Rothbard's Man, Economy, and State: a Memoir

Rothbard's Man, Economy, and State: a Memoir

04/13/2018Gary North

In October 1962, I was given a lifetime advantage: a copy of Murray Rothbard’s Man, Economy, and State. In the language of journalism, it was hot off the presses. It had just been published. I was sent a copy by F. A. Harper, known as Baldy, who was not bald. At the time, he ran the Institute for Humane Studies. Until early that year, he had managed the William Voker Fund. The Volker Fund had put up the money that subsidized the publication of Rothbard’s book. It was published by Van Nostrand, a small but respectable mainstream publishing house located in Princeton, New Jersey. Van Nostrand was also the publisher of a series of books that had been financed by the Volker Fund over the previous two years.

I was in my final year of college as an undergraduate. I had written to Harper the previous year about some questions I had about Ludwig von Mises’ Human Action (Yale University Press, 1949). Harper responded in a letter. I still have the fragments of that letter. For some unknown reason, I cut off the introduction to the letter, which would have had the date on it. I suspect this was in the summer of 1961.

By 1962, Harper was serving as my part-time mentor. I did not fully understand this at the time. In November 1961, he paid for me to fly to Burlingame, California, in order to spend a few hours with him. This was one of the turning points in my life, although I did not know this at the time. He gave me a copy of Israel Kirzner’s book, The Economic Point of View, which had been published by Van Nostrand in 1960. I wrote this on the front page: “presented by F. A. Harper November, 1961.” He was recruiting me. I have been grateful for this ever since. When he sent me Man, Economy and State, he was still in the process of recruiting me.

Within a few months after my visit, Harper was fired by the man who controlled the Volker Fund, Harold Luhnow, the nephew of William Volker, who died in 1947. Luhnow took over the management of the Fund in 1947. He shifted its focus from charitable activities in Kansas City, Missouri to financing the remnants of classical liberalism. In early 1962, he replaced Harper with Ivan Bierly, who had received his Ph.D. under Harper at Cornell years before. The Volcker Fund was renamed “The Center for American Studies.” That shift turned out to be crucial in my career. Bierly hired a new staff. One of the people he hired was R. J. Rushdoony. I wrote to him in the spring of 1962. I met him when he lectured for two weeks at a summer seminar sponsored by the Intercollegiate Society of Individualists. Rushdoony continued to recruit me in my senior year. He brought me to work for the Center as a summer intern in 1963, and I lived at his home. I spent the whole summer reading the basic texts of Austrian School economics, including Man, Economy, and State.

ACADEMIC GUILDS

Rothbard’s book was a masterpiece, both conceptually and rhetorically -- the art of persuasion. He had a rigorously systematic mind. He also had a stupendous memory regarding materials he had read, which he demonstrated in the book’s footnotes. He had an unmatched ability to write clearly. I mentioned this in my article in the 1988 Festschrift for Rothbard, Man, Economy, and Liberty. In my article, “Why Murray Rothbard Will Never win the Nobel Prize,” I said that he wrote much too clearly to win it.

Mises was a clear writer. But in Human Action, he offered fewer footnotes than Man, Economy, and State. He also did not use the paraphernalia of modern economics. There are no equations and no graphs in anything Mises ever wrote. The famous supply and demand scissors are absent in his books. In terms of presentation, Rothbard in Man, Economy, and State was far closer to the mainstream academic community than Mises was. But he was not close to the mainstream community with respect to the content of what he wrote. He was an academic pariah in 1962, and he remained a pariah all his life. He shared this position with Mises.

This was not a liability in the long run. One of the important points made by Thomas Kuhn’s paradigm-shifting book, The Structure of Scientific Revolutions, also published in 1962, was this: major shifts in the worldview of intellectuals are usually generated from either the fringes of an academic guild or from outside the academic guild. If they are generated from inside, they are generated from young men who are reacting against the outlook of the guild. They are on its fringes. The other source of change in perception comes from brilliant outsiders who are in no way under the authority of a particular academic guild.

Mises was funded from outside of academia. New York University paid him no salary for a quarter of a century. He retired in 1969. He may have been the oldest professor in the nation. The money to pay his salary had been put up by rich friends of Mises, most notably Lawrence Fertig, who was on the board of New York University. He donated through the Foundation for Economic Education after its founding by Leonard E. Read in 1946. The Volker Fund also put up money for Mises and Hayek at the University of Chicago. The Volker Fund had put Rothbard on its payroll, mainly to review books, beginning in the mid-1950's. Rothbard was not on any university or academic payroll in 1962. Only after the demise of the Center for American Studies in 1964 did he get his first teaching position, which was at Brooklyn Polytechnic Institute. The school did not offer an economics major. He taught budding engineers. He was on the fringes.

Mises and Rothbard were outsiders. That was their great advantage. This was not clear to me in 1963, but after I read Kuhn’s book in 1968, I understood. The economics guild had no control over either of them. Neither of them published in professional journals. Rothbard had published a few essays, but after 1960 he never bothered again. He made a wise decision. He did not have to conform to what any editor believed.

CLARITY AS A STANDARD

I have always appreciated clarity of exposition. In 1963, as today, I was of the opinion that an author had two primary responsibilities: accuracy and clarity. Persuasion is in third place. Rothbard was tremendous at all three. In this sense, he became my literary model. To the extent that I am known for my writing, I gained this skill more from Rothbard than anybody else.

In 1966, I took a graduate seminar on the American Revolution from Douglass Adair. He had been the editor of The William and Mary Quarterly. He had personally transformed it from a journal that published regional memorabilia into the premier journal of colonial history. He told us that he always used this criterion for screening manuscripts. If an article did not stand on its own merits without the footnotes, he would not publish it. He said that the footnotes were important to validate the thesis, but if the article was heavily dependent on the footnotes to make its point, it was not worth publishing. That impressed me at the time. I see in retrospect that everything scholarly/academic that Rothbard ever wrote would have qualified for publication in terms of Adair’s rule.

Adair made another observation. He said that every scholar would benefit from a year of editing a scholarly journal in his field. Why? Because he would discover how few of his colleagues have the ability to write clearly.

Rothbard had a huge advantage over his peers. He was the master of clarity in the field of economics. He was even more clear than Hazlitt. As a friend of Hazlitt's, I guarantee you that Hazlitt would have been the first to admit this. He was a humble man. For a man who achieved so much, he was an astoundingly humble man. He had an enormous respect for Rothbard.

F. A. Hayek was a clear writer, but as he admitted, he was not a systematic thinker. He divided schools of thought into two groups: systematizers and puzzlers. Hayek called himself a puzzler. In economic thought, this is clearly seen in Austrian School economics from the beginning. Carl Menger and Eugen Böhm-Bawerk were systematizers. Friederich Wieser was a puzzler. Not many people have ever read Wieser. Puzzlers are harder to read than systematizers.

Hayek gained attention in the English-speaking academic world beginning in the early 1930's. Mises was not well-known in academia outside of Austria. Hayek is still the best known Austrian School economist. He won the Nobel Prize in 1974. But Hayek never wrote a treatise on economics.

Henry Hazlitt was a clear writer. He was rhetorically gifted. He had the ability to sustain long, complex arguments, as he demonstrated in his refutation of Keynes, The Failure of the “New Economics.” It was published in 1959. We never see it footnoted in any scholarly journal. There are few people who have ever read it. Hundreds of thousands of people have read his little masterpiece, Economics in One Lesson (1946), but he wrote it in just a few months, and it is not systematic in the way that treatises are supposed to be. It was not meant to be a treatise. It was meant to be a popular book that introduced people to free-market principles. It succeeded. Nothing that Hazlitt ever wrote was a comprehensive treatise.

In 1949, the world of economic theory was waiting for a clear, comprehensive, systematic treatise.

PIECES OF THE ECONOMIC PUZZLE

Most of the pieces of the economic puzzle had been lying around in an unorganized pile ever since Adam Smith's Wealth of Nations (1776). They had been refined and trimmed by Carl Menger in 1871 in his Principles of Economics. The British economist Alfred Marshall in 1890 attempted to put the pieces together in his Principles of Economics, but as is true of so many British thinkers, he was something of a puzzler, not a systematizer. The British intellectual tradition is inductivist, not deductivist. It does not begin with first principles. The pieces in his textbook did not fit together well because they were not systematically based on methodological individualism in the way that Human Action is.

I will now make an admission. It was not until just a few years ago that I recognized what should have been screamingly obvious to me and everybody else. Human Action was the first comprehensive treatise on economics. This may seem like a preposterous statement, but if you look back over the books on economics prior to Human Action, there is no book that starts at the beginning – the acting individual – and develops a comprehensive theory of all aspects of the market process in terms of just a few principles, which Mises called axioms and corollaries. No other economist called them axioms and corollaries. That was what made Mises unique.

Rothbard was an a priorist (deductivist) in epistemology, just as Mises was. In 1962, this made a grand total of two economists. In Man, Economy, and State, Rothbard laid out the chapters of the book in a systematic fashion. From Chapter 2 on, each chapter is a development of the previous chapter. This is what a prioristsare supposed to do. They start with axioms, and they develop the axioms, point by point. Mises had done the same thing in Human Action. Rothbard did it with greater precision. He also did it with greater clarity.

The first person to understand the uniqueness and comprehensive nature of Human Action was Rothbard. He saw this in 1949. This gave him an edge over all of his contemporaries. That is why Man, Economy, and State, which took him over a decade to write, was so important to my generation of budding economists. He systematized what was already a systematic introduction to economic theory. He made it easier for us to grasp the importance of what Mises had done.

Mises put together pieces of the puzzle. Rothbard took that completed puzzle and made it more palatable for younger economists who wanted to see graphs. Fortunately, he never used an equation. That would have sullied the product.

Rothbard never claimed uniqueness for his book. He fully understood that it was a derivative product. But as an introductory treatise that uses the paraphernalia of the modern economic textbook, Rothbard’s book is more serviceable than Mises’s book. In 1962, the enormous volume of his footnotes represented a survey of almost everything that had been published in the journals over the last 50 years. I have never seen anything like it. Admittedly, this dates the book. But that was inevitable, given Rothbard’s strategy. He wanted to introduce the basics of Austrian economic thought, and he wanted it within a framework of the sweep of economic opinion as of 1960 or thereabouts.

CONCLUSION

I don’t know if younger scholars read Man, Economy, and State before they read Human Action. In retrospect, I’m not sure whether I finished Man, Economy and State before I finished Human Action. I do know that I read quite a bit of Human Action in 1961. I wrote to Harper about the book in 1961. But I don’t remember if I read the whole book before the summer of 1963. I had finished both books by late August 1963. But there is no question in my mind that Rothbard opened the categories of economics more clearly to me than Mises had done. Rothbard’s literary style and his approach to economics was exactly what I needed in 1963. His book gave me an edge on my contemporaries. It shaped my work dramatically both in graduate school and subsequently. I even wrote a term paper for a course in apologetics – the philosophical defense of Christianity – on Rothbard’s epistemology. That was in 1964.

If someone has never read any economics, and he wants to start at the top, I recommend that he read Human Action first. But if he is in graduate school as an economics major, he probably would be wise to read Man, Economy and State first. If you like supply and demand graphs, read Rothbard’s book first. If you don’t like graphs, read Mises first.

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Canada is Not a Free Trade Zone

04/19/2018Tho Bishop

When lampooning the various arguments for trade barriers, Murray Rothbard would like to try to use the arguments offered against foreign trade to trade between states themselves.

As he wrote in Making Economic Sense:

The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.

Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.

If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure rip-off of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less-efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.

Unfortunately such "absurdity" has been ruled to be the law of the land in Canada. As the National Post reports:

After a legal battle fought all the way to Canada’s highest court, a New Brunswick man’s quest to be able to buy slightly cheaper alcohol in a neighbouring province has failed.

In a unanimous decision handed down Thursday, the Supreme Court of Canada ruled provincial trade barriers are constitutional as long as they’re aimed at a valid purpose within the province’s jurisdiction, with only an incidental effect on trade. Canada’s constitution simply “does not impose absolute free trade across Canada,” it declared....

On its face, the case was about booze. But had the challenge been successful, the precedent could have struck down a massive swath of provincial trade barriers, from agricultural supply management to e-commerce to environmental controls. Crown attorneys from every province had lined up at the Supreme Court to argue against the challenge, with the federal government siding with them.

The ruling declared that allowing “full economic integration” within Canada would “significantly undermine the shape of Canadian federalism, which is built upon regional diversity within a single nation.” Federalism means there must be “space to each province to regulate the economy in a manner that reflects local concerns,” the court ruled.

As Maxime Bernier, a Conservative Member of Parliament and a student of Austrian economics noted, "Sad day for defenders of economic freedom in Canada."

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Waco: 25 Years Later

04/19/2018James Bovard

25 years ago this morning, FBI tanks were busy collapsing the home of the Branch Davidians atop their heads. FBI was also gassing the children, women, and men - leading to a conflagration that left 76 people dead. Waco shows that it is not an atrocity if the U.S. govt. does it - that federal aggression against Americans will often be ignored by the media - and that Congress cannot be trusted to expose federal outrages.

Read more from Jim Bovard at The Hill: Bitter lessons 25 years after Waco, Texas, siege

 

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Gratitude and Wonder for the Internet

04/18/2018Gary North

This is a simple video, cheap to produce, and free to post. It is about the fact of its own existence. The talking head is the remarkable investigator James Corbett.

A Moment for Wonder

We are witnessing an incomparable transformation of world civilization, and we barely recognize it. We are too busy to recognize it. We are hard-pressed to think through the implications of it for our own lives, let alone the lives of seven and a half-billion other people. But the transformation is taking place. We have gone through it, almost oblivious to the fact that we have been going through it. We almost take it for granted. That was Corbett's point.

I want to make another point. The most important unanswered question that any historian can ask is this one: what made possible, beginning around 1800, compound economic growth per capita of about 2% per annum? Historians rarely ask this question. None of the ones who have attempted to answer it have come up with a plausible answer. Yet that phenomenon has led to the creation of the world that would be completely unrecognizable to anybody born in 1800. This has taken place within the lifetime of three generations. I have come back to this point repeatedly. John Tyler was born in 1790, and he became President in 1841. I have interviewed his grandson, Lyon Tyler. Both Lyon and his brother Harrison are still alive. This is inconceivable.

The 2% per annum per capita real economic growth that has taken place over the last two centuries was imperceptible to the people living through the transformation. Year-by-year, the world got richer, and the only exception was the decade of the 1930's. Yet people did not perceive the transformation. Gadget by gadget, the world was completely changed, but people only noticed the gadgets that applied to their lives. There is more to life than the compounding of gadgets, yet the compounding of gadgets ultimately transformed the world.

Corbett's point applies to the last two decades. Here, breakthroughs were made, based on Moore's law, which have changed our lives. Moore's Law accelerates a lot more than 2% per annum. It accelerates at something close to 50% per annum. Despite this, we have lived through the repercussions since 1965 in the field of silicon technology, and we have adjusted without any problem. We barely notice what is taking place around us. We take it for granted. That's why I thought Corbett's video was impressive. Using digital technology, he made his point in such a way that we understand it. He did it simply by using a piece of digital music. At first, it was not clear what he was getting at. But, by the end of the presentation, it was clear what he was getting at.

To his sense of wonder, I add a sense of gratitude. I am a writer. Writers want to find readers. In the history of mankind, up to 1996, writers had to find either a publisher that would print and distribute their materials, or else they had to become direct response marketers who could seek out an audience through the use of mailing lists. I tried the first approach, and I failed. I tried the second approach, and I succeeded.

Today, as the extraordinary experience of Jordan Peterson indicates, all you have to be is good. Never before in the history of man has the principle outlined in Albert J. Nock's 1936 essay, "Isaiah's Job," been truer: the Remnant will seek you out. To use the words of the voice that spoke to Kevin Costner, if you build it, they will come. Warning: if it's not any good, they won't stay long unless they are crackpots. Of course, there is always a large number of crackpots. You may get an audience, but they won't be worth recruiting.

We now are being pressured to restructure our lives. We do it voluntarily. People who use Facebook and social media, which I do not, have had to re-budget time in their lives. The way we communicate has changed. We are told that the way people get elected has changed. There is nothing that the critics can do about it. That really is the bottom line. All the handwringing about the supposed Russian involvement in American politics is essentially irrelevant. The two main candidates used the system to the hilt. Trump used it cheaper. He won. The candidates will always use the best tools available.

There is nothing anybody can do about it that is significant. The establishment doesn't like it. The people who were the pioneers of the transformation want to be in the establishment. More or less, they have been adopted by the establishment. But our lives are changing in a completely un-predictable way. The geniuses who created Facebook, Amazon, and all the other digit-based institutions have been financially successful, and they have solved little problems to make their empires grow. But they have no control over the direction in which history is moving, because, visibly, there are so many new directions in which it may be moving. So many different groups use Facebook that there is no way of knowing which group is going to be successful. Everybody has some eschatology. Everybody has some theory of the future. But, with respect to specific predictions about how old movements are going to use specific new technologies, nobody has a clue.

Let me give a recent example. Google, renamed Alphabet, has a subsidiary: Waymo. Waymo has developed the new technology of self-driving cars. I have thought myself radical in saying that I think self-driving cars are going to be widespread in 2025. Little did I know. Waymo has just ordered 20,000 self-driving Jaguars, which will be delivered between now and the end of 2020.

Waymo Live Unveil Highlights: Self-Driving Jaguar I-PACE

My wife understands their strategy. She says they're going to appeal to rich people whose time is valuable. Waymo thinks that their cars will be driving a million trips a day in 2020. If this turns out to be true, there will be tremendous pressure on everybody else whose time is valuable to either use Waymo or else buy self-driving cars of their own. Other companies, such as Uber and Lyft, are going to have to compete by using self-driving cars.

Let's talk politics. If the rich people find that self-driving cars save them money, then they are going to make certain that politicians vote for policies that will enable the spread of self-driving cars. That's another reason why Waymo is buying Jaguars. Anyway, that's my theory.

For articles on this, go herehere, and especially here.

NYC cab drivers demand action to stop suicide crisis

New York City cabbies are going to be out of business in 48 months. They see what is coming. They are desperate for politicians to save them. It will not work. Some have begun committing suicide.

This protest is futile. Moore's law is relentless. Self-driving cabs are coming. We must adjust. Despair is futile. Politics is futile. An unplanned, widespread, international process of innovation is irreversible, short of a total breakdown of world civilization. This is unlikely.

Hayek called this the spontaneous order. The free market is replacing politics in the realm of economic planning. The state is on the defensive.

The central planners are holding up signs: "Stop!" The process will not stop. They will be run over.

It is a time for gratitude, not just wonder.

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The Mises Lecture That Inspired Ron Paul to Run for Congress

04/18/2018Tho Bishop

It's amazing what you can find in the Mises digital archives.

Here is a lecture by Ludwig von Mises on Socialism that he gave at the University of Houston. In the audience was a doctor from Lake Jackson, TX. After listening to this talk, he decided to run for Congress.

This was the only time Ron Paul met Mises, as he notes in his book Mises and Austrian Economics: A Personal View.

Because of my interest in individual liberty and the free market, I became closely associated over the years with friends and students of Mises, those who knew the greatness of Mises from a long-term personal friendship with him. My contact, however, was always through his writings, except on one occasion. In 1971, during a busy day in my medical office, I took a long lunch to drive 60 miles to the University of Houston to hear one of the last formal lectures Mises gave—this one on socialism. Although 90 at the time, he was most impressive, and his presentation inspired me to more study of Austrian economics.

Between Mises's Austrian accent and the recording quality of the 70s, it's not the easiest to understand. But still, a very neat piece of history. 

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Historical Controversies Podcast: Season 3

04/18/2018Mises Institute

Today, Chris Calton kicked-off the third season of his Historical Controversies podcast, which will recount the controversial history of the American Civil War.

The complete series (including Seasons 1 and 2) is available on iTunes, YouTube, Soundcloud, Google Play, Stitcher, Mises.org, and via RSS feed.

If you enjoy the podcast, please leave a positive rating and review.

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Peak Politico

04/18/2018Tho Bishop
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Trump Nominates Another Obama-Approved Federal Reserve Nominee

04/17/2018Tho Bishop

In no area has President Trump differed more from his campaign rhetoric than the field of monetary policy. Yesterday Trump announced the nominations of Richard Clarida and Michelle Bowman to the Federal Reserve Board of Governors, with the former to fill the role of Vice Chair. Clarida’s nomination in particular illustrates how uninspiring Trump’s appointments have been, as he was a finalist for a Fed governorship under Obama until he withdrew his name from consideration. Interesting enough, doing so resulted in Jay Powell, Trump’s new Fed Chair, to fill the position.

Richard Clarida, a former Bush Treasury official, currently serves as a Columbia University professor and an adviser to Pacific Investment Management Co.  He is a New Keynesian who has published a great deal on “Optimal Monetary Policy.” (Guido Zimmerman has an interesting QJAE article on the topic which references some of Clarida’s work.)

In terms of his policy views, he offers an interesting contrast to fellow Marvin Goodfriend – whose nomination has currently been stalled in the Senate. To Clarida’s credit, he reject’s Goodfriend’s support for negative interest ratesgoing so far as to question their legality for the Fed. In his advisory role at Pimco, his analysis has questioned the effectiveness of contemporary monetary activism. As he co-wrote in a June 2016 analysis:

In recent years we have described “riding a wave” of central bank interventions, as a range of unconventional policies have been rolled out across countries, driving asset price returns. This wave-riding has worked well in the past. Looking out over the secular horizon, however, diminishing returns to central bank interventions – and the potential for policy activism to do more harm than good, notably in the case of negative policy rates – advise against such an approach.

Of course he also differs in one area where Goodfriend is good, the use of the Fed’s balance sheet. Goodfriend has warned that the Fed’s buying of non-Treasury assets, like mortgage backed securities, gets it into the business of allocating capital. Instead, Clarida thought the Fed was too modest in buying up assets following the financial crisis.

As Matthew C. Klein  of Barons notes:

Clarida thought the Fed could effectively respond to downturns by committing to buying as many bonds – including mortgage bonds and corporate bonds – as necessary to "cap" interest rates at the levels it wants:

Much of the existing literature either misses entirely or under-appreciates how robust an LSAP [large-scale asset purchase] program can be at lowering bond yields and/or credit spreads...a central bank can everywhere and always put a floor on any nominal asset price (or set of nominal asset prices) for as long as it wants...So long as the central bank is willing to buy an unlimited volume of those bonds (potentially including the entire outstanding stock) at the interest rate it wishes to put a ceiling on, it will succeed. And of course, the above reasoning also applies directly to an Lsap program targeted at corporate bonds or mortgage backed securities.

The Fed successfully capped U.S. government borrowing costs in the 1940s, and this experience was cited by the Fed's staff in mid-2003. While the idea failed to gain traction among American policymakers, the Bank of Japan has successfully used "yield curve control" to limit yields on Japanese government bonds since 2016. Clarida's position in 2010 suggests he would be keen on something similar, perhaps also including mortgage bonds and corporate bonds, should he be at the Fed during the next downturn.

In terms of Fed reform, Clarida is likely to be an ally for House Republicans who have pushed to make the Fed adopt a rules-based monetary policy framework. Clarida has long written about the advantages of a rules-based framework and even has his own “forward-looking” version of the Taylor Rule.

As a voting Fed member, Michelle Bowman will also have an impact on the future of monetary policy – but as far as I can tell she has made no public comment on the subject. Rather than being an economist, she’s an attorney who had a long career as Washington staffer. Her employers include Senator Bob Dole, House Transportation Committee, the House Oversight Committee, FEMA, and Homeland Security Secretary Tom Ridge. Not the best resume for draining the swamp.

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Bring Back Interest Rates!

04/17/2018Jeff Deist

Let interest rates rise. Better yet, let interest rates function in the marketplace, wholly independent of central bank attempts at rate-setting or targeting.

How? Not through a laughably small and slow process of Fed tapering, but through a wholesale and aggressive selloff of assets still polluting the Fed's balance sheet since it began aggressively those assets from commercial bank in 2008.   

This was the critical point made by all three speakers at our event in Nashville this past weekend: interest rates need to rise before any true economic recovery can occur. The manipulation of interest rates by the Fed and other central banks causes untold distortions throughout the entire economy. Unless and until we address this problem, no fiscal or monetary policy changes will make much sense or have much salutary effect. Money and credit will continue to flow into less than optimal uses, investors will be forced to continue chasing yields in the casino equity markets, and Congress (plus other western legislatures) will continue to produce trillion dollar annual deficits without much worry about debt service. 

Perhaps worst of all, the world will continue to believe a fairy tale: that the Fed effectively recapitalized US commercial banks in the 2008 crisis and through successive rounds of QE without pain or consequences. Are we really to believe the monetary base underpinning the world's reserve currency can be quadrupled in less than a decade without causing lasting damage? That gross overspending by Congress can be wished away simply by having the Fed provide a ready market for Treasury debt at miniscule interest rates? Or that interest rates should have no connection to the savings habits of society? 

It all strains credulity, which is precisely why monetary policy relies so heavily on technocratic jargon and opaque processes: they want to confuse or bore us into not paying attention. And thus the can is kicked down the road, politically and policy-wise. That's how we became a high time preference society almost by stealth.

You can watch these engaging presentations by Dr. Robert Murphy, Carlos Lara, and myself here.

These excerpts from my talk attempt to remind the listener that none of this is normal, in fact quite the opposite. Not too long ago prosperous societies were based on the notion of capital accumulation, of producing more than they consumed, making the next generation better off in the process.

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This is the fundamental and foundational change that has to occur. We need real, positive interest rates, meaning rates above inflation rates. We have to reward saving if we intend to have a growing or sustainable economy.

It is not exaggeration to say interest rates drive civilization.

They are the most important signals in an economy. Everything flows from them, because the cost of borrowing money effects the cost of almost everything.

This is the fundamental and inescapable starting point for building not only a real economy but a real culture. Every healthy society accumulates capital, every healthy society produces and saves more than it consumes and borrows. The human desire to leave something to future generations explains why all of us sit in splendor today, in this restaurant, enjoying conditions our great grandparents could not have imagined.

To do this you need actual real interest rates, market prices for money. Savers and borrowers, supply and demand, need to meet. We have a mechanism for this, it’s called the market. Without market prices you have socialism, the opposite of markets.

So why do so many otherwise free-market economists not object to monetary central planning?

The most important interest rate is the Federal Funds rate, the rate at which commercial banks borrow from each other overnight if they need to meet reserve requirements for their loans. The Fed controls this rate, or “targets” it, by manipulating the amount of reserves banks have in their accounts with the Fed. Banks with high reserves don’t much need to borrow from each other, so the Fed Funds rate stays low. And since 2008 commercial banks have received interest on excess reserves parked at the Fed, which encourages high balances and keeps rates low.

All commercial interest rates — e.g., the interest you pay on your mortgage — flow from the Fed Funds Rate on a cost-plus basis.

But when the Federal Reserve effectively keeps interest rates lower than they would be naturally, it creates a terrible disconnect between lenders and borrowers. And this disconnect causes unbelievable distortions throughout the economy. As David Stockman says, because of central banks there is no honest pricing of goods anywhere — we simply don’t know, for example, what a barrel of oil or a bushel of wheat or a Honda Accord should cost. The Fed has distorted the single most important price in the entire economy — the Federal Funds rate.

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The Gains from Trade

04/17/2018Mark Thornton

Here is a simple example of the gains from trade. The exact some physical goods has different subjective values for their owners and both benefit from exchange! 

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Livestream of Tonight's Fractional Reserve Banking Debate between Bob Murphy and George Selgin

04/16/2018Mises Institute

Tonight Mises Senior Fellow Bob Murphy is debating George Selgin of Cato's Center for Monetary and Financial Alternatives on the topic of fractional reserve banking. The host is Gene Epstein's Soho Forum, an excellent monthly debate series based in New York City. 

You can watch live tonight at 6:30 ET on Reason's Facebook page

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