Monday, December 27, 2010

Political Economy: False Choices and the True Dilemma

In 1789 a group of men gathered in Paris to sound the death knell for the ancien regime, and to inaugurate the modern political world.  But there were some differences among them.  Some wanted to abolish the old order more completely.  Others wanted to retain some vestiges of the old privileges.  In this "National Constituent Assembly" of France, the ideological birds of a feather sat together; the more radical members on the left, the more conservative members on the right.

On that day, on the eve of the French Revolution, not only was the modern political world born, but so was its terminology.1  To this day, politics is bisected into a "left wing" and "right wing".  Now with regard to specific fleeting political agendas, vague distinctions like this make sense.  Movable umbrella terms are necessary since legislation involves shifting coalitions of people who do not agree on every single point.  The trouble starts when the terminology of the political moment is imported wholesale into the language of science, in which precise, fixed distinctions are called for.  The "left/right" divide is downright confusing for social science.

Where this confusion is most pronounced is in intellectual discussion of western society following World War I. According to common opinion, there are two politico-economic extremes: communism (or socialism) on the left, and fascism (or Nazism) on the right.  Sound policy then is considered a balancing act between two opposite forms of totalitarianism.  If one leans too far to the left toward the interests of the poor and weak, one arrives at communism/socialism.  Veer too far to the right toward the interests of the rich and strong, and you get fascism.  This political taxonomy is entirely unscientific.  Neither fascism, nor Nazism have ever been scientifically identifiable social orders.  They are party platforms, and thus are assemblages of often-contradictory ideas and slogans.  Calling fascism a "social order" makes as little sense as calling "Tea Partyism" or "Blue Dog Democrat-ism" a social order.

Moreover, as Ludwig von Mises demonstrated2, the allegedly "right-wing" social order of Nazi Germany was just as much socialism as was Lenin's Russia.  Through economic interventions the German government completely took over the economy.  The only "market" left was a sham.  Private individuals owned the means of production in name only.  Real ownership of the means of production was in the hands of the state.  This is what Mises called "socialism of the German or Hindenburg pattern".  This variety of socialism is also known as Zwangswirtschaft, which is basically German for "compulsory economy".  Those who were once entrepreneurs, devolve in a Zwangswirtschaft into mere shop manager (Betriebsfuhrer in Nazi legalese), following the orders of a central command.

The only way in which "socialism of the Russian or Lenin pattern" (as Mises termed the more familiar variant of socialism) is distinct from the Zwangswirtschaft is in the non-essential fact that it has no such veneer of faux-private ownership.  Its socialism is simply more overt.

Another way of stating this is as follows.  In the populist propaganda of Bolshevism, under "socialism of the Russian or Lenin pattern" the people ostensibly own the state, and the state in turn owns the means of production.  While, under the sham capitalism of Nazism and "socialism of the German or Hindenburg pattern", the people ostensibly own the means of production, but the state in turn owns the people.

Thus these occupants of different political "poles" really occupy the same ground, and are only separated by a trivial technicality: the existence or absence of a sham market.  Each variant of socialism does indeed have its own distinctive path.  But it has nothing to do with "left vs. right", "poor vs. rich", or "weak vs. powerful".  Rather, it is a matter of "bureaucratization vs. interventionism".   Bureaucratization, by forthrightly gobbling up the market bite-by-bite, leads to the overt socialism of the Russian or Lenin pattern.  Interventionism, by subtly crippling the market and replacing it incrementally with a network of government diktats, leads to the sham market of socialism of the German or Hindenburg pattern.3

Revolutionary socialist governments, like the Nazi and the Bolshevist states, will generally adopt one path or the other.  But it is by no means necessarily an either/or choice.  Gradual approaches toward socialism, like the one the U.S. is currently taking, often rely on both: here overtly socializing an industry via nationalization, there covertly socializing an industry via market interventions.  And one type of socialization often leads to the other.  Thus through this gradual, dual approach to socialization, one can imagine what one day might be called "socialism of the American pattern" arising, characterized by a hodgepodge of vast bureaus and sham markets.

Thus it is conceivable that there can be a single socialist system that is a mixture of the two varieties of socialism.  However, a mixture of capitalism and socialism is entirely inconceivable, in spite of the fact that many think of all real world economies as "mixed systems".4

As Mises wrote, the mere existence of some bureaus and state-owned firms does not alter the capitalist nature of society and make it a "mixed system" of capitalism and socialism.  Such institutions, although they are inept in comparison with private firms, exist in the midst of a market society.  Because of this, they have recourse to market prices, and can thus have some rationality in their budgets.  Rationalization of the social division of labor is thus still effectuated by the market.

Another important distinction is that, according to Mises, bureaucratization is not a form of interventionism.5  Bureaucratization makes people poorer to be sure, but it does so by constraining the ambit of the market, not by interfering in its workings.

Some have said "interventionism" is system in-and-of itself, and they propose it as a sensible, "middle of the road" policy between capitalism and socialism.  Mises exploded this fallacy.  Utilizing the findings of classical political economy, as well as the findings of modern economics (including his own original insights), he demonstrated that all economic interventions are, in effect, contrary to the purposes of all; including the purposes of those who advocate them.6  They are thus destructive, not constructive.  Interventionism is not a system of social production; it is nothing but a hampering of capitalism.  A hampered capitalist order is still a capitalist order.  The social division of labor in a hampered capitalist order is always effectuated by the sectors of the market which have not yet been crippled by interventions.

When one is confronted by the contrary-to-purpose effects of an intervention, one has two choices in dealing with those effects.  One can undo the intervention, in which case one chooses capitalism.  Or one can try to eliminate the harm with further intervention.  However, further intervention can only lead to still more harm, which would thus call for yet further intervention.  Thus, if one does not choose capitalism, one must choose ever-increasing interventions, which ultimately will completely destroy the market and culminate in socialism of the German pattern.7  If one does not choose capitalism, one chooses socialism.

Not everybody associates "fascism" with the economic policy of the Nazis.  Those who know their history remember that part of the economic policy platform of Benito Mussolini, the founder of fascism, was "corporativism", in which production was directed by "corporatives", each of which represented the participants of a specific industry.  Some even call our present economic order "fascist", because they equate "corporatism" with the "corporativism" that they identify with fascism.  But corporations lobbying for privileges (corporatism) is not the same thing as whole industries collectively owning the means of production relevant to their industry (corporativism).  The two notions are distinct, and must be treated separately.

Corporatism is not a system of social production.  Corporations lobby for privileges which hamper capitalism, it is true.  But, regardless of who instigates the hampering, hampered capitalism is capitalism nonetheless.

And as Mises explained, corporativism is no more a permanent social order than is interventionism.8  The crux of the matter is: who is to determine policy decisions within a given corporative: the landowners, the capitalists, or the workers?  If the state adjudicates between them, then it is the state which is essentially disposing of the means of production, and thus corporativism devolves into socialism.  If the corporatives operate according to a democratic principle, then it is the majority workers who will dictate policy, and thus corporativism devolves into syndicalism.

Under syndicalism, the means of production of each industry are owned by the workers of that industry.  The syndicalist program is distilled by the slogans, "the railroads to the railroadmen!" and "the mines to the miners!"  Syndicalism too has been put forth as another candidate as a "third way" between capitalism and socialism.  But syndicalism is no system of social production either.9  As soon as the needs of society change in the slightest, how is a syndicalist order to adapt?  Under capitalism, shifts in consumer demand adjust prices.  In seeking profits, entrepreneurs try to anticipate these price adjustments, and thereby adjust the structure of production to best satisfy consumer wants in the new state of affairs.  In the flux of the market, resources shift from one industry to another, in response to consumer demand.  But, under syndicalism, why would any producer's syndicate acquiesce to a diminution of its importance and wealth in society?  Production is for the sake of consumption, never the other way around.  Therefore, any system of social production worthy of the name must have some means of at least conceivably adjusting production for the sake of consumption.  Even socialism ostensibly fits this bill, because the central administration at least has the authority to adjust production by diktat, in order to try to better serve society (if not the intellectual means to do so rationally).  But no syndicalist has ever put forth any idea of how a syndicalist state would do so, that did not involve becoming, in essence, capitalism or socialism.

Thus, every economic policy decision is a two-pronged fork in the road; there is no third prong.  And neither are the two prongs toward the "left" and the "right".  There is capitalism, and there is socialism.

One is tempted to say that the two prongs are "forward" and "backward".  This would be to adopt the strategy of the Marxists who characterized everything they liked as "progressive" (as well as everything the disliked as "reactionary").  But again, this would be eschewing scientific distinctions for political word games.  The honest man does not rely on catchwords and slogans, in hopes that the gullible public will latch onto his program by dint of its association with words that resound favorably in their ears.  The honest man tries to speak to the mind of his auditors, not to their ears, because he is confident in the inherent strength of his ideas.  He will even accept unflattering names for his position, and grant flattering names to his opponent's position, if that will but put an end to the distracting word games, and allow the true debate to begin.

What is more "social" than the coordinated ecumenical society of mutual benefactors produced by capitalism?  It is true that capitalism progresses via the accumulation of capital.  But the upshot of increased capital in proportion to labor is an increase in the marginal productivity of labor, and thus a rise in real wages.  And if anything is prejudicial to the vested interests of the already-rich capitalist, is it not pure capitalism, which does not let him rest on his laurels, but demands that he put himself up to the test of the market again and again, lest his fortune gradually dwindle?  Thus should not the market order be given a more flattering (and descriptive) name than "capitalism"?  Should not socialism, that fundamentally anti-social program, be stigmatized with an ugly appellation?

Such are the distracting games of demagogues, and they would only slow liberalism down.  The most direct path to success is to use the terms at hand, as they are found in the best literature in our tradition (which happens to be the oeuvre of Ludwig von Mises), and simply explain what we mean by them.  Any sane person who learns what is truly entailed in "that which is called capitalism" and what is truly entailed in "that which is called socialism" will choose the former over the latter.  That is because socialism (which, again, is the only direction one can choose besides capitalism) is social suicide.  As Mises irrefutably proved as early as 192010, the socialist state has no way of rationally directing production.  Socialism means discoordination, capital consumption, famine, and death.  Thus between capitalism and socialism (which, once more, are the only two choices), the informed chooser could not have an easier choice to make.

And this is the choice that is before everybody.  The fact that everybody in their right mind would choose capitalism, if only they knew what the choice really meant, is why there is a harmony of interests.  Cognizance of this harmony of interests is what underpinned the scientific liberalism (one might call it "harmonist doctrine", as Mises does11) that first arose in the writings of men like Hume, Smith, and Condillac; that intellectually won the field in the days of Ricardo and Say; and that had its greatest impact on policy in the days of Cobden and Bastiat.  And it was the denial of this harmony of interests-- what amounted to a philosophy of irreconcilable conflict (or, as Mises termed it, an "anti-harmonist doctrine")-- that underpinned the revolt against liberalism which reached its culmination in the twentieth century.

This philosophy of irreconcilable conflict is yet another common feature between the totalitarians of the so-called "left" and "right".  With the overthrow of liberalism, the world once again came to embrace the "Montaigne dogma"12: the incorrect notion that no group can gain except by another group's loss.  This was the social philosophy of the mercantalists, which was heroically overthrown by the early liberals.   The people of the early 20th century west came under the sway of the new "anti-harmonism", dominant among the intellectuals of the time.  Thus, adherence (or at least acquiescence) to the party programs of the both the "far right" and "far left" came naturally to them.  They either adopted the lebensraum doctrine of national conquest promoted by the Nazis, Fascists, and other national imperialists, or the doctrine of perpetual class warfare promoted by the internationalist Marxists.  As Mises brilliantly characterized it, the only important difference between the two doctrines, was that one divided society into irreconcilable camps vertically (along national lines) and the other did the same horizontally (along class lines).13

The sooner classic liberals abandon the sloppy distinctions of party politics,  and adopt the scientific distinctions of Ludwig von Mises, the better will it be for our efforts in explaining to our fellow man the stark choice that lies before him.  Right vs. left, fascist vs. communist, all the alleged "middle ways" (interventionism, syndicalism, corporativism, etc.): these are all false choices.  As Mises demonstrated, ultimately there is one true dilemma in political economy: capitalism vs. socialism.

1Dean Russel, The First Leftist

2Ludwig von Mises, Socialism

3Mises, Critique of Interventionism

4Mises, Socialism

5Mises, Bureaucracy

6Mises, Interventionism: An Economic Analysis

7Mises, Interventionism: An Economic Analysis


9Mises, Socialism

10Mises, Economic Calculation in the Socialist Commonwealth

11Mises, Theory and History

12Mises, Human Action

13Mises, (gotta look up where I read that)

Saturday, December 25, 2010

Understanding Mises | The Theory of Money and Credit | Chapter 3: The Various Kinds of Money

Chapter 3 of The Theory of Money and Credit establishes the terminology Mises will use to construct his theory of indirect exchange.  Mises stresses that terminological discussions are not an end for science, but a means for discovering principles.  And the principles to be discovered for monetary theory are economic principles, not juristic or numismatic principles.  More specifically, the goal of monetary theory is to discover the "laws that determine the exchange ratio between money and other economic goods."

The terms and distinctions Mises settles upon are as follows.

First there is the distinction between money and money substitutes.  Claims on money are not considered to be money themselves, but rather are termed money substitutes.  An important qualification is that a claim on money is only considered a substitute for that money if it is (a) perfectly liquid (no significant expense must be incurred for the claim to be redeemed), (b) perfectly secure, and (c) payable on demand (that is, it doesn't need to "mature" like, for example, a Treasury bill or a Certificate of Deposit).  If the claim does not satisfy the above criteria, then it is not a money substitute.  If it is used as a general medium of exchange, then it, by definition, is money proper.  But it is obviously not the same kind of money as that which it is redeemed for.  It circulates as its own kind of money.

Thus token money is, by definition, a money substitute and not money proper.  To conceptually lump a token money with specie as money proper, simply due to its metallic content would be to think as a numismatist, and not as an economist.  What matters for economics is the thing's role in market exchanges.

Mises subdivides money proper into three categories:
We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person.
Now a claim on money can only be credit money if it is an "imperfect" claim against other kinds of money.  Because, again, if the claim is (a) perfectly liquid, (b) perfectly secure, and (c) payable on demand, then it qualifies as a money substitute, and not as money proper.

The important distinction between commodity and fiat money is that the latter is technologically indistinguishable from things that are not money.  A note of non-redeemable fiat paper may have the exact same chemical make-up as a bill of board game play money.  It is the legal status of each that is the decisive difference between the two.  Gold specie, on the other hand, is money by virtue of being gold.  It has its own use value (although no "intrinsic" value as is so often claimed, even by fans of Austrian economics); a use value that was decisive in it initially acquiring exchange value.

A school of monetary theorists which Mises refers to here as "nominalists" (and elsewhere as chartalists and etatists) would have it that all money is fiat money.  Moreover, they say the "money nature" of fiat money arises immediately from the state declaring that it is money.  Mises demonstrates with references to documentary evidence, that historically money has in general been exchanged by weight and quality, and not by "tale" (denomination), so long as any relative debasement has been detected.  Therefore, most money throughout history has been commodity money.

Furthermore, even money that is truly fiat money is not established as money immediately upon state pronouncement.  To think otherwise would be to think as a jurist, and not as an economist.  What makes a thing a money is that it is actually used as a general medium of exchange by individuals on the market.  Legal tender laws may be the deciding factor in convincing individuals to use the government's paper as money, but it is the use that makes it money, and not the law.

Thursday, December 23, 2010

Mises on Self-Education in Economics

"Whether one likes it or not, it is a fact that the main issues of present-day politics are purely economic and cannot be understood without a grasp of economic theory. Only a man conversant with the main problems of economics is in a position to form an independent opinion on the problems involved. All the others are merely repeating what they have picked up by the way. They are an easy prey to demagogic swindlers and idiotic quacks. Their gullibility is the most serious menace to the preservation of democracy and to Western civilization.

The first duty of a citizen of a democratic community is to educate himself and to acquire the knowledge needed for dealing with civic affairs. The franchise is not a privilege but a duty and a moral responsibility. The voter is virtually an officeholder; his office is the supreme one and implies the highest obligation. A citizen fully absorbed by his scientific work in other fields or by his calling as an artist may plead extenuating circumstances when failing in this task of self-instruction. Perhaps such men are right in pretending that they have more important tasks to fulfill. But all the other intelligent men are not only frivolous but also mischievous in neglecting to educate and instruct themselves for the best performance of their duties as sovereign voters."

Ludwig von Mises, Bureaucracy