘financial capitalism’ which Shiller describes as “a system in which finance, once the handmaiden of industry, has taken the lead as the engine driving capitalism.”

Finance capitalism, a new name but an old idea, has been unpopular for years.  In the 1930s, especially, right after the Great Depression, the big finance houses, like J. P. Morgan were seen as conspirators against the public interest.  Goldman Sachs, the ‘great vampire squid’ of Rolling Stone’s Matt Taibbi, plays the same role these days.

Some of Shiller’s defense of the financiers is simply puzzling because it is pretty obvious nonsense.  This is what he has to say about securitization – the bundling of hundreds of mortgages into layered bonds that have been sold all over the world:

Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the problem of “lemons.” This problem…refers to the aversion many people have to buying anything on the used market, like a used car.[i]

The claim that securitization solves the information problem is paradoxical to say the least.  How can removing a mortgage from the initial lender improve the buyer’s knowledge of the borrower?  Surely the guy who actually originates the loan is in the best position to evaluate the creditworthiness of the borrower?

Ah, the answer is apparently the rating agencies:  “Bundling mortgages into securities that are evaluated by independent rating agencies, and dividing up a company’s securities into tranches that allow specialized evaluators to do their job, efficiently lowers the risk to investors of getting stuck with lemons.”

Really?  Not everyone agrees.  Here’s a comment about rating agencies from Michael Burry, who was one of the few to spot the eroding quality of sub-prime mortgages in the years leading up to the 2007 crash.  Burry’s conclusion was that the proportion of demonstrably bad loans in MBSs increased over the years, but the credit scores remained the same!  So much for the credit-rating agencies which were, in effect, captives of (and paid by!) the bond issuers. Shiller concedes that securitization “turns out not to have worked superbly well in practice,” but he blames optimism about house prices (and where did that come from?), not the built-in opacity and erosion of responsibility of securitization itself.

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