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Source link: http://archive.mises.org/9343/the-misesian-case-against-keynes/

The Misesian Case against Keynes

January 30, 2009 by

Out of false theories of employment, money, and interest, Keynes distilled a fantastically wrong theory of capitalism and of a socialist paradise erected out of paper money. Moreover, Keynes offered no theory of stagnation at all. He merely gave a perfectly normal phenomenon, such as falling prices a bad name, so as to find another excuse for his own inflationary schemes. FULL ARTICLE

{ 45 comments }

Connie January 30, 2009 at 8:11 pm

I was fascinated by your article. It is well intentioned I am sure. Well structured and well thought out as well! I must admit, however, … it was the most difficult article I have examined since subscribing to the Daily Articles. The gist of the article became evident but not with out pain.

I would appreciate one of your learned followers, readers or associates to create a review that interprets it for the novice … not a novice of economics but a novice of the language you use.

The pedantic tone in which the article is written may resonate well with some. However, for one to more easily understand your writing requires one to possess a rare and complete command of the English language. Most do not!

Having said that, and with all due respect, I should indicate that my praxeological originary often suffers and becomes victim to a case of mutanalogy of the ceteris which often accompanies the itermetafiling of ones exuberant soloquaciousness.

Mark Humphrey January 30, 2009 at 10:03 pm

This is a Five Gold Star essay, and one of the most fun readings I’ve enjoyed in a while. It was all wonderful: the exposition of time preference and interest rates, the clarity of the distinction between saving and the demand for money to hold; and especially!!….the careful and effective dissection and refutation of J.M. Keynes’ quackery.

At the end, I enjoyed enormously Keynes’ wailing about the possibility that misers might take over the world and invest less than they save. One can see them clearly, glint eyes gleaming as they stack gold coins in the cellar; money which they refuse to spend on consumers’ goods but also stubbornly refuse to invest for interest. Sadly, one can only pine for such a development, which would contain a perversely happy outcome for spendthrifts like me! For not only would the thrift of misers leave more goods for regular folks to enjoy (at lower prices reflecting reduced consumer demand), but our money would rise in purchasing power as misers considerately keep theirs locked away!

There is a rational explanation for the utter irrationality and stupidity of the Keynesian Revolution and Conquest. For the last 300 years, philosophical nihilism has been on the rise–a world view that in many different ways denigrates and attacks the validity of the senses, of conceptual understanding, of knowledge. By attacking knowledge, this world view also attacks the validity of facts and principles, including the principles of human choice that we call morality. In short, the rise of nihilism and the widespread, uncritical and often unconscious acceptance of its precepts negates respect for reason. Under the spell of nihilism, “Intellectuals” no longer place great value on logical coherence. So logical arguments don’t much influence them.

But nihilism yields another result besides the decline in respect for reason. This is political collectivism. For if man is a creature without the capacity of understanding or moral choice, then what distinctions define human individuals? Certainly not character. If so, this means that human beings are only superficially individual, much like cattle or sheep. And of course, if we are not moral agents, but simply “brothers and sisters” or members of the social family, then political collectivism makes apparent sense.

Of course, Keynesian quackery is merely a rationalization for political collectivism. Its followers don’t care about logical coherence or understanding the world. What they want is to be “socially well adjusted”.

Thanks for a truly excellent essay!

pbergn January 30, 2009 at 10:25 pm

Excellent article. I liked the style – very scholarly written…

The author does a good job at articulating the fundamental differences in the way the Classical or Misesian Economics (on which the latter is founded) defines the most common notions of science of Economics such as Employment, Interest, Money, Capital Processes…

It clearly demonstrates that Classical Theory of Economics is more closely reflecting the social and economic processes historically being observed via formal way of reasoning based on logic and facts that can be ultimately deducible from basic, incontestable propositions…

However, I was left with a couple of uncertainties or questions:

1. Classical Economics Approach to Employment

According to Mises (or the author): “Unemployment in the unhampered market is always voluntary”.
This statement seems to pre-suppose at least three things:

a. scarcity in demand for certain type of labor;

b. ability of laborers to adapt to other types of labor relatively quickly;

c. preference of laborers to accept wages not covering their basic living expenses (i.e. insufficient to buy them shelter, minimal food and clothing) to non-productive methods such as crime, begging, voluntary exile from the society, etc.

I do not think that the last two conditions above are fair assumptions in regarding the unemployment as “voluntary”.

2. Classical Economics Approach to Interest

As I understand it, the Classical Economics mainly ties the interest to the phenomenon of “aggregate sum of all individual time-preference rates”, and to a lesser degree to the risk premium.

My problem with this definition is that I do not see a direct correlation between time-preference and the actual interest rate value itself.

For example, while there is a certain correlation between interest and risk (in a sense that the upper limit for risk tolerance determines whether the lending transaction can occur at all), the tolerance to risk can not determine the value of the interest itself; I believe the same can be said about the time-preference as well. The time-preference may certainly determine whether the lending transaction will occur or not, or its duration, but is insufficient to determine the actual value of the interest rate…

Instead, I prefer to think of interest as the excess in value (price) of the money, just like for any other good or service, which is being determined via supply and demand ratio…

Excellent article, notwithstanding…

Beta Hater January 31, 2009 at 1:01 am

This is a such a great article. This essay is so much more than a refutation of Keynes. It is also a refutation of most of the material taught in macroeconomics courses across the country. I would like to point out this article’s implications for IS-LM analysis, particularly for the LM Curve.

Hoppe explains that Keynes’s Liquidity Preference Theory of Interest is clearly incorrect. Keynes believed that interest is a monetary phenomenon. Hoppe explains that money would not exist in the ERE. He then points out that interest would exist in the ERE. Hence, interest must be a real phenomenon, not a monetary phenomenon.

The LM Curve is an extension of Keynes’s Liquidity Preference Theory of Interest. Hence, Hoppe’s refutation of the Liquidity Preference Theory of Interest is also a refutation of the LM Curve. This of course means that any policy prescriptions flowing from IS-LM analysis are absurd because they are based on a faulty theory of interest. (Note that the money market diagram used to derive the LM Curve is the same as the diagram used by Rothbard on page 31 of the Mystery of Banking to determine the purchasing power of money. The only difference, of course, is that Y-axis in Rothbard’s book is the purchasing power of money. In short, Rothbard correctly argues that the supply and demand for money determine the interest rate, while Keynes incorrectly argued it determines the interest rate.)

Furthermore, the Aggregate Demand (AD) curve is derived using the intersection of the IS and LM curves at different price levels. This means any conclusions drawn from AS-AD analysis are also absurd.

These are by no means the only criticisms of IS-LM and AS-AD frameworks. The IS Curve is equally flawed. The point is that Hoppe’s article is not just a refutation of Keynes and his General Theory. It is a refutation of essentially all the macroeconomic material espoused at the undergraduate level across the country. This article is an important contribution to fight for liberty.

P.M.Lawrence January 31, 2009 at 7:26 am

Unfortunately, although much of the criticism of Keynes is correct, Hoppe is himself guilty of “trying to prove too much”, with the result that he got the following wrong:-

- Hoppe reads too much into “Unemployment in the unhampered market is always voluntary”. He supposes that “laborers might insist on not allowing themselves to be hired at a wage below a certain rate, that is, imposing on themselves a minimum wage below which they will not be hired” [emphasis added]. As a physical reality, they cannot sustainably accept wage levels lower than enough to survive on. Granted, levels have not yet dropped to that, but it is still a lower bound. There is no a priori reason to suppose that this bound will always and everywhere be sufficient for them all to price themselves into work (and see below). Clearly, as, when and if this happens, either his theory is wrong or there is some kind of hampering going on (or both – but let’s stipulate the theory for purposes of argument).

- Hoppe hasn’t thought through the “unhampered” part enough. He only recognises two possibilities: ‘When the market is subject to the coercion of external intervention, specifically when an external coercive institution, whether a union or a government, imposes wage rates above the market-clearing level, then there will be “involuntary” unemployment, and that unemployment will last so long as the wage rate is held above the marginal productivity of labor in that occupation… An alternative way in which the government may coerce unemployment is to subsidize that unemployment by paying workers to the extent that they are unemployed. This can occur either as direct government payments to the unemployed (often tax-exempt and thereby higher in after-tax terms) or as welfare payments.’ He shows that he considers these representative of the only possible cases by his statement “involuntary unemployment is only logically possible once the free-market economy is fundamentally changed and a person or institution is introduced which can successfully exercise control over resources that he or it has not homesteaded or acquired through voluntary exchange from homesteaders”. Yet resources can be controlled with that effect even when they are controlled after being “homesteaded or acquired through voluntary exchange from homesteaders”. If nothing else, a country that has hit Malthusian constraints would necessarily be unable to provide everyone a living wage; but as some people deny that that case can ever arise, let us consider another. It would be quite possible for some generations of exchanges to leave a few people with most resources and the rest with almost none, simply by the workings of each generation favouring certain younger people and selling them their resources in return for pensions (I am getting round inheritance issues with this). Then the people with few resources would only have wage labour as an option, and setting up independently for themselves would not be an option. So, you can legitimately reach the sort of situation that was obtained illegitimately after the Enclosure of the Commons, the Highland Clearances or the Irish Evictions – and history tells us that those did leave people unable to price themselves into work that paid enough to survive; we know, because many didn’t survive.

- Hoppe has misread what is going on in “An alternative way in which the government may coerce unemployment is to subsidize that unemployment by paying workers to the extent that they are unemployed. This can occur either as direct government payments to the unemployed (often tax-exempt and thereby higher in after-tax terms) or as welfare payments.” While it superficially appears that these payments provide just such an economic incentive, he has forgotten to compare it with the actual alternative. Things like welfare payments were brought in as part of the Elizabethan Poor Law and Bismark’s prototype Welfare State in order to head off the general distress when people could not find work that paid enough to survive on. This was not simple compassion but to head off crimes of necessity and the general dislocation those people would spill over on the rest – an external cost; even criminalising poverty still left policing costs that got spread, and providing welfare turned out to be more cost effective. So, they settled on welfare levels that were just sufficient for survival. At those levels, welfare and similar do not subsidise unemployment, as the levels are no more than the lower bound already set by physical necessity. To the extent that some countries have raised the levels above that, there is a subsidy corresponding to the excess payments – but not to the whole of the payments. The rest of the payments are merely changing one spill over cost for another (but see the work of Professor Kim Swales and his colleagues and my own independent work for an approach to getting rid of it entirely with a Pigovian virtual wage subsidy – it would work best as part of a transition to a Coasian solution, which really would implement an “unhampered market”).

- Hoppe is also jumping to a conclusion with “Any increase in the accumulation of capital goods and in the roundaboutness of the production structure raises, in turn, the marginal productivity of labor. This leads to increased employment and/or wage rates and, in any case (even if the labor-supply curve should become backward sloping with increased wages), to a higher wage total.” [Emphasis added.] In fact, he would only be justified in asserting “…permits increased employment and/or wage rates…” – it is raising an upper bound on wage levels. He has not considered the full implications of his own logic, that there are also (or should also be, in an unhampered market) pressures on workers to make them bid their wages down. Both the immediate and the long term equilibrium result will very much depend on which set of tendencies prevails, which in turn depends on their size and on how fast they grow. Certainly the received wisdom of the 18th century – based on a theory backed by empirical observation – was that the Iron Law of Wages worked to drive wages down to survival levels, i.e. that set of tendencies won out in the industrialised world in the circumstances of that era.

There also some things that Hoppe merely asserts but does not prove in this passage. However, they may well have been addressed elsewhere in the larger work, or references given, so even though some seem implausible or incomplete on the face of it, things of that sort are only to be expected in a mere excerpt like this.

P.M.Lawrence January 31, 2009 at 7:32 am

Oops, typo. Make that “…the received wisdom of the 19th century…”.

H.M. Lee January 31, 2009 at 9:16 am

P.M. :

You are obviously very scholarly and posess great gifts. You comments were very thoughtful, but please allow a simple layman (businessman) a few counterpoints.

1) When someone decides not to partcipate in the market due to unappealing price, that is totally voluntary. Again, they chose to avoid the sell or buy opportunity. Just yesterday, a team member of mine chose not to close a $1.2MM deal. The profit margin was too low to allocate my firm’s resouces against the order. Did we involuntarily loose this deal. Heavens no, we chose not to participate.

2) A mandated wage price floor absolutely creates unemployment. You should consider the real life alternative. The price floor for wages actually permits social discrimination without a market penalty.

3) I worked at a state employment service for two years while in college. If you don’t think that unemployment compensation can hamper someone from getting back to work, you should spend time at one.

3) I don’t see where this bidding down actually occurred in the industrialized world. If it did, and the workers real income was dimished, why would the industrialized world enjoy the highest standards of living (true measure of wealth not money). If the developing world were bid their wages above the market, their development would slow and eventually cease.

fundamentalist January 31, 2009 at 9:45 am

Fantastic article! Thanks! I find it harder every day to believe that people swallowed Keynes’ nonsense so easily. The only explanation I can come up with is that people were so enamored of socialism they were willing to check their brains at the door.

Fephisto January 31, 2009 at 10:31 am

Each generation has an awesome Austrian Economist:

Mises -> Rothbard -> Hans Hermann Hoppe

This is awesome.

Reason January 31, 2009 at 12:46 pm

P.M.,

Thanks for your thoughtful comment.

Does it really follow that the rich, by trading their estates/wealth to a select few for pensions, will relegate the many to wage labor with no opportunity otherwise?

Am I right to say that you are applying Darwinistic principles, probably Malthusian really, to human beings? But aren’t we social animals capable of reason? How much determinism do you believe in?

There will be the starving to death poor no matter what?

Even if wage rates were lowered to one penny a week what would that mean to the cost of food? Are you saying that in the unhampered market that there is a necessary lag that makes consumer goods follow behind wage rates as they drop, or that there is a 50/50 chance that this will happen, or merely that it is a possibility- as in the way that crime or a fire is a natural given no matter the state of market?

Is it a problem with Hoppe’s deduction or do you prefer induction?

michael January 31, 2009 at 12:55 pm

Congratulations! The article proposes an excellent solution to our current dilemma.

“Unemployment in the unhampered market is always voluntary” So all we have to do is snap our fingers.. and presto! we are all employed again.

pbergn January 31, 2009 at 1:01 pm

Couldn’t help but notice that Classical Economics puts quite a stretch on the meaning of “voluntary”. It’s like choosing between gallows and firing squad, and calling it voluntary death by firing squad, when one chooses a quicker way to die…

Nevertheless I accept the idea that this is juts a matter of terminology used in the science of Economics…

Still don’t see how time-preference will actually determine the interest rate… For example, if someone gets a 30 year mortgage at a, say, 6% interest rate, it does NOT mean that the sum of all aggregate time-preferences lead to this number. The mortgagee does not expect to build anything innovative in the future. The guy just needs a house he cannot afford in the present. So, he borrows. On other hand, the lenders give that money to the borrower, since they have apparently nothing better to do with it in the next 30 years or so.. Is that really so?! It is kind of hard to believe in that…
The whole interest rate business is still a mystery for me, and the Austrians are NOT really explaining the phenomenon well… I say, it’s just the price of the money sold (leased) for a certain amount of time…

Another great irony that I couldn’t help but notice is the fact that if the true Free Market System were to set-in in some land, that would automatically drive all the theoretical economists, and even most kinds of economists out of job.

Think about it: let us say a miracle happens, and the world suddenly opens its eyes and understands the superiority of teachings of Austrian School of Economics, and adopts the system.

The question is, what would all economic scholars do under the truly Free Market System? Remember, they do not really produce anything, and with the acceptance of the best economic theory, there is no demand for any others…

So, one prediction I am making for all the economists, Austrians including – there will be a high voluntary unemployment of economists, since it is not likely they will be willing to work voluntarily as even more successful farmers…

Now, that’s a dilemma to ponder upon, don’t you think? ;-)

Jack Green January 31, 2009 at 1:26 pm

To Hans-Hermann Hoppe:
Please dont waste your time or anyone else’s talking about Keynes – He is a has been and never was worth talking about = Henry Haxlitt’s book “Economics in one easy lesson” – is worth its weight in gold = and to dig deaper read LVM’s “Human ACTION”
SINCERELY JACK GREEN

pbergn January 31, 2009 at 3:57 pm

TO: P.M.Lawrence

Excellent summation, P.M.!

That’s exactly what I was trying to explain to overly-optimistic in more layman’s terms!

It’s simple – there are too many people, to few resources. Their paths collide, thus producing results of physical struggle for existence and control over natural resources (again to survive and make their life happier)…

There is no way around this. One needs a minimal welfare state to appease the hungry and the weak, or some eugenics policy to drastically decrease the human population, to balance it with the availability of natural resources (that’s exactly what Nazis were trying to achieve)…

If you were to ask me – I choose minimal welfare state over eugenics any day!

I though it is a no-brainer, and should not require this amount of scholarly articles and empty talk that is going around nowadays…

pbergn January 31, 2009 at 4:37 pm

TO: H.M. Lee

H.M.,

You argumentation is not fair: what others and I are saying is that you have to have a minimum wage set at survival level – not ANY level. You 1.2M dollar example is not applicable in this context.

Also, you contend the following in your last paragraph, and I quote:

“[...] I don’t see where this bidding down actually occurred in the industrialized world. If it did, and the workers real income was diminished, why would the industrialized world enjoy the highest standards of living (true measure of wealth not money). If the developing world were bid their wages above the market, their development would slow and eventually cease.
[...]“

The answer is simple – the industrialized world has unemployment benefits and other social mechanisms that would prevent standard of living to slide below a certain level. Becides, the industrially developed countries have a lot of phony jobs that pay a lot, but are not strictly speaking required for teh economy (because bunch of Asians are killing themselves for peanuts, somwhere accross the world)

Also you are forgetting, that in the developing world, workers hardly own or control anything… All the resources there are controlled by a handful of wealthy industrialized nations through multi-national corporations and corrupt local governments (often installed by the former)…

If the developing world workers tried to bid up their wages they would simply be discontinued, and another batch of unfortunates would have been installed to toil in their stead…

It’s all about control of resources, baby. Game over!

Heath Nestor January 31, 2009 at 8:29 pm

This is an excellent exposure of Keynes. I did; however, encounter one of my few long standing disagreement with Austrian theory. It isn’t a particularly important one. I do believe it is significant.

Austrians assert that people prefer present consumption to future consumption. Thus, payment of interest is essential to motivate delayed consumption. I have no doubt that this is wrong. I need no more proof than that I from time to time save without receiving any interest. Why? Because at the time I prefer the potential for future consumption to present consumption. I don’t doubt that this is fairly common.

The better theory would be that preferences between present consumption and future consumption vary from individual to individual, and from time to time. There is ample evidence that individuals will sometimes accept a negative real interest rate. Negative nominal interest rates should be a hard sell. Some will likely accept a slight negative rate to avoid the cost and responsibility for safe keeping of cash. Acceptance of substantial negative nominal interest rates seems unlikely.

Payment of positive nominal rates and positive real rates of interest are only essential to lure those savers who will spend rather than save at zero interest. The fact that some will save for zero interest probably has no impact on market rates of interest determined at the margin. The highest paying remaining potential borrower must pay enough to lure the lowest demanding saver to save.

Even then we don’t know that either or both aren’t bluffing. Perhaps the saver who get 6 percent would have settled for three if the borrower had held out longer. The borrower might have went up to 9 percent if the saver had held out longer.

Even though the error in claiming that everyone prefers present consumption to future consumption may not have any bearing on actual interest rates, I believe it is still important. Any error, even irrelevant ones, raises questions about the rest of the theory.

H.M. Lee January 31, 2009 at 9:50 pm

pbergn:

You bring your strong opinions well. I’m not going to try to bring you to my point, because I have seen that to be futile. People see the world as they are, not as it actually is. We can disagree, but indulge me to bring forth fact.

The industrialized world has not always had minimum wage. Workers’ lives improved in every standard before min. wage existed. Refridgeration, availability to healthcare, transportation, et.al provided real improvements to peoples lives. Also, most jobs have paid labor prices well above the mandated wage; therefore, it really created unemployment at the lowest levels of skill. It denied entry to the workforce the very people that needed entry most. It (min wage) also permitted continued biggotry and social discrimination. The owner of a firm was free to practice all sorts of discrimination without penalty due to min. wage holding the line on labor rates. I reccomend Thomas Sowell’s work on young black unemployment rates in the 1960′s.

I don’t understand these phony jobs of which you speak (except many government jobs). I surely don’t have one and have never worked for a company that has any. We never appointed a czar for anything. Cost controls, mandated by our shareholders, generally keep the czars out.

Your opinions about MNC’s are erroneous. The PRC is the fastest developing nation, and MNC’s have absolutely no control over their Gov’t. Those Asians of which you speak see opportunity were you see slavery. They are no different than any people that seek to improve themselves by work and saving. If they bid up their wages, the jobs may move somewhere less expensive. Isn’t that what Dr. Hoppe was saying.

The truth is that “markets clear”. That truth is liberating, clarifying, and beyond question.

Don’t be so dismissive. The game is never over. I enjoyed our exchange.

P.M.Lawrence February 1, 2009 at 1:28 am

In answer to H.M. Lee:-

- “When someone decides not to partcipate in the market due to unappealing price, that is totally voluntary” is accurate for cases like the example he gave, but not when the price (the wage) is too low for someone to sustain himself. Someone like that would be better off turning to crime, since he would be better off even if he is caught. If he is unsuited for that from lack of skills or temperament, he really will end up dead, whether he takes the low paying work or not. Apparent exceptions appear in entry level work or apprenticeships, when the worker has to subsidise it (maybe with family support or from previous savings), and the point is that it is not sustained but hopefully leads to a payback later. But that’s not an option either, if the personal subsidy isn’t there.

- “A mandated wage price floor absolutely creates unemployment”. That just isn’t so. Rather, the lower bound on wages created by physical necessity first creates it, then the minimum wage replaces the physical necessity constraint, giving the appearance that it was all down to the minimum wage. It’s like having a crash barrier between a road and a brick wall. Sure, cars crash into the barrier, but does that mean there would be no crashes if you just got rid of the barrier? You would have to get rid of the wall first and then the barrier to achieve that.

- “You should consider the real life alternative. The price floor for wages actually permits social discrimination without a market penalty.” That is incorrect, unless it is set higher than survival (which it sometimes is). There is another special case which used to apply in rural areas until a generation or two ago, but no longer does in the developed world. A family might be able to grow some of its own food etc., and then it wouldn’t need family members’ earnings to live on, just as a top up wage to make up the shortfall. But when that happened, wages were bid lower than survival for other potential workers, and putting in a minimum wage actually protected them against competition from workers who had that sort of non-cash subsidy. Sometimes, that social discrimination was just the outworkings of helping people without those non-cash resources. Unfortunately, globalisation means that the minimum wage in one country doesn’t cover people in developing countries who can accept sub-survival top up wages because they still have those personal resources, so the workers in the first country can’t compete at the bottom end of the scale. The effects of that spread over the whole of the scale, e.g. Indian middle managers on lower salaries can afford comparable lifestyles to developed world ones on higher salaries, and so on.

- “I worked at a state employment service for two years while in college. If you don’t think that unemployment compensation can hamper someone from getting back to work, you should spend time at one.” Again, it depends on sustainability and so on. If the compensation vanished, some would take low paid work to eke out their savings until things looked up – or, to put it another way, they would use their savings to eke out the pay until things looked up. If that only happened to a few, there genuinely would be a good chance that something better would come along in time. But if that stopped working for them, as it would for most if a lot of people had to do it, it would be outside the scope of the employment service and wouldn’t be visible there.

- “I don’t see where this bidding down actually occurred in the industrialized world”. Huh? That’s the empirical data people observed in the 19th century, that led them to formulate the theory of the Iron Law of Wages I mentioned earlier. Follow the link and its references and you’ll see some of the data.

- “If it did, and the workers real income was dimished, why would the industrialized world enjoy the highest standards of living (true measure of wealth not money)”. Simple: it didn’t, while the conditions for that applied. Various other things came along starting in the late 19th century that worked more strongly in the opposite direction.

- “If the developing world were [to] bid their wages above the market, their development would slow and eventually cease”. True; so? If they continue developing in such a way that more than 100% of the gain goes to some people in such countries, then for the rest development is already going backwards (this happens to dispossessed peasants there, just as it did in our own history, since they need more than just a top up wage after being dispossessed but they can’t get it while some people there can still bid wages down that much).

Reason asks:-

- “Does it really follow that the rich, by trading their estates/wealth to a select few for pensions, will relegate the many to wage labor with no opportunity otherwise?” No, that was just a thought experiment to show that even within what Libertarians consider legitimate, you can still get to a pattern of resource ownership like the harmful pattern that achieved that and which really has happened in history. I would expect that in real life it would develop so slowly that only a few in each generation would be squeezed off the edge, rather than all coming at once in one generation – but the total squeezed out would be comparable. That’s one reason why I would want yet other private institutions around to offset that slow squeeze, probably family based ones.

- “Am I right to say that you are applying Darwinistic principles, probably Malthusian really, to human beings?” No, although I could. I carefully didn’t as I could come at it a different way without having to argue that to people who had strong objections waiting to be triggered. “But aren’t we social animals capable of reason? How much determinism do you believe in?” For one thing, I know ways out of this bind, like Professor Swales’s Pigovian virtual wage subsidy I mentioned in my earlier comment. But I also believe that unless people do things like that to change course, the course will be followed – and, after a certain point, no amount of human behaviour will make a material difference. I forget his precise phrase, but G.K.Chesterton said it better. As, when and if we get that far, then yes, “There will be the starving to death poor no matter what”.

- “Even if wage rates were lowered to one penny a week what would that mean to the cost of food? Are you saying that in the unhampered market that there is a necessary lag that makes consumer goods follow behind wage rates as they drop, or that there is a 50/50 chance that this will happen, or merely that it is a possibility- as in the way that crime or a fire is a natural given no matter the state of market?” No, none of those. I’m just saying that there are certain market conditions in which people cannot survive on the wage level that would clear the labour market. We know, because it has happened in history.

- “Is it a problem with Hoppe’s deduction or do you prefer induction?” Neither. I used the historical cases as counter-examples to the general idea that labour markets can always clear without intervention, then I did a bit of deduction to show that you could adapt the actual counter-examples to get equivalent hypothetical ones that could be reached under the narrowest understanding of what Hoppe meant by “unhampered”, e.g. bypassing Libertarian debates about inherited property and such, in case people claimed that the real world counter-examples didn’t match their theory.

H.M. Lee adresses pbergn:-

- “The industrialized world has not always had minimum wage. Workers’ lives improved in every standard before min. wage existed.” No, definitely not. First, things got worse for two or three generations, then they have been improving, at any rate until just lately. However, the deterioration started before industrialisation, and the improvements started before minimum wages – although they did coincide with a pattern of institutional changes like Trade Union strength, welfare systems, workplace regulation and free trade in foodstuffs. Later on, that pattern included minimum wages. It’s really hard to pick any of these out as causative just from the timing, and enough was going on at once that a lot could have been harmful but overcome by the other stuff.

- “Refridgeration [sic], availability to healthcare, transportation, et.al provided real improvements to peoples lives”. Transportation didn’t (though hanging and the hulks were worse), and the rest came later. I wonder if he meant transport? That only helped people once free trade allowed food to be imported, and even then it made things worse for the poor in exporting countries until countries like Russia and the USA with surplus improved or readily improveable land came on stream.

- ‘The truth is that “markets clear”. That truth is liberating, clarifying, and beyond question.’ If that means his mind is made up, I will not confuse him with the facts. If, however, he has an open mind on the subject, I have provided relevant material, any or all of which he can confirm separately either by searching the internet or with regular ground work in libraries and such. I have already done as much towards providing that sort of information as is possible in blog comments.

RWW February 1, 2009 at 1:47 am

Heath Nestor:
I need no more proof than that I from time to time save without receiving any interest. Why? Because at the time I prefer the potential for future consumption to present consumption.

This is not true. You save because, at the time, there is nothing which you would rather have than the money. If there were something that you would rather have, then you would prefer to have it immediately rather than later on.

pbergn February 1, 2009 at 1:50 am

RE: H.M. Lee

Thanks, H.M.

I appreciate your explanation. I agree in general with what you are saying .

By saying “minimal welfare state” what I really meant was that there has to be some cushioning mechanism to avoid further decline in standards of living, since not everyone is equally talented, and the demands for a particular kind of labor constantly vary. Consequently, there will always be some marginal members of the society that will not be able to find employment due to lack of talent, disability, laziness or otherwise…

I believe it is more in the interests of private enterprises to subsidize the marginal members of the society to some extend in order to avoid more dire consequences of them resorting to non-productive methods in order to procure subsistence… I understand that these members of the society are a drag on the Free Markets… But to allow them to fail may be much costlier then just to subsidize their subsistence in the long run…

I fully understand that the task of determining the form and extent of these subsidies or the cushioning mechanisms, as I call them, opens the Pandora’s box of corruption, and even more injustice done to the members of the society who these measures are targeting to protect… Therefore not all the measures would be acceptable. That is why the whole issue is not so trivial… But to pretend that this issue will dissolve on its own due to solely Free Market forces, is not, in my opinion, correct…

Look, I am no Socialist, but I am not a Fascist either… I am merely advocating for some minimal measures to avoid extreme polarization of the society.. My motivation is partly humanitarian and partly driven by the practical reality…

Thanks again.

AnneMarie February 1, 2009 at 2:39 am

I should like to point out that neither begging nor robbery is unemployment, rather both are a form of self-employment.

AnneMarie February 1, 2009 at 2:54 am

Sorry, hit submit before my point was complete. To continue: the potential employer has an unfilled need for labor. If his offered wage is so low that no one finds it preferable to begging, then in order to fulfill his labor requirement he will be forced to raise the wage to the point that at least one laborer finds preferable to begging or he won’t have any workers.
Therefore, a wage so low that no one will take the job is self-defeating for the employer.

H.M. Lee February 1, 2009 at 10:59 am

RE: P.M.

Nice reply. Like everyone on the post, your passion and intellect are beyond question. Also, I would not try to bring you to my point since that is likely futile.

I am from one of those rural areas where we grew our own food to subidize wages. There is really nothing wrong with it. The food actually tastes better, anyway. We grew so much we gave the excess away. By being more self-sufficient the wage rate that my father was willing to accept was lower. It allowed earnings to be directed to higher goods. What is survival for someone may not be for another; therefore, the min. wage is inherently flawed. It seeks to create the price floor where local skills, manpower, and opportunity could do it better.

Many thanks. Again, your answers are civil and heady. I simply disagree.

H.M. Lee February 1, 2009 at 11:15 am

pbergn:

I would never label anyone (socialist, fascist or whatever). Labels create a sort of collectivism to which I don’t subscribe. People are too complex for simple categorization.

My problem with min. wage and price floors is that they impede freedom. They also tend to deny entrance to the market the very lowest (and needy) participants. If a person can’t get a job because they can’t command a wage at the floor, they will be unemployed. They will be denied the training and opportunity necessary to improve themselves. Societal problems aside, I see what it does to the individual’s sense of worth. Society is a result of the sum of individual worths.

P.S. — Anne Marie is right about incremental wage increases driven by the market. The bid/ask spread will narrow and the market will clear.

RWW February 1, 2009 at 11:47 am

By being more self-sufficient the wage rate that my father was willing to accept was lower.

A need for self-sufficiency of this sort (growing your own food) is generally a sign of a problem with the market, generally brought about by coercive regulations. In a market with a proper and unregulated division of labor, it should always be a better use of your time to labor in order to buy food, rather than growing it yourself.

Then again, you said you lived in a rural area, so I guess the root problem may have been that there simply was not a sufficient density of people for the market to fully operate.

H.M. Lee February 1, 2009 at 11:57 am

RWW:

Will you concede that people may grow their own food for a myriad of reasons. Some actually consider it leisure. They are not all the direct result of the labor market.

Those corecive regulations were likely taxation. We paid no margina income taxes or sales taxes on the food that we grew.

This blog is fascinating.

H.M. Lee February 1, 2009 at 11:58 am

RWW:

Those regulations were likely taxation. We paid no marginal income taxes or sales taxes on the food that we grew.

This blog is fascinating.

H.M. Lee February 1, 2009 at 12:20 pm

P.M. :

You appear to have you rmind made up, so this may be futile.

The so called iron law of wages was refuted by nearly every avenue of economics. Even the socialists had problems with it. That is the problem with some economics, you can call something a law when it is actually a theory intended to explain something. The ILOW is way to broad in scope.

Wages for a set of skills fluctuate with the demand for that set of skills. As the skills become either more abundant (over demand) or irrelevent the bid/ask spread falls. It happens every day in many situations.

I would never seek to interpret the 19th century by simply reading the evidence placed forth by someone that first had a conclusion to prove. The conclusion seeks to explain a narrow perspective.

Many thanks for your attempts to help me understand your point. The empirical evidence that I see is in the everyday conduct of commerce. My belief is that it permits freedom, strength, and standards. Please don’t dismiss people that take issue with you as naive or closed-minded. We like all others simply seek to understand our world, and maximize the quantity of smiles that we give and receive.

I’m smiling right now.

RWW February 1, 2009 at 12:23 pm

Ah yes, that’s why I wrote of the “need for self-sufficiency,” rather than the act of being self-sufficient itself, as a problem. Some people do find gardening enjoyable, much to my personal bemusement. :)

H.M. Lee February 1, 2009 at 12:51 pm

RWW:

You are correct. It is not truly leisure in that if it had no tangible return, you would not engage in it. My opinion is that it falls in an area between wage earning work and leisure.

I too am bemused by people who find gardening enjoyable.

Reason February 1, 2009 at 1:29 pm

P.M.,

You write:

“…Enclosure of the Commons, the Highland Clearances or the Irish Evictions – and history tells us that those did leave people unable to price themselves into work that paid enough to survive; we know, because many didn’t survive.”

These situations had feudal bases and should be viewed in such context. Of course, what ‘feudal’ means varies among historians. Remaining is the question of whether it is possible in an unhampered market for demand of basic necessities to outstrip supply to the point of structural famine or slavery.

Many things are possible. I would not argue that in a free market that government would not form and, with this formation, the privilege that leads to social darwinism in the real sense. (Government is predatory by its privileged nature.)

More importantly, what is the likelihood of this structural inequity happening given a free market?

The answer is: orders of magnitude less than under a system of feudal ties or any order based on the ideology that some have more rights than others (the basis of government). It should go without saying that individual property is a concept inextricably linked to market formation.

Malthus is problematic. Did he understand how, as HM Lee stated, that markets clear? For certainly the question is not whether there are too many people and not enough resources- I bet what Americans throw away in an afternoon would feed the entire world for a day. The challenge is getting the world to think free markets in the Austrian sense- not in the Chicago school sense, not in a state enforced sense, or under any other privileged organization’s mandate. Privilege supported by mass ideology is the source of most, if not all, major crimes against humanity in this world.

pbergn seems to think that free markets erase or displaces the moral imperative to take care of the weak. Nonsense. It is the only way to allow individuals to act in good conscience without predetermination. Government taxes individual ability to make moral choices. The system of property and free exchange fosters expression, innovation and production are two kinds. Include charity, too.

crosson February 1, 2009 at 1:59 pm

@PM

I read your post and it’s well spelled out however your arguments are largely based on extremities of situation or vague cases lacking citation. It’s hard to take any of your arguments seriously other then you desperately trying to justify your own personal point of view.

Can you provide some evidence in which to support some of your arguments?

Also, in rebuttal to your stance on the Iron Law of Wages. This theory is silly to present here in an Austrian Economics forum.

The theory is formed out of an isolated situation where employers are not forced to compete with each other and where various other market objects are ignored. Not to mention that when this theory was popular, in the early 20th century, large portions of the industrialized sectors practiced heavy cartels. That alone breaks the free-market system. The Iron Law of Wages then becomes a band-aid fix over the original wound, but does not address what caused the wound originally.

The short of it is this. Labor is a scarce commodity. There are factors which drive it’s price down and factors which lift it up. Thats where the REAL market value comes into play.

H.M. Lee February 1, 2009 at 2:45 pm

Neither crosson nor Reason need my humble agreement. Their logic and words speak for themselves. That being said, please allow my complementary post.

Our friend crosson is right. The ILOW has not stood up to scrutiny. The great flaw in it is that it does not account for increased real wages in times of increased production. No general law except supply and demand can account for price movement. The supply and demand is generally too local in geography and can only pertain to a certain set of skills.

Our friend Reason is also correct. The market has proven to be the most effecient and fair method for resouce distribution yet found by man. It is my love of humanity and the individual that compels me to subscribe to the Austrian School. I see a great tyranny imposed upon people when some entity outside demanders and producers intercedes to make the market inefficient. Intercession denies participation.

pbergn February 1, 2009 at 5:22 pm

TO: H.M. Lee / AnneMarie

Thanks guys. As always, I appreciate your feedback…

I understand what you mean, H.M., when you are saying markets will clear – that is it is the very nature of the market to balance need for certain good or service or skill, etc. via supply and demand…

I perfectly understand that premise – it’s common sense.

In other words you guys firmly believe that the unhampered Free Market will lead to establishment of more or less balanced distribution of wealth in the society in the long run. You tend to blame any inconsistency in this respect to the external factors such as government interference..

Let me bring you an example of what I meant to show – that even in the unhampered Free Market there will be eventually a huge social and economic polarization:

Take Latin American Countries, or any other countries with pseudo-democracies installed as the rule of the land (a.k.a. plutocracies)…

Why the wages in these countries are NOT going up? Why these countries never develop after a certain point? Why after all these years you still see enormous wealth polarization in these countries?

Now, I know what are you going to say – it is all the local government intervention…

Don’t you see the same pattern emerging again and again in different countries of a handful of multi-national corporations (MNC’s) extracting everything that is possible from these countries in co-operation with the local corrupt leaders? Why the wages are not going up in these countries? Why we do not see any competition from the foreign companies to improve the standards of living of their foreign workforce? Why?!

If your theory were correct, eventually the strong competition would have lead to the steady increase of wages for foreign workers, or steady improvement in their standards of living…

Take China. I was in Detroit last spring for the auto-show… The cab driver who picked me up from the airport told me a story about a Chinese businessman of some kind that saw the snow on the ground, and his first reaction was to exclaim: “Look, the snow is white! The snow is white!”… Prompted by the cab driver to explain himself, the Chinese businessman told him that the snow in industrialized provinces of China is black from soot and other industrial waste…

How would you explain a fact that People’s Republic of China produces around 40% of world goods, and yet only the negligent minority of its people can afford to buy any of the products they produce?!

If you explain me this phenomenon from the Austrian point of view, I will never, ever, challenge you again…

And yes, regarding the “phony” jobs in the industrialized world that I had mentioned in my previous post, here it is:

I am a consultant, so I had the opportunity work all over the United States in different industries…

Everywhere I go I see the same pattern – extreme redundancy and inefficiency in the businesses that are supposed to be the “free market enterprises”. You have redundant number of managers, redundant number of coordinators, consultants, advisors, all sorts of “command and control” folks… These redundant people that essentially do not do anything, sit layer upon layer on each other, and the only reason why this is possible is that the essential work is being performed overseas through outsourcing…

It’s like having phony government jobs but in private sector…

Thanks H.M., and understand, please, please – I am not here to disprove Austrian theory, I am here to clarify my doubts that I have about it. I am for it, NOT against it. I just have some serious doubts about the end results…

P.M.Lawrence February 1, 2009 at 6:28 pm

AnneMarie suggested that “I should like to point out that neither begging nor robbery is unemployment, rather both are a form of self-employment… the potential employer has an unfilled need for labor. If his offered wage is so low that no one finds it preferable to begging, then in order to fulfill his labor requirement he will be forced to raise the wage to the point that at least one laborer finds preferable to begging or he won’t have any workers. Therefore, a wage so low that no one will take the job is self-defeating for the employer.”

They aren’t a form of sustainable self-employment for everybody, even if you redefine employment to include them. And the other points are true, but only in the long run. While there are people around with other resources, an employer can do it. That also includes people with some savings, as long as more like that keep coming along to replace them.

H.M. Lee writes “I am from one of those rural areas where we grew our own food to subidize wages. There is really nothing wrong with it. The food actually tastes better, anyway. We grew so much we gave the excess away. By being more self-sufficient the wage rate that my father was willing to accept was lower. It allowed earnings to be directed to higher goods. What is survival for someone may not be for another; therefore, the min. wage is inherently flawed. It seeks to create the price floor where local skills, manpower, and opportunity could do it better.”

I entirely agree. In fact, it’s pretty much what the Distributists and the Georgists have in mind, to eliminate the survival constraint lower bound on acceptable wages. With that, the conditions needed for Hoppe’s position are there. The problem doesn’t come from that, it comes when some people don’t have that but others do. In that situation, a minimum wage prevents all the work going to people with private resources and bidding the wage level too low for the rest to get work they can survive on. That doesn’t eliminate casualties the way unemployment benefits do, but it reduces their number, and like unemployment benefits it spreads the burden a bit more.

RWW writes “A need for self-sufficiency of this sort (growing your own food) is generally a sign of a problem with the market, generally brought about by coercive regulations. In a market with a proper and unregulated division of labor, it should always be a better use of your time to labor in order to buy food, rather than growing it yourself.”

As long as you remember that the full market solution still leaves those people with private resources. They would rent out the land they could grow food on, or sell it and invest the proceeds, and still have a private income so that they only needed top up wages lower than survival levels.

H.M. Lee later writes “The so called iron law of wages was refuted by nearly every avenue of economics. Even the socialists had problems with it. That is the problem with some economics, you can call something a law when it is actually a theory intended to explain something. The ILOW is way to broad in scope.”

That is misunderstanding what I wrote. I wasn’t relying on that theory, I was pointing out that a certain stage of the Industrial Revolution had data about wage levels pressing against survival. That led some people to work out that theory to account for the data. I was using that stage to show that things like that could happen (in fact, it’s common in developing countries now). I mentioned and linked to the theory so people could find their way to the data I used.

Reason supposes that the (first phase of the) Enclosure of the Commons, the Highland Clearances and the (19th century) Irish Evictions “…had feudal bases and should be viewed in such context”.

Actually, no. The Enclosure of the Commons was what happened at least a generation after feudalism ended, and the other two came after the clan system and colonial tenancy arrangements respectively.

“Of course, what ‘feudal’ means varies among historians”. If you count “bastard feudalism” (Livery and Maintenance), you get that one generation lag until the first enclosures. If you only count the “pure” version, it’s nearly two centuries.

“Remaining is the question of whether it is possible in an unhampered market for demand of basic necessities to outstrip supply to the point of structural famine or slavery”.

Yes, that question remains – but we don’t need to address it, as we can see that the survival lower bound wage level problem comes up far earlier than that.

“More importantly, what is the likelihood of this structural inequity happening given a free market?”

It depends on your definition of free market. Some people consider that the Enclosure of the Commons, the Highland Clearances and the Irish Evictions were all free market operations, since they don’t count just how those resources had earlier been transferred to the owners who later disposed of them that way. As things like that happened at least three separate times under just one sovereignty, it seems very likely indeed. But I already outlined how it could happen even without those uncompensated transfers (I should have clarified that that wouldn’t involve “the rich, by trading their estates/wealth to a select few for pensions… relegat[ing] the many to wage labor with no opportunity otherwise” [emphasis added], but the ordinary run of the older generation doing it and making a select few in the younger generation richer, so leaving some others more dependent on wages, until eventually some of those started getting squeezed out).

“pbergn seems to think that free markets erase or displaces the moral imperative to take care of the weak. Nonsense. It is the only way to allow individuals to act in good conscience without predetermination. Government taxes individual ability to make moral choices. The system of property and free exchange fosters expression, innovation and production are two kinds. Include charity, too.”

Well, it’s not nonsense so long as you understand it as free markets not in themselves doing those things but rather allowing those other things to happen – and also allowing those other things not to happen.

Crosson writes “I read your post and it’s well spelled out however your arguments are largely based on extremities of situation or vague cases lacking citation. It’s hard to take any of your arguments seriously other then you desperately trying to justify your own personal point of view.”

But extremes are precisely how you ought to test over-broad theories. If the theory claims that much generality, it still ought to work with extremes that are easy to use to highlight behaviour.

“Can you provide some evidence in which to support some of your arguments?”

I don’t have to, I already did (you can google for the phrases I used or even follow some that had links, then search beyond those). But you might also want to check through materials from the Distributists (good but outdated data and analysis, i.e. not fully allowing for modern developments, leading to incomplete policies, some useful but some more recent ones harmful), the Georgists (good but outdated data, and outdated incomplete analysis leading to faulty dead end policies even for earlier periods) and the Mutualists (good and current data, and current incomplete analysis leading to useful but incomplete policies).

“Also, in rebuttal to your stance on the Iron Law of Wages. This theory is silly to present here in an Austrian Economics forum.”

See my remarks just above, to H.M. Lee.

“The theory is formed out of an isolated situation where employers are not forced to compete with each other and where various other market objects are ignored. Not to mention that when this theory was popular, in the early 20th century, large portions of the industrialized sectors practiced heavy cartels. That alone breaks the free-market system. The Iron Law of Wages then becomes a band-aid fix over the original wound, but does not address what caused the wound originally.”

Actually, the data leading people to formulate the theory came from the late 18th to mid 19th centuries, when things were not like that.

H.M. Lee February 1, 2009 at 7:29 pm

pbergn:

I agree that there can be excessive management in companies. They are a form of waste. I’m a lean mfg. guy, so no argument here. Everyone that does not add value (that which the customer is will to pay for) is waste, necessary or not.

I would never be so arrogant as to attempt to summarize the Austrian point of view as to the developing world. Safe to say that the developing world is not going through stages any different than the currently developed one. In regards to Latin America, markets can only be free where property is protected, entry and exit of markets in permitted. Look at the improvements in Ireland after property liberalization. The lack of stable currencies also has an effect.

You seem like a good and thoughtful person. I happy to exchange with you. Superbowl halftime is over.

RWW February 1, 2009 at 7:40 pm

Is that today?

pbergn February 1, 2009 at 9:50 pm

TO: H.M. Lee

Thanks, H.M.

I will be cautiously optimistic and keep my fingers crossed that the Austrians are getting it right (there is hope then for the humanity)…

RWW February 2, 2009 at 12:30 am

The beautiful thing about economics, like any deductive science, is that you don’t have to take the experts’ word for it.

Jonathan February 2, 2009 at 10:15 am

I agree with all of this article except one area which probably reveals I misunderstood it.
What does HHH mean when saying that demand for money has nothing to do with either investment or consumption. You don’t decide on your demand for money without considering your demand for consumption or investment…. what am I missing?

Jonathan February 2, 2009 at 10:20 am

or in the next paragraph ‘Increases or decreases in the demand for money, other things being equal, lower or raise the overall level of money prices, but real consumption and investment as well as the real consumption/investment proportion remain unaffected; and, such being the case, employment and social income remain unchanged as well. ‘… if people suddenly increase the demand for money (as we are seeing today) it surely increases the purchasing power of money but it most certainly does affect employment, investment, consumption etc….

Reason February 2, 2009 at 4:25 pm

PM,

Thanks again for your erudite responses.

History is a foreign country and your passport has more stamps than mine. I certainly will not make a claim to being an expert on Feudal and Gaelic history. At any rate, I will attempt to offer some hedging against your claims.

Enclosure does have medieval roots in the 13th century. King Henry and the barons made deals. The Statute of Merton and the Statute of Westminster are two examples. It also seems that over the following centuries there were enclosure and anti-enclosure movements, with either side taking what could be seen to be advancing markets or rights, but importantly, rarely both. But Austrian theory advances the idea of harmony with rights and market.

So what could cause this tension?

It was always the King or Parliament making the final decisions and decrees. These political offices were part and parcel of a landscape of institutionalized privilege and a populace with a belief in ‘ancient rights’ sans a modern conception of market or equality. The existence of taxation evidences a predatory device of political divide and conquer. It also seems that Scottish clans were amalgamations of kindred ties and feudal land tenure. To add, the 18th and 19th century “Inclosure Acts” were decrees of Parliament.

What in all of this may act as experiential evidence that markets do not battle scarcity more efficiently? Not much when the historical record shows markets were muted and the free division of labor as a concept was not common knowledge or even formulated.

What Enclosure history might say stronger is that politics destroys the natural harmony between right and market.

Yes, it does follow that ‘free market’ has to be positively defined.

Of course, there is the ideal/reality gap to settle. But putting that aside for a moment, I would have to say that a free market society is one in which economic calculation is relatively efficient and moving along towards more efficiency. Understandably, this takes a populace generally believing in individual property, contracts, the voluntary division of labor, and an equality of dignity. These ideas in the heads of the many will likely lead to progressive attempts to destroy political privilege.

A more complete conception of freedom is the difference between perceiving rights equal to statuses vs. rightly seeing statuses as unnecessary and unjust political creations. The clansmen and the serf often claimed ancient rights against the barons, parliament or king but did not challenge the statuses of the latter. But the modern revolution, call it liberalism in the Misesian sense, means that the ideas of property and right are just in themselves and stand outside and a priori to history, common law, status and circumstance. Liberalism says that whatever was decreed by the ancients or what position in society your father had does not play on this equality.

In this free market liberal view, should Parliament, the Aristocracy, and the Royal Family be seen as anything other than property thieves? Of course starvation and oppression would be the result of a society based on status- hereditary, elected or otherwise political.

Of course, under a free market, economic ‘kingship’ may result but the populace will generally understand that revocation of power is in their buying and abstention from buying. There would also be barring economic power from translating into political power because the populace would not stand for it and majorities would be difficult to form anyway. For example, Manchester United Football Club is king of the sports world, but it cannot tax, and the entire organization is based on contract, voluntary agreements (sans stadium issues), and winning. Manchester United is a group of collective property rights, but not statuses.

This whole discussion highlights the need for deductive economic logic vs. historicism or empiricism.

Thanks again, PM. I hope I added substance to the conversation.

P.M.Lawrence February 6, 2009 at 11:15 pm

Sorry for the delay replying, Reason. I’ll try a version without links to see if it gets through.

The Statute of Merton was indeed mediaeval, but as its wikipedia entry shows, it actually worked against the Enclosure of the (part in use of the) Commons until it ceased to be observed properly. It was just that the enclosers later made false claims under it to get what they wanted. From another link I can’t provide, it appears that the Statute of Westminster also could not be used like that until that later period (actually, the second Statute of Westminster was the one involved).

“It was always the King or Parliament making the final decisions and decrees”.

Actually, no. Typically what happened was that the local notables were also the local magistrates who had to implement what was in place from those sources, and both could and did twist those as suited them, e.g. claiming to act under special categories of the Statutes of Merton and Westminster.

“It also seems that Scottish clans were amalgamations of kindred ties and feudal land tenure”.

Again, no. Scots Law and wider society combined various elements from different sources, including clan elements; but the clan elements were distinct from the feudal ones. It was the bringing into the formerly clan sector of different concepts of land tenure that made the problem – not as a continuing thing once in place, but from the transition without any buying out compensation.

“Of course starvation and oppression would be the result of a society based on status- hereditary, elected or otherwise political”.

Not necessarily, and in fact it was unusual. The problems mostly arose from uncompensated transitions – often away from that sort of society.

fundamentalist February 7, 2009 at 9:38 am

Pbergn: “Why the wages in these countries are NOT going up? Why these countries never develop after a certain point? Why after all these years you still see enormous wealth polarization in these countries?”

You ask some very good and relevant questions that I’m sure a lot of others are asking. Right after college I spent some time in third world countries and the poverty there got me interested in economics. It took me about 30 years of searching to find what I think is the truth. A good place to start is with Douglass North’s works on institutional economics. He shows that traditional government structures have historically involved a king, usually a conqueror, and an elite group usually known as the nobility. The king knows he can’t maintain power without the support of the nobility, so he buys their support by giving them the authority to steal from the masses but not from each other. That keeps the masses poor, the king in power and the nobility rich. The traditional model has dominated history from the beginning and is still the dominant form of government in the world today.

Some nations have democracy, but it tends to be a veneer placed over the traditional form of government. Corruption is very high in most countries. Free markets aren’t the measure of capitalism. Capitalism is the rule of law with a high regard for property rights. Free markets should be an extension of property rights. However, in traditional societies if you add free markets to high levels of corruption you get the rule of thieves. In most poor countries, markets may be free, but property is poorly protected and easily stolen by those in power, so few people invest in new businesses or new equipment.

MNC’s use the system to their advantage. They know that corruption exists and believe they are powerless to change it. So they bribe state officials to protect their property. Sometimes the gamble doesn’t pay and the MNC loses its property anyway, but it works well enough that MNC’s keep using it. In addition, MNC’s often get a monopoly in exchange for the extra risk.

The reason wages aren’t rising in Latin America is that investment is lagging. For wages to rise, companies must feel free to invest in new equipment and plants. They won’t do that if they think they will lose their investment. In addition to corruption, Latin America is very socialistic, which means they place high taxes on business, high levels of regulation, high levels of inflation, and the unions are very strong. All of these prevent businesses from adding plants and equipment. Also, Latin countries give a competitive advantage to small through the law so that larger companies have to reason to expand. The sum of all of this is that worker productivity in Latin America is low and not growing. In the long run, wages are linked to labor productivity.

China has a similar experience to Latin America, except that it has a huge population of expatriate Chinese who have earned large amounts of wealth outside China and have enormous business expertise. These expatriates take advantage of family connections and the corruption of local officials to keep their investments safe.
The key to development in the third world is respect for property, not just free markets. Free markets without property rights or the rule of law are disastrous. When people on this web site speak of free markets, they usually have the idea of property rights and rule of law in mind, too. Property without free markets is useless and nonsense.

fundamentalist February 7, 2009 at 12:09 pm

PS, You won’t find a lot from Austrian econ on what’s wrong with third world countries because Austrian econ was developed in Europe at a time when the rule of law and property rights were at a high level. Those are assumed in Austrian economics. However, there is some good info on it at the GMU Mercatus Center web site dealing with development in Africa. Also, read anything you can find by the late Peter Bauer.

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