Banksters, Mega-Corporations and Billionaires are the real Big Brothers – but for how long?

Key parts of the world’s financial affairs have been hi-jacked by self-serving financial organisations, bureaucracies, country leaders and individuals.   The outlook is dire.

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The Century Of Total War Coincided With The Century Of Central Banking

The Century Of Total War Coincided With The Century Of Central BankingVia The Mises Institute, 2 November 2019

  [This talk was delivered at the Mises Circle in New York City on September 14, 2012.]

The 20th century was the century of total war. Limitations on the scope of war, built up over many centuries, had already begun to break down in the 19th century, but they were altogether obliterated in the 20th. And of course the sheer amount of resources that centralized states could bring to bear in war, and the terrible new technologies of killing that became available to them, made the 20th a century of almost unimaginable horror.

It isn’t terribly often that people discuss the development of total war in tandem with the development of modern central banking, which — although antecedents existed long before — also came into its own in the 20th century. It’s no surprise that Ron Paul, the man in public life who has done more than anyone to break through the limits of what is permissible to say in polite society about both these things, has also been so insistent that the twin phenomena of war and central banking are linked. “It is no coincidence,” Dr. Paul said, “that the century of total war coincided with the century of central banking.”

He added:

If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.

For the sake of my remarks today I take it as given that Murray Rothbard’s analysis of the true functions of central banking is correct. Rothbard’s books The History of Money and Banking: The Colonial Era Through World War II, The Case Against the FedThe Mystery of Banking, and What Has Government Done to Our Money? provide the logical case and the empirical evidence for this view, and I refer you to those sources for additional details.

For now I take it as uncontroversial that central banks perform three significant functions for the banking system and the government.

First, they serve as lenders of last resort, which in practice means bailouts for the big financial firms.

Second, they coordinate the inflation of the money supply by establishing a uniform rate at which the banks inflate, thereby making the fractional-reserve banking system less unstable and more consistently profitable than it would be without a central bank (which, by the way, is why the banks themselves always clamor for a central bank).

Finally, they allow governments, via inflation, to finance their operations far more cheaply and surreptitiously than they otherwise could.

As an enabler of inflation, the Fed is ipso facto an enabler of war. Looking back on World War I, Ludwig von Mises wrote in 1919, “One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”

No government has ever said, “Because we want to go to war, we must abandon central banking,” or “Because we want to go to war, we must abandon inflation and the fiat money system.” Governments always say, “We must abandon the gold standard because we want to go to war.” That alone indicates the restraint that hard money places on governments. Precious metals cannot be created out of thin air, which is why governments chafe at monetary systems based on them.

Governments can raise revenue in three ways.

Taxation is the most visible means of doing so, and it eventually meets with popular resistance.

They can borrow the money they need, but this borrowing is likewise visible to the public in the form of higher interest rates — as the federal government competes for a limited amount of available credit, credit becomes scarcer for other borrowers.

Creating money out of thin air, the third option, is preferable for governments, since the process by which the political class siphons resources from society via inflation is far less direct and obvious than in the cases of taxation and borrowing. In the old days the kings clipped the coins, kept the shavings, then spent the coins back into circulation with the same nominal value. Once they have it, governments guard this power jealously. Mises once said that if the Bank of England had been available to King Charles I during the English Civil War of the 1640s, he could have crushed the parliamentary forces arrayed against him, and English history would have been much different.

Juan de Mariana, a Spanish Jesuit who wrote in the 16th and early 17th centuries, is best known in political philosophy for having defended regicide in his 1599 work De Rege. Casual students often assume that it must have been for this provocative claim that the Spanish government confined him for a time. But in fact it was his Treatise on the Alteration of Money, which condemned monetary inflation as a moral evil, that got him in trouble.

Think about that. Saying the king could be killed was one thing. But taking direct aim at inflation, the lifeblood of the regime? Now that was taking things too far.

In those days, if a war were to be funded partly by monetary debasement, the process was direct and not difficult to understand. The sequence of events today is more complicated, but as I’ve said, not fundamentally different. What happens today is not that the government needs to pay for a war, comes up short, and simply prints the money to make up the difference. The process is not quite so crude. But when we examine it carefully, it turns out to be essentially the same thing.

Central banks, established by the world’s governments, allow those governments to spend more than they receive in taxes. Borrowing allowed them to spend more than they received in taxes, but government borrowing led to higher interest rates, which in turn can provoke the public in undesirable ways. When central banks create money and inject it into the banking system, they serve the purposes of governments by pushing those interest rates back down, thereby concealing the effects of government borrowing.

But central banking does more than this. It essentially prints up money and hands it to the government, though not quite so directly and obviously.

First, the federal government is able to sell its bonds at artificially high prices (and correspondingly low interest rates) because the buyers of its debt know they can turn around and sell to the Federal Reserve. It’s true that the federal government has to pay interest on the securities the Federal Reserve owns, but at the end of the year the Fed pays that money back to the Treasury, minus its trivial operating expenses. That takes care of the interest. And in case you’re thinking that the federal government still has to pay out at least the principal, it really doesn’t. The government can roll over its existing debt when it comes due, issuing a new bond to pay off the principal of the old one.

Through this convoluted process — a process, not coincidentally, that the general public is unlikely to know about or understand — the federal government is in fact able to do the equivalent of printing money and spending it. While everyone else has to acquire resources by spending money they earned in a productive enterprise — in other words, they first have to produce something for society, and then they may consume — government may acquire resources without first having produced anything. Money creation via government monopoly thus becomes another mechanism whereby the exploitative relationship between government and the public is perpetuated.

Now because the central bank allows the government to conceal the cost of everything it does, it provides an incentive for governments to engage in additional spending in all kinds of areas, not just war. But because war is enormously expensive and because the sacrifices that accompany it place such a strain on the public, it is wartime expenditures for which the assistance of the central bank is especially welcome for any government.

The Federal Reserve System, which was established in late 1913 and opened its doors the following year, was first put to the test during World War I. Unlike some countries, the United States did not abandon the gold standard during the war, but it was not operating under a pure 100 percent gold standard in any case. The Fed could and did engage in credit expansion. On Mises.org we feature an article by John Paul Koning that takes the reader through the exact process by which the Fed carried out its monetary inflation in those early years. In brief, the Fed essentially created money and used it to add war bonds to its balance sheet. Benjamin Anderson, the Austrian-sympathetic economist, observed at the time, “The growth in virtually all the items of the balance sheet of the Federal Reserve System since the United States entered the war has been very great indeed.”

The Fed’s accommodating role was not confined to wartime itself. In America’s Money MachineElgin Groseclose wrote,

Although the war was over in 1918, in a fighting sense, it was not over in a financial sense. The Treasury still had enormous obligations to meet, which were eventually covered by a Victory loan. The main support in the market again was the Federal Reserve.

Monetary expansion was especially helpful to the US government during the Vietnam War. Lyndon Johnson could have both his Great Society programs and his overseas war, and the strain on the public was kept — at first, at least — within manageable limits.

So confident had the Keynesian economic planners become that by 1970, Arthur Okun, one of the decade’s key presidential advisers on the economy, was noting in a published retrospective that wise economic management seemed to have done away with the business cycle. But reality could not be evaded forever, and the apparently strong war economy of the 1960s gave way to the stagnation of the 1970s.

There is a law of the universe according to which every time the public is promised that the boom-bust business cycle has been banished forever, a bust is right around the corner. One month after Okun’s rosy book was published, the recession began.

Americans paid a steep cost for the inflation of the 1960s. The loss of life resulting from the war itself was the most gruesome and horrific of these costs, but the economic devastation cannot be ignored. As many of us well remember, years of unemployment and high inflation plagued the US economy. The stock market fared even worse. Mark Thornton points out that

in May 1970, a portfolio consisting of one share of every stock listed on the Big Board was worth just about half of what it would have been worth at the start of 1969. The high flyers that had led the market of 1967 and 1968 — conglomerates, computer leasers, far-out electronics companies, franchisers — were precipitously down from their peaks. Nor were they down 25 percent, like the Dow, but 80, 90, or 95 percent.

… The Dow index shows that stocks tended to trade in a wide channel for much of the period between 1965 and 1984. However, if you adjust the value of stocks by price inflation as measured by the Consumer Price Index, a clearer and more disturbing picture emerges. The inflation-adjusted or real purchasing power measure of the Dow indicates that it lost nearly 80% of its peak value.

And for all the talk of the Fed’s alleged independence, it is not even possible to imagine the Fed maintaining a tight-money stance when the regime demands stimulus, or when the troops are in the field. It has been more than accommodating during the so-called War on Terror. Consider the amount of debt purchased every year by the Fed, and compare it to that year’s war expenditures, and you will get a sense of the Fed’s enabling role.

Now while it’s true that a gold standard restrains governments, it’s also true that governments have little difficulty finding pretexts — war chief among them — to abandon the gold standard. For that reason, the gold standard in and of itself is not a sufficient restraint on the government’s ambitions, at home and abroad.

As we look to the future, we must cast aside all timidity in our proposals for monetary reform. We do not seek a gold-exchange standard, as existed under the Bretton Woods system. We do not seek to use the price of gold as a calibration device to assist the monetary authority in its decisions on how much money to create. We do not even seek the restoration of the classical gold standard, great though its merits are.

In the 1830s, the hard-money Jacksonian monetary theorists coined the marvelous phrase “separation of bank and state.” That would be a start.

What we need today is the separation of money and state.

There are some ways in which money is unique among goods. For one thing, money is valued not for its own sake but for its use in exchange. For another, money is not consumed, but rather is handed on from one person to another. And all other goods in the economy have their prices expressed in terms of this good.

But there is nothing about money — or anything else, for that matter — that should make us think its production must be carried out by the government or its designated monopoly grantee. Money constitutes one-half of every non-barter market transaction. People who believe in the market economy, and yet who are prepared to hand over to the state the custodianship of this most crucial good, ought to think again.

Interventionists sometimes claim that a particular good is just too important to be left to the market. The standard free-market reply turns this argument around: the more important a commodity is, the more essential it is for the government not to produce it, and to leave its production to the market instead.

Nowhere is this more true than in the case of money. As Ludwig von Mises once said, the history of money is the history of government efforts to destroy money. Government control of money has yielded monetary debasement, the impoverishment of society relative to the state, devastating business cycles, financial bubbles, capital consumption (because of falsified profit-and-loss accounting), moral hazard, and — most germane to my topic today — the expropriation of the public in ways they are unlikely to understand. It is this silent expropriation that has made possible some of the state’s greatest enormities, including its wars, and it is all of these offenses combined that constitute a compelling popular brief against the current system and in favor of a market substitute.

The war machine and the money machine, in short, are intimately linked. It is vain to denounce the moral grotesqueries of the US empire without at the same time taking aim at the indispensable support that makes it all possible. If we wish to oppose the state and all its manifestations — its imperial adventures, its domestic subsidies, its unstoppable spending and debt accumulation — we must point to their source, the central bank, the mechanism that the state and its kept media and economists will defend to their dying days.

The state has persuaded the people that its own interests are identical with theirs. It seeks to promote their welfare. Its wars are their wars. It is the great benefactor, and the people are to be content in their role as its contented subjects.

Ours is a different view. The state’s relationship to the people is not benign, it is not one of magnanimous giver and grateful recipient. It is an exploitative relationship, whereby an array of self-perpetuating fiefdoms that produce nothing live at the expense of the toiling majority. Its wars do not protect the public; they fleece it. Its subsidies do not promote the so-called public good; they undermine it. Why should we expect its production of money to be an exception to this general pattern?

As F.A. Hayek said, it is not reasonable to think that the state has any interest in giving us a “good money.” What the state wants is to produce the money or have a privileged position vis-à-vis the source of the money, so it can dispense largesse to its favored constituencies. We should not be anxious to accommodate it.

The state does not compromise, and neither should we. In the struggle of liberty against power, few enough will oppose the state and the conventional wisdom it urges us to adopt. Fewer still will reject the state and its programs root and branch. We must be those few, as we work toward a future in which we are the many.

This is our mission today, as it has been the mission of the Mises Institute for the past 30 years. With your support, we shall at this critical moment carry on publishing our books and periodicals, aiding research and teaching in Austrian economics, promoting the Austrian School to the public, and training tomorrow’s champions of the economics of freedom.

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Ludwig Von Mises explained the world’s adoption of faulty economics

Ludwig Von Mises explained the world’s adoption of faulty economics  By Richard Ebeling, The Heartland Institute, 8 September 2019

September 2019 marks 70 years since the appearance of Ludwig von Mises’s Human Action: A Treatise on Economics, one of the truly great “classics” of modern economics.

September 2019 marks 70 years since the appearance of Ludwig von Mises’s Human Action: A Treatise on Economics, one of the truly great “classics” of modern economics. Too often a “classic” means a famous book considered to have made important contributions to some field of study and that is reverentially referred to but is unfortunately rarely ever read any-more.

In economics, Adam Smith’s Wealth of Nations is a typical example of such a work. Every economist and a good number of people in the general public have heard of the “invisible hand” and the notion that self-interest furthers the public interest through the incentive mechanism of free-market competition; but in fact few economists nowadays have actually read more than a handful of snippets and brief passages from Smith’s profound treatise. Among the general public, the number of people who even know the snippets dwindles to almost nothing.

A still-read and still-relevant classic 

However, Ludwig von Mises’s Human Action uniquely stands out as a classic in the literature of economics. Not only among “Austrian” economists but also for a growing number of other people, Mises’s brilliant treatise continues to be read and taken seriously as a cornerstone for understanding the nature of the free society and the workings of the market economy.

It has taken on even more relevance and significance in these first decades of the 21st century because of the economic crisis of 2008-2009, the full effects from which the American economy has still not fully recovered, and in the wake of a dangerous revival of a call for a “democratic socialism” that demands the implementation of various forms and degrees of government central planning. They have made the economic reasoning and public-policy analysis that runs through most of Human Action as timely today as when its first edition appeared in bookstores on September 14, 1949.

A few days after its publication, the famous free-market journalist Henry Hazlitt reviewed Human Action in his column in Newsweek magazine. He emphasized its importance by telling his readers,

[The] book is destined to become a landmark in the progress of economics.… Human Action is, in short, the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared…. It should become the leading text of everyone who believes in freedom, in individualism, and the ability of a free-market economy not only to outdistance any government-planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.

Keys to human progress

If the field of sociology did not have such a controversial history and so many conflicting notions about what its subject matter and approach are supposed to be about, it would not be misplaced to say that in Human Action, Mises demonstrated himself to be not only one of the greatest economists of the last century, but one of its leading sociologists as well.

In the most appropriate meaning of the term, Mises formulated a “science of society” in the tradition of Scottish philosophers such as Adam Smith. All that happens in the social world begins in the thinking and actions of individual human beings. They are the starting point for understanding society: man, as a purposefully acting being, gives assigned meanings to the world around him, selects desired ends, decides upon possibly useful means to their attainment, and undertakes courses of action through time in attempts to bring his desired plans to fruition.

Humans rose above animal existence through their developed capacity to reason, conceptualize, imagine possible futures, and conceive of ways of bringing them into reality. But on his own, man’s mental and physical powers are too limited for achieving much above bare subsistence. The profound key to the betterment of the human condition, Mises insisted, was man’s discovery of the benefits that could come from a division of labor through which men could specialize in their tasks and mutually gain through cooperative association that slowly but surely improved the standards of living, the quality of life, and the cultural elements that mark off “civilization.”

But how shall human beings collaborate — through plundering conquest or peaceful trade? It took thousands of years for people to stumble upon the superiority of market-based cooperation over politically based power and privilege. As production and trade become ever more complex owing to the extension of the system of division of labor, there had to arise a method by which the participants in the emerging relationships of supply and demand could know how and what to do.

Economic calculation

A central theme through much of the Human Action is Mises’s insistence on the essential importance of economic calculation. In the early decades of the 20th century, socialists of almost all stripes were certain that the institutions of the market economy could be done away with — either through peaceful means or violent revolution — and replaced with direct government ownership or control of the means of production with no loss in economic productivity or efficiency.

Mises’s landmark contribution 100 years ago in 1920 was to demonstrate that only with market-based prices expressed through a medium of exchange could rational decision-making be undertaken for the use and application of the myriad means of production to ensure the effective satisfaction of the multitudes of competing consumer demands in society.

“Monetary calculation is the guiding star of action under the system of division of labor,” Mises declared in Human Action. “It is the compass of the man embarking on production.” The significance of the competitive process, as Mises had expressed it in his earlier volume Liberalism (1927), is that it facilitates “the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable.”

Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning. How, Mises asked, will the socialist planners know the best uses for which the factors of production under their central control should be applied without such market-generated money prices? Without private ownership of the means of production, there would be nothing (legally) to buy and sell. Without the ability to buy and sell, there would be no bids and offers, and therefore no haggling over terms of trade among competing buyers and sellers. Without the haggling of market competition there would, of course, be no agreed-upon terms of exchange. Without agreed-upon terms of exchange, there are no actual market prices. And without such market prices, how will the central planners know the opportunity costs and therefore the most highly valued uses for which those resources could or should be applied to satisfy the consumer demands of “the people”?

With the abolition of private property, and therefore market exchange and prices, the central planners would lack the necessary institutional and informational tools to determine what to produce and how, in order to minimize waste and inefficiency.

Therefore, Mises declared in 1931,

From the standpoint of both politics and history, this proof [of the impossibility of socialist planning] is certainly the most important discovery by economic theory.… It alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society.

Government intervention and monetary manipulation

At the same time, Mises demonstrated the inherent inconsistencies in any system of piecemeal political intervention in the market economy. Price controls and production restrictions on entrepreneurial decision-making bring about distortions and imbalances in the relationships of supply and demand, as well as constraints on the most efficient use of resources in the service of consumers. The political intervenor is left with the choice of either introducing new controls and regulations in an attempt to compensate for the distortions and imbalances the prior interventions have caused or repealing the interventionist controls and regulations already in place and allowing the market once again to be free and competitive. The path of one set of piecemeal interventions followed by another entails a logic in the growth of government that eventually results in the entire economy’s coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis through an unintended back door.

The most pernicious form of government intervention, in Mises’s view, was political control and manipulation of the monetary system. Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy. Waves of inflations and depressions were the product of political intervention in money and banking. And that included the Great Depression of the 1930s, Mises argued.

Under various political and ideological pressures, governments had monopolized control over the monetary system. They used the ability to create money out of thin air through the printing press or on the ledger books of the banks to finance government deficits and to artificially lower interest rates to stimulate unsustainable investment booms. Such monetary expansions always tended to distort market prices resulting in misdirections of resources, including labor, and malinvestments of capital. The inflationary upswing that is caused by an artificial expansion of money and bank credit sets the stage for an eventual economic downturn. By distorting the rate of interest — the market price for borrowing and lending — the monetary authority throws savings and investment out of balance, with the need for an inevitable correction.

The “depression” or “recession” phase of the business cycle occurs when the monetary authority either slows downs or stops any further increases in the money supply. The imbalances and distortions become visible, with some investment projects having to be written down or written off as losses, with reallocations of labor and other resources to alternative, more profitable employments, and sometimes significant adjustments and declines in wages and prices to bring supply and demand back into proper order.

The errors of Keynesianism

The Keynesian revolution of the 1930s, which then dominated economic-policy discussions for decades following the Second World War, was based on a fundamental misconception of how the market economy worked. What Keynes called “aggregate demand failures” (to explain the reason for high and prolonged unemployment) distracted attention from the real source of less-than-full employment: the failure of producers and workers on the supply side of the market to price their products and labor services at levels that potential demanders would be willing to pay. Unemployment and idle resources were a pricing problem, not a demand-management problem. Mises considered Keynesian economics basically to be nothing more than a rationale for special-interest groups, such as trade unions, who didn’t want to adapt to the reality of supply and demand, and of what the market viewed as their real worth.

Thus Mises’s conclusion from his analysis of socialism and interventionism, including monetary manipulation, was that there is no alternative to a thoroughgoing, unhampered, free-market economy — and one that included a market-based monetary system such as the gold standard.  Both socialism and interventionism are, respectively, unworkable and unstable substitutes for open, competitive capitalism.

The classical liberal defends private property and the free-market economy, Mises insisted, precisely because it is the only system of social cooperation that provides wide latitude for freedom and personal choice to all members of society, while generating the institutional means for coordinating the actions of billions of people in the most economically rational manner.

The apparent triumph of capitalism over collectivism, following the demise of the Soviet bloc in the 1990s, has, unfortunately, turned out to be mostly an illusion. Governments in the Western world did not reduce their size or intrusiveness in the economic affairs of their citizens. The interventionist-welfare state has remained alive and well, and continued to grow along with the government debts to pay for the entire redistributive largess.

Central banking and free banking

But the heart of the interventionist system is government control of the monetary system — indeed, it has remained an untouched element of monetary central planning through the institution of central banking.

Fortunately, over the last forty years, Mises’s analysis and defense of gold-backed, private competitive banking in place of government-monopoly central banking has finally begun to win over a growing number of Austrian and other advocates. (See my ebook Monetary Central Planning and the State.)

Monetary manipulation by central banks inserts one of the most disruptive distortions into the process of economic calculation. Interest rates — which are meant to inform market participants about the availability of savings relative to the demands for investment expenditures, and which facilitate the coordination of resource use over periods of time relative to the demands of income earners for consumption in the present versus the future — send out misinformation to both producers and consumers under the pressure of monetary expansion.

The financial crisis and its interventionist aftermath

In the wake of Federal Reserve monetary mischief during the early years of the 21st century, imbalances and distortions were once again generated by monetary policies that resulted in the financial and economic crisis of 2008-2009.

There soon occurred the return of the “ghost of Keynes past.” In the face of the inescapable need for the rebalancing and re-coordination of misdirected resources and malinvested capital for a full return to normal and sustainable, market-based growth, government spending and budget deficits to “stimulate” the economy out of a recession were once again insisted upon.

The focus remained on “aggregate” output and employment, which always hides from view the underlying microeconomic relations that are at the core of the market process. How can the multitudes of market participants discern where and to what extent market errors have been made under the pressure of past monetary and interest-rate manipulations if the price system is not permitted to perform its job of telling the truth about the reality of supply and demand? That is, the degree to which resources were misallocated and wrongly priced during the preceding boom. Or the extent to which men, material, and savings-backed financial funds need to realign themselves to restore a properly understood full-employment market-driven economy.

The recovery period was drawn out for almost ten years, longer than most other periods of post-boom readjustments since the end of the Second World War. How could people know what to do and where to do it in the social system of division of labor, when the crucial tool of economic calculation was undermined by government bailouts, subsidies, price floors, capital-market interventions, and continuing monetary manipulation and near-zero interest-rate policies that threatened new misdirections of capital and labor, with the risk of another boom-bust cycle to come?

In the immediate aftermath of the 2008-2009 downturn, the argument was constantly made that many banks were too big to fail, that depositors needed to have their various bank accounts protected and guaranteed, and that the repercussions of allowing the financial markets to adjust on their own to the post-boom reality would have been too harsh. In fact, Mises had responded to such arguments in his 1928 monograph, Monetary Stabilization and Cyclical Policy, even before the Great Depression began, by warning of what today is understood as “moral hazard,” that is, the danger of reinforcing the repetition of bad decisions by the government’s bailing out mistakes made in the market:

In any event, the practice of intervening for the benefit of banks, rendered insolvent by the crisis, and of the customers of these banks, resulted in suspending the market forces that otherwise would have served to prevent a return of the expansion, in the form of a new boom, and the crisis which inevitably follows. If the banks emerge from the crisis unscathed, or only slightly weakened, what remains to restrain them from embarking once more on an attempt to reduce artificially the interest rate on loans and expand circulation credit? If the crisis were ruthlessly permitted to run its course, bringing about the destruction of enterprises which were unable to meet their obligations, then all entrepreneurs — not only banks but also other businessmen — would exhibit more caution in granting and using credit in the future. Instead, public opinion approves of giving assistance in the crisis. Then, no sooner is the worst over, than the banks are spurred on to a new expansion of circulation credit.

Mises’s warning

Just as there was a huge shift toward more and bigger government in the years leading up to the publication of Human Action, so today we are seeing an expansion of governmental presence and domination of social life, especially in health care, education, and the energy sector — as well as the financial and capital markets.

But where will all the money come from to fund this new gargantuan largess for expanded political paternalism? In the Austria of the interwar period of the 1920s and 1930s, Mises had witnessed and explained the consequences from unrestrained government spending that finally resulted in the “eating of the seed corn” — capital consumption. Mises warned of this danger, too, in the pages of Human Action, and the fact that there must be a point at which the interventionist welfare state will have exhausted “the reserve fund” of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the redistributive state. Those currently in political power in Washington seem hell-bent on bringing that about in the decades ahead.

The enduring value and importance of Human Action

A “predecessor” of Human Action had appeared in German in 1940. Shortly after it appeared, Friedrich A. Hayek reviewed it, emphasizing its astonishingly unique qualities:

There appears to be a width of view and an intellectual spaciousness about the whole book that are much more like that of an eighteenth-century philosopher than that of a modern specialist. And yet, or perhaps because of this, one feels throughout much nearer reality, and is constantly recalled from the discussion of the technicalities to the consideration of the great problems of our time…. It ranges from the most general philosophical problems raised by all scientific study of human action to the major problems of economic policy of our time…. [The] result is a really imposing unified system of a liberal social philosophy. It is here also, more than elsewhere, that the author’s astounding knowledge of history as well as of the contemporary world helps most to illustrate his argument.

The years since the original appearance of Human Action in 1949 have done nothing to diminish the validity of Hayek’s interpretation. Indeed, the social, political, and economic conditions of our world today give Ludwig von Mises’s treatise a refreshing relevance matched by few other works written over the last century.

That is what has resulted in its being read by more and more people today, rather than simply being one of those many “classics” collecting dust on a shelf. If enough people discover and rediscover the timeless truths in the pages of Human Action, the ideas of Ludwig von Mises may well assist us in stemming the growing tide toward an even larger leviathan state that dangerously looms in front of us.

[Originally Published at the Future of Freedom Foundation]

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About Peter Senior

I'm a very experienced and pragmatic management consultant. I've reviewed and led the restructuring of many organisations - large and small corporations and Government Departments, much of the time as President of the New Zealand Institute of Management Consultants. Before that I was General Manager of a major NZ newspaper; earlier, an analyst for IBM UK. I gained an honours degree in engineering at London University, and studied management at Cambridge University. This wide range of experience has left me frustrated: I continue to see too many examples of really bad management. Sometimes small easily fixed issues; sometimes fundamental faults; and sometimes really tricky problems. Mostly these issues can be fixed using a mixture of common sense, 'management 101' and applying lessons from years of management experience. Unfortunately, all too often, politics, bureaucracy and daft government regulations get in the way; internal factors such as poor culture and out-of-date strategies are often evident. So what's gone wrong, and why, and most importantly, how to fix 'it'? I hope there are like-minded people 'out there' who will share their thoughts enabling 'us' to improve some significant management failures that affect the general public. If you just accept bad management, you don't have the right to complain! If you'd like to share thoughts on any aspects of management, send me an email to petersenior42@gmail.com . My latest project has the interim title 'You’ve been conned. Much of what you were taught and read is largely irrelevant, misleading or plain wrong – this is the REAL story of life: past, present and our possible future.' The working paper so far comprises 105 pages, many listing references and interim conclusions. The main problem is finding sufficient credible evidence, and realising the more Iearn, the more I realise I don't know!
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