A new twist on a chilling phrase.

Last night I had the good fortune to attend a book launch for a new book entitled Spread the Wealth, authored by Mr. David R. Breuhan (The title is ingenious, sure to attract many of today’s coercive spreaders and spreadees).  I’ll have more details on the event later.  In the meantime, peruse the site and pick up the book.  Mr. Breuhan offers a prescription for our economic ills.  And you’re part of the medical team.

Frankly, I don’t know whether to believe it or not.  Hat tip to Casey’s Daily Dispatch.

Sophism is not a word often read or heard by the eyes and ears of the twenty-first century. It is a word, however, we would do well to become more familiar with. At its root lies wisdom, but the Sophists of the fifth century BC damaged that root for all time; so that rather than relating to wisdom, it is now used to indicate a “plausible but fallacious argument”. It is this fallacious meaning that Frédéric Bastiat had in mind when he titled his collection of essays Economic Sophisms (pdf version here). And while the term in modern use can also indicate an intention to deceive, Bastiat mostly thought the best of his intellectual opponents and assumed that they were not the authors, but rather, the victims and unwitting propagators of the deceit inherent in economic fallacies.

Sophisms, praised as the “…best literary defense of free trade available…” is a collection of two different series of essays defending free trade against the economic fallacies of mid nineteenth century France. In the First Series, a collection of twenty-three essays first published together in 1845, Bastiat examines free trade from many different perspectives employing a variety of writing styles. Most of the essays are written in a conversational prose with an occasional one being satire or story. The Second Series of seventeen essays was originally published in 1848. In terms of style this series differs from the first in that over half of the essays are stories, dialogues or satire with only a few being written in prose.

On the first read, the essays in Sophisms may appear to be repetitious. Even Bastiat admits as much when he says that repetition, “…the inherent defect of this little work…” is also “…its principal utility.” There is, in fact, much repetition, but it is intentional.  Bastiat is following the advice of Jean-Baptiste Say, who was a major influence on his economic formation. In his Introduction to A Treatise on Political Economy, Say states:

To obtain a knowledge of the truth, it is not then so necessary to be acquainted with a great number of facts, as with such as are essential, and have a direct and immediate influence; and, above all, to examine them under all their aspects, to be enabled to deduce from them just conclusions, and be assured that the consequences ascribed to them do not in reality proceed from other causes. [Emphasis added]

And indeed, Bastiat does examine the facts under all aspects. In every case, whether the satirical petition to the king to have the right hand of all his subjects cut off or the passionate warning of the perversion of the meaning of words, Bastiat examines the facts of protectionist economic policies and exposes the fallacies upon which the policies are built. In each case he follows more of Say’s advice to “…discover the chain which binds them [facts] together, and always, from observation, establish the existence of the two links at their point of connexion (sic).” In his own Introduction Bastiat echoes Say with an explanation of the complexities of mounting a defense against the simple half-truths of his opponents:

… we cannot limit ourselves to the consideration of a single cause and its immediate effect. We know that this effect itself becomes in its turn a cause. In order to pass judgment on a measure, we must, then, trace it through the whole chain of its effects to its final result. In other words, we are reduced, quite frankly, to an appeal to reason.

Thus his reasons for repetition.

Free trade is the obvious theme of the Sophisms, but it’s addressed through many different fallacies. Some of the fallacies include, imports destroy the country’s wealth; high prices increase the country’s wealth; a favorable balance of trade increases wealth; general welfare is incompatible with justice and peace; economics is based on theory, not real life, and more. His most famous essay in Sophisms, “A Petition”, is a fictitious request for a law to forbid sunlight indoors. To do so would increase jobs and industry including whaling, shipping, agriculture, manufacturing and more. Not a Frenchman would miss out on the prosperity. Of course, the request is absurd, but, as in many of the essays, he uses the absurdity to point out the harm brought to consumers in order to create or protect jobs and industry.

And it is the role of the consumer that is Bastiat’s main point through and through. His mission is to show the reader the many and varied ways that the sophisms bring him harm:

In regard to the question that I have been dealing with, each sophism doubtless has its own phraseology and its particular meaning, but all have a common root: the disregard of men’s interests in their capacity as consumers. To show that this sophism is the starting point for a thousand roads to error is to teach the public to recognize it, to understand it, and to mistrust it under all circumstances.

A nation is free, when it is bent on freedom; and the most formidable obstacle to the establishment of civil liberty is the absence of the desire for it.

Jean-Baptiste Say, from a footnote in A Treatise on Political Economy, Book III, Chapter VIII, Of Taxation

“If you’ve been diagnosed “probable” or “presumed” 2009 H1N1 or “swine flu” in recent months, you may be surprised to know this: odds are you didn’t have H1N1 flu. In fact, you probably didn’t have flu at all.”

So begins the CBS report, Swine Flu Cases Overestimated? A report that all should read.  CBS reports that that fever and cough you or your child recently had not only probably wasn’t the H1N1 flu, it also wasn’t likely to have been the seasonal flu.  The report also reveals the sinking sand on which the government’s case is built: The CDC is not counting H1N1 cases, has recommended that states no longer test for the virus, and most cases tested before individual testing was halted weren’t even the flu, of any type.  (Of course, you should still get the vaccine.)

We asked all 50 states for their statistics on state lab-confirmed H1N1 prior to the halt of individual testing and counting in July. The results reveal a pattern that surprised a number of health care professionals we consulted. The vast majority of cases were negative for H1N1 as well as seasonal flu, despite the fact that many states were specifically testing patients deemed to be most likely to have H1N1 flu, based on symptoms and risk factors, such as travel to Mexico.

It’s unknown what patients who tested negative for flu were actually afflicted with since the illness was not otherwise determined. Health experts say it’s assumed the patients had some sort of cold or upper respiratory infection that is just not influenza.

Further galling is the stonewalling by the CDC:

When CDC did not provide us with the documents…

More than two months later, the [FOI] request has not been fulfilled.

The CDC did not response to questions from CBS News for this report.

One doesn’t have to believe in conspiracies to think something bigger than the flu is going on during this year’s flu season.

I’ve been reading A Treatise on Political Economy by Jean-Baptiste Say.  In a discussion on money and the “unfixing” of its value from silver Say notes (63) that at first the practice was opposed by the Law, saying, “Law strenuously opposed the innovation…”.  He continues, however, “…but principle was compelled to give way to power; and the crimes of power, when the consequences began to be felt, were confidently attributed to the fallacy of the principle.”

How’s that for a one sentence summary of 21st century political economy?

I was reading through some old notes in preparation for an upcoming economic discussion when I came across this essay.  It’s one of the best cases of, and explanations for, the gold standard that I’ve ever read.  I’m keeping the author a mystery.  Wait ’til the end to click the link to see who wrote it.  Simply amazing.

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Gold and Economic Freedom

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

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. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Click here to see the author.

The Holy Cause has just released the September edition of the Christian libertarian Blog Carnival.  Be sure to stroll the midway and consider the thoughts and reasoning of each contributor as issues of the day are examined from a Christian libertarian perspective.  As always, they’re excellent.

I can’t help myself so back just for a moment.

Granted, the president can’t help that he won.  Granted, his prize is the Nobel Peace Prize, not the Prize in Economics.  And, granted, under the circumstances, he handled the situation well.  Here’s hoping though,  he’ll use this occasion to learn about past recipients of the Nobel prize and take to heart Friedrich A. Hayek’s lecture, The “Pretence of Knowledge”, and his acceptance speech, delivered, almost 35 years ago, upon his receipt of the 1974 Nobel Prize in Economics.

An expressed apprehension from his acceptance speech:

…is that the Nobel Prize [in Economics] confers on an individual an authority which in economics no man ought to possess.

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.

But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

And a few nuggets from his lecture:

…I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false…

…In fact, in the case discussed, the very measures which the dominant “macroeconomic” theory has recommended as a remedy for unemployment — namely, the increase of aggregate demand — have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate — or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate…

…To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.