STEEL-cameralist Manifesto Part 3e: The Error Theory of Economics.

Contents

Introduction

1: Imperium In Imperio.

2: Democracy.

3: Hazlitt’s Fundamental Lesson of Economics.

4: Central Banks, Fiat Currency, Fractional Reserve Banking and the Austrian Theory of the Business Cycle.

5:  The Welfare State.

6: Immigration.

7: Foreign Free Trade.

8: Form V Reality and Information Corruption.

9: Design Principles for Quacks and Synthetic A Priori Economics.

10: Conclusion.

Our explanation of the economic crisis is not an economic theory per se. It is a general explanation that explains a cluster of economic anomalies covered in the last part. Borrowing an idea from philosophy, the following is an “error theory”.

An error theory is a theory that explains an error. The error is usually a false or an unreasonable set of beliefs that is usually plausible and widely held. Here, we will construct an error theory to explain source and then the cause of the cluster of economic anomalies and why mainstream economic theory and practice itself is corrupt; indeed, we claim that it is a pseudo-science.

To recap, anomalies are facts that do not fit a theory; if the anomalies are widespread, persistent and serious this is a good reason to reject the theory.

In the most general sense, what we mean by “theory” here is firstly the belief in “progress”. That is, with all the experts, all the knowledge and all the experience, the cluster of anomalies and the resulting political consequences – such as Trump, Brexit and the growth of oppositional populist factions in Europe – should not, according to the “theory”, have been possible.

More specifically, however, USG’s economic policies, and those of the West more generally, should not be faced with recurrent “boom and busts”, “class warfare”, or declining living standards. The economy should be stable, with good growth rates and rising prosperity.

This is the Third Anomaly then: the crisis of Western economics.

Our theory says absolutely nothing new that others have not said before. What is different is that we have reduced all the other theories down into one, basic theory. Our error theory is a kind of meta-theory then.

The first cause of the third anomaly, like with the first and second anomalies is Imperium in Imperio.

From this mistake, all the others follow.

1: Imperium In Imperio.

Our explanation begins with the first error of political engineering: Imperium in Imperio.

From this structural mistake, we can reason, deductively, and demonstrate how it causes to all the other mistakes which have caused the crisis.

When you have or if you (such as the American Founding Fathers) create Imperium in Imperio – divided or scattered power – in a political system, it sets of a chain reaction that can play out over hundreds of years.

A state with divided or unsecure power necessarily creates division and division creates rivalry; each competing political actor, faction and institution will necessarily respond to a set of incentives which produce sub-optimal consequences for the state or the people as a whole. In short, the goal is to have power, not to use power well.

Imperium in Imperio creates incoherence and instability because of the permanent tension between the Ruling Elites (and elite institutions) and essentials (and their institutions).

The elites require the essentials to govern. If however, the elites can weaken the power of the essentials by growing the number of “essentials” by promoting expendables or degrading and demoting essentials, the elites can secure their power and exercise it without the dragging effect of essentials.

However, the tension is that elites will need some essentials (to help them govern) so the tension is never absent. No matter how powerful elites become, they need some loyal essentials. Elites maintain the loyalty of essentials by rewarding them with power, prestige and a cut of the profits.

The three way game between elites, essentials and expendables occur and re-occur again and again in history and in every single organisation. This dynamic is an unsolvable problem, it can only be managed and the potential damage resulting from conflict minimized.

Democratic government, meanwhile, is an extreme case of Imperium in Imperio; a modern, republican government, with a separation of power between executive, judiciary and legislature, is yet another example of divided power.

In a democracy to best way gain and maintain power is to bribe people with their own money or, which better – other people’s money. If you are the elite your goal is to make them dependent upon you by making them indebted to you.

Imperium in Imperio or the logic of Power conflict is to be understood as operating on two levels – the intentional and the algorithmic.

As we set out here, with the rules for ruling, elites will use expendables to weaken the power of essentials. This strategy is intentional.

An analogy can help us understand the intentional level of Imperium in Imperio. Imagine if we could use a microscope and look at the micro details of a particular time in history and examine the actions of particular elites, we will find elites obeying the logic of Power conflict and following the rules of ruling.

However, if we switch from a microscope to a wide-angle lens, what we see over the course of two thousand years of Western history is Imperium in Imperio played out on a grand scale.

We call this the algorithmic level. Power selection, like natural selection, and the effects it is responsible for, is not something that individual elites necessarily understand. If they do think in a more abstract way, they are quite likely to have the same political beliefs as everyone else: that progress is spontaneous or even for-ordained because while the “arc of history is long, it bends towards justice.”

In short, real history is hidden from them.

The reason why Universalism and the principles of Equality are front and center in a democracy is because they are adaptive. Imperium in Imperio produces democracy and democracy creates Universalism and Equality; these meme-plexes then further re-enforce democracy in one country and then help spread it around the world.

The real, adaptive, or algorithmic meaning of Universalism is it is a meme-plex that Power finds adaptive because it allows for the interchange of any essential for any other person.

If you can only select men, this is particularism and limits  Power.

If you can only select Christians, this is particularism and it limits Power.

If you can only select white Christians…..you get the picture.

Thus, Power, like a vampire – a predator – is always seeking fresh blood.

If Universalism is horizontal because it will spread itself far and wide , then Equality is vertical because it looks down low, in order to bring things up.

The doctrine of Equality allows Power to select those from the expendable group and promote them over an unruly essential.

At the micro level, we have elites following the rules of ruling, but when we look at the macro picture, we see Power at work, selecting, re-fining, adapting.

2: Democracy.

Democracy is an extreme example of Imperium in Imperio and arguably the most malignant. Democracies cannot govern, and nor can they manage an economy. The reasons for this are exactly the same reasons that private ownership and control lead to prosperity while public ownership (communism) leads to poverty.

Once you have democracy, then the question to ask and to try to answer is:

What kind of economic system is likely to develop; what system did develop and why?

Our claim is that because of the logic of Power conflict, a democracy will develop in a certain, definite way.

USG offers an almost perfect political experiment. The USG of the Founding Fathers was a very, very different regime to the one that now exists. USG was, almost, a libertarian government.

USG is now a mega-state. The question is how it got that way.

The Logic of Power Conflict in a Democracy.

Gaining and maintaining power in a democracy rests on building a winning coalition.

The path to power in a democracy is virtually guaranteed if you can persuade people to support you in return for rewards – power, prestige, perks but above all a cut of the profits. In short, bribery.

Recall Rule Three:

Rule 3:

“Control the flow of revenue. It’s always better for a ruler to determine who eats than it is to have a larger pie from which the people can feed themselves. The most effective cash flow for leaders is one that makes lots of people poor and redistributes money to keep select people—their supporters—wealthy. (Bold mine.) (The Rules are from the Dictator’s Handbook by Bruce Mesquita.)

(To paraphrase Alexander Hamilton, if you control their pay, then you control their principles.)”

However, the necessary conditions for following rule three require control of the production, distribution and supply and collection of money.

The best way to do this is to create and then control – or seize control – of a central bank which is what we will look at in section 4.

The set-text for the failure of democracy is Hans Hermann Hoppe’s Democracy: the God that Failed. The entire book is essential reading to see why democracy leads to sub-optimal economic outcomes, but the following, edited extract captures the entire argument.

Democracy and the De-Civilizing Process.

Hans Herman Hoppe:

GOVERNMENT, GOVERNMENT GROWTH, AND THE PROCESS OF DECIVILIZATION: FROM MONARCHY TO DEMOCRACY

Every government, and that means every agency that engages in continual, institutionalized property-rights violations (expropriations), is by its nature a territorial monopolist. There can be no “free entry” into the business of expropriations; otherwise, soon nothing would be left that could be expropriated, and any form of institutionalized expropriation would thus become impossible. Under the assumption of self-interest, every government will use this monopoly of expropriation to its own advantage-in order to maximize its wealth and income. Hence every government should be expected to have an inherent tendency toward growth. And in maximizing its own wealth and income by means of expropriation, every government represents a constant threat to the process of civilization-of falling time preferences and increasingly wider and longer provision-and an expanding source of de civilizing forces. However, not every government prospers equally and produces decivilizing forces of the same strength. Different forms of government lead to different degrees of decivilization. Nor is every form of government, and every sequence of government forms, equally probable.

Democratic rule-in which the government apparatus is considered “public” property administered by regularly elected officials who do not personally own and are not viewed as owning the government but as its temporary caretakers or trustees-typically only follows personal rule and private government ownership. Because masses or majorities cannot possibly possess any natural authority (this being a personal, individual trait), democratic governments can acquire legitimacy only unnaturally-most typically through war or revolution.

Only in activities such as war and revolution do masses act in concert and do victory and defeat depend on mass effort. And only under exceptional circumstances such as these can mass majorities gain the legitimacy needed to transform government into public property. These two forms of government-private or public ownership of government (monarchy or democracy)-have systematically different effects on social time preference and the attendant process of civilization, and with the transition from personal (monarchical) to democratic (public) rule in particular, contrary to conventional wisdom, the decivilizing forces inherent in any form of government are systematically strengthened.

The defining characteristic of private government ownership and the reason for a personal ruler’s relatively lower degree of time preference (as compared to criminals and democratic governments) is that the expropriated resources and the monopoly privilege of future expropriation are individually owned. The expropriated resources are added to the king’s private estate and treated as if they were a part of it, and the monopoly privilege of future expropriation is attached as a title to this estate and leads to an instant increase in its present value (“capitalization” of monopoly profit). Most importantly, as the private owner of the government estate, the ruler is entitled to pass his possessions on to his personal heir. He may sell, rent, or give away part or all of his privileged estate (and privately pocket the receipts from the sale or rental), and he may personally appoint or dismiss every administrator and employee of his estate.

The institution of private government ownership systematically shapes the incentive structure confronting the ruler and distinctly influences his conduct of government affairs. Assuming no more than self-interest, the ruler tries to maximize his total wealth, i.e., the present value of his estate and his current income. He would not want to increase current income at the expense of a more than .proportional drop in the present value of his assets.

(Reflecting the value of all future expected asset earnings discounted by the rate of time preference), private ownership in and of itself leads to economic calculation and thus promotes farsightedness. While this is true of private ownership generally, in the special case of private ownership of government it implies a distinct moderation with respect to the ruler’s drive to exploit his monopoly privilege of expropriation, for acts of expropriation are by their nature parasitic upon prior acts of production by the nongovernmental public.

Where nothing has first been produced, nothing can be expropriated, and where everything has been expropriated, all future production will come to a shrieking halt. Hence, a private owner of government (a king) would avoid taxing his subjects so heavily as to reduce his future earning potential to the extent that the present value of his estate (his kingdom) would actually fall, for instance.

Instead, to preserve or even enhance the value of his personal property, he would systematically restrain himself in his taxing policies, for the lower the degree of taxation, the more productive the subject population will be, and the more productive the population, the higher the value of the ruler’s parasitic monopoly of expropriation will be. He will use his monopolistic privilege, of course. He will not not tax. But as the government’s private owner, it is in his interest to draw-parasitically-on a growing, increasingly productive and prosperous nongovernment economy, as this would-always and without any effort on his part-also increase his own wealth and prosperity. Tax rates would thus tend to be low.

Further, it is in a personal ruler’s interest to use his monopoly of law (courts) and order (police) for the enforcement of the pre-established private property law. With the sole exception of himself (for the nongovernment public and all of its internal dealings, that is), he will want to enforce the principle that all property and income should be acquired productively and/or contractually, and accordingly, he will want to threaten all private rule-transgressions as crimes with punishment. The less private crime there is, the more private wealth there will be and the higher will be the value of the ruler’s monopoly of taxation and expropriation.

In fact, a private ruler will not want to lean exclusively on tax revenue to finance his own expenditures. Rather, he will also want to rely on productive activities and allocate part of his estate to the production and provision of “normal” goods and services, with the purpose of earning its owner a “normal” (market) sales revenue.

The lesson here is a simple one: do not eat all your seed corn. More generally, the unification of ownership and control leads to responsibility.

If this is the logic of economic reasoning under monarchy (private government) how does democracy (public government) play out?

Hoppe:

In contrast to the internal and external moderation of a monarchy, a democratic (publicly owned) government implies increased excess, and the transition from a world of kings to one of democratically-elected presidents must be expected to lead to a systematic increase in the intensity and extension of government power and a significantly strengthened tendency toward decivilization.

A democratic ruler can use the government apparatus to his personal advantage, but he does not own it. He cannot sell government resources and privately pocket the receipts from such sales, nor can he pass government possessions on to his personal heir. He owns the current use of government resources, but not their capital value. In distinct contrast to a king, a president will want to maximize not total government wealth (capital values and current income) but current income (regardless and at the expense of capital values).

Indeed, even if he wished to act differently, he could not, for as public property, government resources are unsaleable, and without market prices economic calculation is impossible. Accordingly, it must be regarded as unavoidable that public-government ownership results in continual capital consumption.

Instead of maintaining or even enhancing the value of the government estate, as a king would do, a president (the government’s temporary caretaker or trustee) will use up as much of the government resources as quickly as possible, for what he does not consume now, he may never be able to consume. In particular, a president (as distinct from a king) has no interest in not ruining his country. For why would he not want to increase his confiscations if the advantage of a policy of moderation-the resulting higher capital value of the government estate-cannot be reaped privately, while the advantage of the opposite policy of higher taxes-a higher current income—can be so reaped? For a president, unlike for a king, moderation offers only disadvantages.

What of the ruled?

Hoppe:

Moreover, with public instead of private government ownership the second reason for moderation is also gone: the clear and developed class-consciousness of the ruled.

There can never be more than one supreme ruler, whether king or president. Yet while entrance into the position of king and a promotion to the rank of nobility is systematically restricted under a monarchy, in a publicly owned government, anyone, in theory, can become a member of the ruling class-or even president. The distinction between the rulers and the ruled is blurred, and the class-consciousness of the ruled becomes fuzzy. The illusion even arises that such a distinction no longer exists: that with a democratic government no one is ruled by anyone but everyone instead rules himself.

Hoppe is, however, wrong here – the illusion does not just “arise” the illusion was shaped, firstly by propaganda but by the process of Power selection itself.

Hoppe:

While expropriation and taxation before may have appeared clearly oppressive and evil to the public, they seem much less so, mankind being what it is, once anyone may freely enter the ranks of those who are at the receiving end. Consequently, taxes will increase, be it directly in the form of higher tax rates or indirectly in that of increased governmental money “creation” (inflation). Likewise, government employment and the ratio of government employees (“public servants”) to private employees tends to rise, attracting and promoting individuals with high degrees of time preference and low and limited farsightedness.

The consequences:

The combination of these interrelated factors-“public” ownership of the government plus free entry into it-significantly alters a government’s conduct of both its internal and its external affairs.

Internally, the government is likely to exhibit an increased tendency to incur debt. While a king is by no means opposed to debt, he is constrained in this “natural” inclination by the fact that as the government’s private owner, he and his heirs are considered personally liable for the payment of all government debts (he can literally go bankrupt, or be forced by creditors to liquidate government assets).

In distinct contrast, a presidential government caretaker is not held liable for debts incurred during his tenure of office. Rather, his debts are considered “public,” to be repaid by future (equally nonliable) governments. If one is not held personally liable for one’s debts, however, the debt load will rise, and present government consumption will be expanded at the expense of future government consumption.

What comes next is crucial:

In order to repay a rising public debt, the level of future taxes (or monetary inflation) imposed on a future public will have to increase. And with the expectation of a higher future-tax burden, the nongovernment public also becomes affected by the incubus of rising time-preference degrees, for with higher future-tax rates, present consumption and short-term investment are rendered relatively more attractive as compared to saving and long-term investment.

More importantly still, the government’s conduct as the monopolist of law and order will undergo a systematic change. As explained above, a king will want to enforce the preexisting private property law, and notwithstanding his own exceptional status vis-a-vis some of its key provisions, he, too, will assume and accept private-property notions for himself and his possessions (at least insofar as international king-to-king relations are concerned). He does not create new law but merely occupies a privileged position within an existing, all-encompassing system of private law.

In contrast, with a “publicly” owned and administered government a new type of “law” emerges: “public” law, which exempts government agents from personal liability and withholds “publicly owned” resources from economic management. With the establishment of “public law” (including constitutional and administrative law) not merely as law but as a “higher” law, a gradual erosion of private law ensues; that is, there is an increasing subordination and displacement of private law by and through public law.

Rather than upholding private law among the nongovernment public and exploiting its legal monopoly solely for the purpose of redistributing wealth and income from civil society onto itself, a government “ruled” by public law will also employ its power increasingly for the purpose of legislation, i.e., for the creation of new, “positive” civil law, with the intent of redistributing wealth and income within civil society. For’ as a government’s caretaker (not owner) it is of little or no concern that any such redistribution can only reduce future productivity. Confronted with popular, elections and free entry into government, however, the advocacy and adoption of redistributive policies is predestined to become the very prerequisite for anyone wanting to attain or retain a government caretaker position.

Accordingly, rather than representing a “consumption state” (as the typical monarchy does), with public government ownership, complementing and reinforcing the overall tendency toward rising taxes (and/ or inflation), government employment and debt, the state will become increasingly transformed into a “welfare state.”

The three ways to steal in a democracy:

The legislatively-enacted redistribution of income and wealth within civil society can essentially take on three forms.

It can take the form of simple transfer payments, in which income and/or wealth is taken from Peter (the “haves”) and doled out to Paul (the “have-nots”).

It can take the form of “free” or below-cost provision of goods and services (such as education, health care, or infrastructure) by government, in which income and/ or wealth is confiscated from one group of individuals-the taxpayers-and handed out to another, nonidentical one-the users of the respective goods and services.

Or it can take the form of business and/or consumer regulations or “protection laws” (such as price controls, tariffs, or licensing requirements), whereby the wealth of the members of one group of businessmen or consumers is increased at the expense of a corresponding loss for those of another “competing” group (by imposing legal restrictions on the use which the latter are permitted to make of their private properties).

Democracy: the God that Failed, Chapter 1. Hans Herman Hoppe.

3: Hazlitt’s Fundamental Lesson of Economics.

Henry Hazlitt reduced the art of economics to one sentence:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The question to ask is the following: how well does a democracy live up to Hazlitt’s lesson?

Already we have seen that democracies cannot, in principle, do so because the very system itself provides a set of counter-productive incentives and perverse feedback loops to discount long term consequences not only for one group but for all groups.

Next, we will trace the consequences of various policies and decisions and explain the undelaying logic that drives them.

4: Central Banks, Fiat Currency, Fractional Reserve Banking and the Austrian Theory of the Business Cycle.

Now, we begin to look at one of the central causes of the current economic crisis. Firstly, we have the financial institution of a central bank, which allows the state to create a fiat currency and initiate the practice of nation-wide fractional reserve banking (FRB). FRB provides the state with the means to stimulate the economy via credit expansion through the setting of artificially low interest rates.

This is the ultimate cause of the business cycle or “boom and bust.” (Austrian theory of the business cycle).

A: Central Bank.

While you can rob Peter to pay Paul, this strategy is too direct and tends to arouse political opposition.

If you are going to bribe people, you need money. If you don’t have money and you are not inclined to earn it, you can always steal it or, what is even better – create it out of thin air. To do this, you need a central bank.

A central bank allows you to issue credit. Issuing credit is the bread and butter of creating a patronage network between the Ruling Elite who control the state and the banks and whatever group the Elites need or want.

The following explains why central banks are a danger to any free and prosperous society:

Mises blamed unwarranted credit expansion on political pressures for cheap money that the central bank failed to resist. As an institutional reform to avoid the problem he favored free banking, a monetary system without a central bank, although he acknowledged that the adoption of central banking throughout Europe in previous decades had made the choice of free banking versus central banking one of those “questions that have long been regarded as closed”.

Exemplified by Scotland, Sweden, Canada, Switzerland, and other countries in the periods before their central banks were created, free banking meant a system in which decentralized and competitive commercial banks issue the currency, tied down by a contractual obligation to redeem their notes for gold or silver coin. Its defenders argued that competition would prevent all the banks from colluding to expand in concert, and interbank redemption of excess notes or deposits would restrain any smaller set of banks from over-expanding. International redemption would restrain the system as a whole.

In his later treatise Human Action Mises wrote: Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular—one is tempted to say normal— 86 feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.

The Clash of Economic Ideas. Lawerence H. Wright.

However, if there is only a fixed, or highly constrained, amount of money in the system (as is the case with gold), the elites ability to issue credit will be limited, even with a central bank. An economy that used only gold coins would make this practice of vote buying very difficult, but what if you could simply use paper money?

Paper money, or fiat currency, allows a government to spend more than it has and give more that it could if it used a commodity currency such as gold.

B: Fiat Currency.

The following sets out the recent history (in Part 4, we look at FDR’s behavior) and role of fiat currency for USG:

Forty years ago today, on the morning of Sunday, August 15, 1971, the US president, Richard Nixon, declared the inconvertibility of the dollar into gold. The 20,000 tons of the yellow metal deposited in Fort Knox in 1944 had decreased substantially due to the high military costs of the Vietnam War. The United States — the leading global economic power — could not honor its financial commitments.

As a result, the Bretton Woods system officially ended, and the dollar became a fully fiat currency, backed not by gold but by the promise of the government.

This meant the end of a historical and monetary rule that, from the dawn of civilization, had made money a general medium of exchange and also a store of value. It began a new era of historical abnormality — that of fiat currency and central-bank monopoly, where the ability to provide credit and financing becomes as boundless as the production of legally enforced paper printed by the issuing bank.

With the burial of the last vestiges of the gold — that “barbarous relic” of the past, in Keynes’s words — the annoying limitation on the creation of money and credit was broken. Human needs, as well as political demands mobilized through democratic majorities (and minorities), are infinite.

Why stop spending? Why sacrifice immediate pleasures? The new fiat currency, devoid of intrinsic properties, releases governments from their commitment to convertibility, granting unlimited powers to the rulers of this statist system. With the burial of sound money, Keynes stands as the prophet of a new era of enjoyment and excitement under the new gospel of spending. Fiat money helps to remove the link between production and consumption, contributing to the delusion that the ineradicable scarcity of capital has been abolished

So, the key thing to note is that the new fiat currency allowed USG to assume more power and control – brought about by short-term political calculation – because it was no longer constrained by the scarcity of capital.

Next, we see how destructive fiat currencies are:

Now to understand the effects of fiat money on the culture, we must first look at the relationship between financial systems and the nature of government.

A number of economists have observed that fiat money is a prerequisite for tyrannical government, and the idea that monetary interventionism paves the way for tyrannical government is very old and goes back to Nicolas Oresme in the fourteenth century. It has not been emphasized in the twentieth century, but Ludwig von Mises is among the few who has stressed the importance of this relationship.

Mises said that when it comes to limiting government power, it is essential that the government is financially dependent on the citizens, and this addresses the fundamental political problem of controlling the people in office once they are there. We know that generally, once they are in office, elected politicians turn around and do very different things than they said they would do, with many acting contrary to the common good and interests of their constituents.

So how do we ensure that the people in power can be controlled?

Mises tells us the way we control government is through the budget, and this is necessary in a free society. In a democratic system, at least, we elect certain people to the government, and they often enter office believing that they have a mandate to do certain types of things while in office.

But it’s not sufficient that the people tell government officials what they should be doing. It is equally important, if not more important, to dictate how much money the government will have to achieve those ends. So, it is not enough to tell the government that it will only protect private property. This mandate could be pursued with $100,000 or a billion dollars depending on what the people are willing to pay. So if the budget it not controlled, a limited mandate in itself offers no limitation on taxation or how much money is spent.

Mises believed that those who paid the taxes would then need to specifically limit the size of the government budget. The mission of the government does not by itself deter- mine the amount of resources to be used in the mission.

In response, many will complain that if budgets are tightly controlled, then we’ll never have an increase in government services because people hate taxes. That might be so, but, of course, that is the point.

Now, if we abandon a strict connection between what the citizens pay and what government spends, then we find that we move away from rule by the citizens who are being taxed, and toward greater rule by the elites.

The first way this shift can happen is by the government going into debt. The financial relationships then shift toward the new group that is funding the government, namely those who are extending credit to the government. This then weakens the relationship to the citizens who are being taxed, and it also allows the government to spend more money than would have been possible with taxation alone.

Now of course fiat money allows government to take out loans to an unlimited extent because fiat money by definition can be produced without limitation, without commercial limitation or technological limitation, and can be produced in whatever amount is desired. In this way, the government benefits from the support of a central bank, which is to be expected because the central bank itself depends on the legal framework of monopoly provided by the government.

Through these means of finding government revenues outside of directly taxing the population, we see then that fiat money allows for an extension of government activities unconnected to the willingness of the population to actually support revenue increases. In turn, the government’s rule becomes rule by elites such as central bankers and financiers rather than rule by the taxpayers, and the government’s ability to spend becomes more dependent on the ability to access fiat money than the ability to convince the citizens to accept a higher tax burden.

To paraphrase Alexander Hamilton again, if you control their pay, then you control their principles. A state, and the ruling elite who manage it, are constrained if they do not have a central bank, a fiat currency and the ability to practice FRB.

If not, then they can borrow money from the central bank and use this money build their democratic winning coalition.

Alan Greenspan and the Gold Standard.

John Rubino, offers the following analysis of Alan Greenspan, the former Chairman of the Federal Reserve, who strangely changed his mind on the fundamentals of banking depending on whether or not he worked for the state:

When the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people.

He began public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966:

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

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold [in 1934 under FDR].

….

If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

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

 

Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves,” he said.“[T]here is a widespread view that the 19th Century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortableIt wasn’t the gold standard that failed; it was politics.

We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.

With a central bank and a fiat currency in place, you can then begin to bribe and reward your supporters – the poor and the needy, but also the financial speculators and the entrepreneurial and corporate capitalist class (neat trick). How this is done is via the banking practice of Fractional Reserve Banking.

C: Fractional Reserve Banking.

Now, we come to the last element in the financial racket: Fractional Reserve Banking.

Here is how the Mises Wiki explains the practice:

Fractional Reserve Banking…. is a banking regime in which banks accept base money from customers in return for demand claims on the same amount, without maintaining enough reserves of base money to redeem all of the claims at any one time. A bank maintains a fraction of the money it has promised in reserve, in the hope that it will be able to redeem all claims that occur in practice because only a small number of demands for redemption will be made at any one time. The difference between the money accepted and the money retained in reserve is invested in loans or assets, with the returns being legally pocketed by the bank.”

The alternative to fractional reserve banking is “100% reserve banking” or “full reserve banking” where banks treat deposits in a similar way to allocated gold accounts, where the money cannot be lent out for extended periods of time as the money is held in trust on behalf of the client. In this system, only those funds from depositors who volunatarily kept their money with the bank for an extended period (so called “time depositors” or “term depositors”) would be available for lending to third party borrowers.

….

Aside from the criticisms relating to the dislocating effects of the Ponzi-like dynamics inherent in the practice of fractional-reserve banking, the primary economic criticisms relate to its alleged destabilizing effects through the Austrian Business Cycle Theory.

If the bank’s customers lose confidence in the chances of the bank’s repayment, they can decide, en masse, to cash the deposits in. This loss of confidence, if it spreads from a few to a large number of bank depositors is called a bank run

What consequences follow from a bank run? Firstly, the banks will no longer lend, and so firms and people can no longer be able to borrow. Without borrowing, there cannot be any spending. Without spending by consumers, producers will be left with a glut and so must cut production and lay off workers. If workers are laid off, they will not be able to spend. Thus, a perverse feedback loop is created which drives the economy into recession.

The Ugly Truth about Fractional Truth Banking.

The ugly truth is that FRB is not a feature, but a bug – if you’re a expendable or an unlucky essential; if, however, you are an elite, FRB is not a bug but a feature.

Just as we saw with the first and second anomalies, the worse things get the better they will be – for the centralizing power:

Austrian economists, and Ludwig von Mises in particular, have shown that fractional-reserve banking under commodity money necessarily causes economic problems on a grand scale. This is because banks then engage in circulation-credit expansion — that is, they issue money through lending that is not backed by real savings.

Circulation bank credit is inflationary, and it causes economic disequilibria and overindebtedness of the private sector — in particular on the part of governments. It is also the very cause of the “boom-and-bust” cycle.

The latter, in turn, opens the door for ever-greater doses of government interventionism — regulations, nationalizations, price controls, etc. — that, over time, erodes and even destroys the very principles on which the free-market society rests.

This conclusion doesn’t change when there is fractional-reserve banking under fiat money. Fiat money — or, to be more precise, its production — is already a violation of the free-market principle; and fractional-reserve banking amounts to leveraging the economic consequences of fiat money.

However, it is not exactly correct to claim that FRB is the “very cause of the “boom-and-bust” cycle. The prior causes or background set of necessary conditions are:

1: Imperium in Imperio.

2: Democracy.

3: Central Banks.

4: Fiat Currency.

Finally, as the last extract showed, when the economic crisis happens – and it must necessarily happen – it only allows the elites to centralize even more power and control over the economy and hence over society.

What follows next, is an actual example of elites exploiting a crisis, only it comes from the EU and not USG.

Coda: The European Union: A Textbook Example of Never Letting A Economic Crisis Going to Waste.

Christopher Booker, co-author of the book the Great Deception: A Secret History of the European Union summarizes in the following column that the architects of the “European Project” wanted a crisis or to create a crisis so that they could exploit it in order to create a more powerful trans-national super-state.

Booker:

As long ago as 1957, Jean Monnet – who was the real organising genius behind the gradual building of “Europe” into a single, unified state – suggested that it was only through monetary and economic union that the “political union which is the goal” could be achieved. “There are no premature ideas,” he wrote, “only opportunities for which we must learn to wait.

In the 1980s, though, that other great integrator Jacques Delors (second only to Monnet in his influence on the drive to European political union) decided to ignore the advice of McDougall and others and to launch the single currency without the suggested preconditions. To move straight to fiscal union, he knew, was not on the cards. But if the single currency was put in place first, it would create exactly the kind of strains which had been foreseen – making fiscal union the only way out.

Delors was banking on that same principle that Monnet had relied on ever since the “European project” was launched in 1950: the “beneficial crisis” – one which can be used, as so often in the EU’s history, to justify giving a whole new tranche of powers to Brussels. Those responsible for setting up the euro in the 1990s knew that it would eventually bring about the kind of strains between richer and poorer countries that could justify their moving on to the fiscal and political union that was always the real goal.

Once more, we see the distinction between political Form and political Reality going hand-in-hand with the unsecure, centralising state creating conflict, chaos and crisis in order to gain more power. In this particular example, it is not kings and nobles but the Trans-National (Tranzi) European Union (High or Elite) and the Nation state (Middle or Essential) who are the players.

For USG, however, the process of centralization took longer.

Still, all paths lead to the same destination – a centralized state run by progressive bureaucrats. Nick Szabo has a good overview of the development of USG from a “libertarian” government to a “mega-state” here.

5:  The Welfare State.

There are only two ways for a government to have money to spend: from taxes or from borrowing (we will overlook plunder). Again, if the level of money is fixed by gold or silver, the level of government spending will be fixed as well.

A fiat currency on the other hand, frees you up – considerably.

What to spend the money on, however? You could simply throw the money out the window, or hand them out in little envelopes to people in the post-office. But this is too low-ball.

You want something long term, stable and impossible to eradicate because once it is created and people have a “taste”, they can never give it up – something that the expendables want, something that the expendables need.

The answer is that you create a welfare state. Thus, you can create a permanent class of people dependent on you and will thus vote for you every single time.

Theodore Dalryample, in his 2005 review of F.A Hayek’s Road to Serfdom pointed out that Hayek was at his best when he outlined the inevitable moral corruption and the erosion of personal initiative that would result from socialism.

Dalryample:

The most interesting aspect of Hayek’s book, however, is not his refutation of collectivist ideas—which, necessary as it might have been at that moment, was not by any means original. Rather, it is his observations of the moral and psychological effects of the collectivist ideal that, 60 years later, capture the imagination—mine, at least.

Hayek thought he had observed an important change in the character of the British people, as a result both of their collectivist aspirations and of such collectivist measures as had already been legislated. He noted, for example, a shift in the locus of people’s moral concern. Increasingly, it was the state of society or the world as a whole that engaged their moral passion, not their own conduct. “It is, however, more than doubtful whether a fifty years’ approach towards collectivism has raised our moral standards, or whether the change has not rather been in the opposite direction,” he wrote. “Though we are in the habit of priding ourselves on our more sensitive social conscience, it is by no means clear that this is justified by the practice of our individual conduct.” In fact, “It may even be . . . that the passion for collective action is a way in which we now without compunction collectively indulge in that selfishness which as individuals we had learnt a little to restrain.

The British are sadly changed from Hayek’s description of them. A sense of irony is the first victim of utopian dreams. The British tolerance of eccentricity has also evaporated; uniformity is what they want now, and are prepared informally to impose. They tolerate no deviation in taste or appearance from themselves: and certainly in the lower reaches of society, people who are markedly different, either in appearance because of the vagaries of nature, or in behavior because of an unusual taste they may have, especially for cultivation, meet with merciless ridicule, bullying, and even physical attack. It is as if people believed that uniformity of appearance, taste, and behavior were a justification of their own lives, and any deviation an implied reproach or even a declaration of hostility. A young patient of mine, who disliked the noise, the vulgarity, and the undertone of violence of the nightclubs where her classmates spent their Friday and Saturday nights, was derided and mocked into conformity: it was too hard to hold out.

 

 The pressure to conform to the canons of popular taste—or rather lack of taste—has never been stronger. Those without interest in soccer hardly dare mention it in public, for fear of being considered enemies of the people. A dispiriting uniformity of character, deeply shallow, has settled over a land once richer in eccentrics than any other. No more Edward Lears for us: we prefer notoriety to oddity now.

 

 The British are no longer sturdily independent as individuals, either, and now feel no shame or even unease, as not long ago they would have felt, at accepting government handouts. Indeed, 40 percent of them now receive such handouts: for example, the parents of every child are entitled not merely to a tax reduction but to an actual payment in cash, no matter the state of their finances. As for those who, though able-bodied and perfectly able to work, are completely dependent on the state for their income, they unashamedly call the day when their welfare checks arrive “payday.” Between work and parasitism they see no difference. “I’m getting paid today,” they say, having not only accepted but thoroughly internalized the doctrine propounded in the Beveridge Report, that it is the duty of the state to assure everyone of a decent minimum standard of life regardless of his conduct. The fact of having drawn 16 breaths a minute, 24 hours a day, is sufficient to entitle each of them to his minimum; and oddly enough, Hayek saw no danger in this and even endorsed the idea. He did not see that to guarantee a decent minimum standard of life would demoralize not only those who accepted it, but those who worked in the more menial occupations, and whose wages would almost inevitably give them a standard of living scarcely higher than that of the decent minimum provided merely for drawing breath.

 

The state action that was supposed to lead to the elimination of Beveridge’s five giants of Want, Disease, Ignorance, Squalor, and Idleness has left many people in contemporary Britain with very little of importance to decide for themselves, even in their own private spheres. They are educated by the state (at least nominally), as are their children in turn; the state provides for them in old age and has made saving unnecessary or, in some cases, actually uneconomic; they are treated and cured by the state when they are ill; they are housed by the state, if they cannot otherwise afford decent housing. Their choices concern only sex and shopping.

No wonder that the British have changed in character, their sturdy independence replaced with passivity, querulousness, or even, at the lower reaches of society, a sullen resentment that not enough has been or is being done for them. For those at the bottom, such money as they receive is, in effect, pocket money, like the money children get from their parents, reserved for the satisfaction of whims. As a result, they are infantilized. If they behave irresponsibly—for example, by abandoning their own children wherever they father them—it is because both the rewards for behaving responsibly and the penalties for behaving irresponsibly have vanished. Such people come to live in a limbo, in which there is nothing much to hope or strive for and nothing much to fear or lose.

Private property and consumerism coexist with collectivism, and freedom for many people now means little more than choice among goods. The free market, as Hayek did not foresee, has flourished alongside the collectivism that was—and, after years of propaganda, still is—justified by the need to eliminate the five giants. For most of the British population today, the notion that people could solve many of the problems of society without governmental Gleichschaltung, the Nazi term for overall coordination, is completely alien.

 Of course, the majority of Britons are still not direct dependents of the state. “Only” about a third of them are: the 25 percent of the working population who are public employees (the government has increased them by nearly 1 million since 1997, no doubt in order to boost its election chances); and the 8 percent of the adult population either unemployed or registered as disabled, and thus utterly dependent on government handouts. But the state looms large in all our lives, not only in its intrusions, but in our thoughts: for so thoroughly have we drunk at the wells of collectivism that we see the state always as the solution to any problem, never as an obstacle to be overcome.

One can gauge how completely collectivism has entered our soul—so that we are now a people of the government, for the government, by the government—by a strange but characteristic British locution. When, on the rare occasions that our Chancellor of the Exchequer reduces a tax, he is said to have “given money away.” In other words, all money is his, and whatever we have in our pockets is what he, by grace and favor, has allowed us.

 Our Father, which art in Downing Street. . . .

 Roads to Serfdom. Theodore Dalryample.

6: Immigration.

Democracies, however, are very unstable – economically and politically. Moreover, the vast majority of voters vote either for their self-interest or according to their tribal self-identification. These tribal patterns are largely stable and predictable (pattern of voting as a tribe) but who and what they vote for is not.

Ruling elites, by contrast, are always minorities. The political left consists of a number of overlapping coalitions with only a minority of voters who are absolutely dedicated to left-wing ideals.

Given this demographic weakness, a right-wing democratic reaction, or a full blown socialist monstrosity is always a possibility.

The solution to this problem is to “elect” a new people, of course. This solution, while only theoretical in the past, is now a practical reality thanks to modern transport.

Thus, the left import new voters and provide them with all the typical benefits that the left’s welfare state brings.

Businesses, on the other hand, gain short-term economic advantages because of access to cheap labour, but the left earn long-term political advantages because they are growing their voting base now and for forever.

Naturally, the new immigrants stir up resentment among some of the populace, but this causes the immigrants to stick closer to their new patrons. Furthermore, any violence or what is now called “hate speech” allows the state to regulate even more of the economy via anti-discrimination laws or to demand diversity quotas for minorities and women. This stirs up even more resentment and “hate speech” from essentials or expendables. This leads to more regulation – yet another perverse feedback loop at work.

As a rule, always assume that the formal reason for something is the complete opposite of its real meaning. To begin with, see the following table, put together by author, economist and dissident academic, Fabien Tassano, on the public v hidden or formal v real motives of the Ruling Elites when it comes to “regulating” the economy.

In a different post Tassano writes:

Why have we tolerated so much intervention in our lives over the past twenty years? To the point where civil liberties are arguably the lowest of any peacetime period for at least a century? Because the changes forced on us have supposedly been driven by ‘good intentions’.

Double jeopardy is abolished, phone calls and emails can be tapped by local government staff, babies are removed from mothers by social workers within hours of delivery – but it is all done “for the good of others”. The sum of human misery produced by all this poking, prying and bulldozering must be frightful.

Good intentions has been the excuse that has fuelled the inexorable rise in statism. Even under Thatcher, the rise was merely slowed not reversed.

Libertarians seem to be no different in being taken in by this rationalisation. Recently a columnist on the Sunday Times bemoaned the degradation of the British university system, but then echoed the usual mantra, “no doubt all this was done with high-minded intentions”. Is it automatically “high-minded” to aim for an outcome in which more of us receive a shoddy product, compared to fewer of us receiving a decent one? Plenty of people behave as if it is, so perhaps the columnist in question thinks so too.

That is why the revelation, publicised earlier this year, that the Labour government’s drive to have mass immigration was motivated at least in part by the desire to “rub the Right’s nose in diversity and render their arguments out of date” was so interesting. (For “Right”, it is probably necessary to read “bourgeoisie”.) It is the first time that I can recall seeing an admission that the real agenda behind a do-gooding cover story was about doing down the wrong kind of people. Unless you count former BBC head Greg Dyke’s “hideously white” slogan.

The standard conservative answer is that bad consequences are a result of ignorance but good intentions. A reactionary, on the contrary, sees them as intentional. The revelation regarding New Labour’s immigration plan that Tassano refers to can be read here:

Official figures to be published on Thursday will confirm that foreign immigration under Labour added more than three million to our population.

At the same time nearly one million British citizens voted with their feet, some saying that they were leaving because England was no longer a country that they recognised.

How could all this have happened in the teeth of public opposition? Even the Labour government’s own survey last February showed that 77 per cent of the public wanted immigration reduced, including 54 per cent of the ethnic communities, while 50 per cent of the public wanted it reduced ‘by a lot’.

The strongest evidence for conspiracy comes from one of Labour’s own. Andrew Neather, a previously unheard-of speechwriter for Blair, Straw and Blunkett, popped up with an article in the Evening Standard in October 2009 which gave the game away.

Immigration, he wrote, ‘didn’t just happen; the  deliberate policy of Ministers from late 2000…was to open up the UK to mass immigration’.

He was at the heart of policy in September 2001, drafting the landmark speech by the then Immigration Minister Barbara Roche, and he reported ‘coming away from some discussions with the clear sense that the policy was intended – even if this wasn’t its main purpose – to rub the Right’s nose in diversity and render their arguments out of date’.

That seemed, even to him, a manoeuvre too far.

The result is now plain for all to see. Even Blair’s favourite think tank, the Institute for Public Policy Research (IPPR), commented recently: ‘It is no exaggeration to say that immigration under New Labour has changed the face of the country.’

It is not hard to see why Labour’s own apparatchiks supported the policy. Provided that the white working class didn’t cotton on, there were votes in it.

Research into voting patterns conducted for the Electoral Commission after the 2005 general election found that 80 per cent of Caribbean and African voters had voted Labour, while only about 3 per cent had voted Conservative and roughly 8 per cent for the Liberal Democrats.

The Asian vote was split about 50 per cent for Labour, 10 per cent Conservatives  and 15 per cent Liberal Democrats.

There were also economic factors. A collection of essays published recently by the IPPR underlined the role of Gordon Brown’s Treasury in this affair. A high level of immigration made economic growth look better and helped keep wages and, therefore, inflation down.

Others, too, saw economic benefits for themselves. The employers’ organisations kept their heads down, but there is little doubt that they were privately encouraging a supply of cheap labour which was good for profits, whatever its impact on society.

Then there were those members of the middle classes who found it convenient to have cheap exotic restaurants and even cheaper domestic help, but were blind to the wider consequences of this population inflow which were, of course, felt in the poorer neighbourhoods. (Recall Hazlitt’s rule.)

Sure, this is England, but England is simply a vassal state of USG and the exact same things for the exact same reasons occur in America.

7: Foreign Free Trade.

When it comes to foreign free trade, similar incentives for the Ruling Elite and the centralizing state are at work.

Firstly, corporations will chase the bottom line and if that means moving production abroad, they will do so. USG’s Ruling Elites could stop this via tax and tariffs. However, corporations can simply bribe politicians via the use of campaign donations or arranging sinecures for politicians when they leave office in return for getting their way. Also, foreign corporations and foreign states can bribe individual politicians and political parties to obtain favorable trade policies. (See this for one of many potential examples.)

Free trade is a good deal for politicians and it is a good deal for the corporations, but it is not necessarily a good deal for either the American worker or for America.

The individual politicians, however, do not care. They do not care because the workers are either not in their district or don’t vote for them anyway. If they do, then losing an election does not matter so much because they have a well-paying job already waiting in either the public or private sector.

For political parties, similar reasoning applies. Short term gain in terms of donations and electoral victories override everything else.

The situation is more perverse, however. Even if de-industrialization eventually causes massive unemployment – even for the people who normally vote for you, this is yet one more opportunity for the political parties to use the state to acquire even more power.

(If you were a politician, like Bill Clinton, who started the process of allowing factories to leave America, you don’t have to worry about this because you will be long gone from office when the consequences begin to bite.)

The worse things get, the better they will be. Recessions, depressions and unemployment are simply opportunities for the state to grab more power under the guise of acting for the public good. Finally, the left can always blame the corporations for the problem, as they can with immigration. (Indeed, as we were writing this, the Atlantic published this.)

The more unemployment there is, the more you must tax, print, borrow and spend on welfare or some other government program.

Thus, you create new dependents who must vote for you.

Again, as we covered in the rules, keeping power largely involves rewarding your supporters with money, perks and prestige.

All of the preceding is simply the result of an unsecure state and an unsecure Ruling Elite having to create winning coalitions (and thus having the means to create them i.e money) to gain and maintain power.

Free Trade might make sense in most cases, but not all.  This is because states, especially states like USG, cannot completely follow the logic of commerce; it must also consider and sometimes follow the logic of conflict.

In other words, states must sometimes practice geo-economics and not economics.

Geo-economics.

The following is from Edward Luttwak:

As this is how things are, it follows that—even if we leave aside the persistence of armed confrontations in unfortunate parts of the world and wholly disregard what remains of the Cold War—World Politics is still not about to give way to World Business, i.e. the free interaction of commerce governed only by its own nonterritorial logic.

Instead, what is going to happen—and what we are already witnessing—is a much less complete transformation of state action represented by the emergence of “Geoeconomics.”

This neologism is the best term I can think of to describe the admixture of the logic of conflict with the methods of commerce—or, as Clausewitz would have written, the logic of war in the grammar of commerce.

An era of intense “geoeconomic” activity might thus become an era of unprecedented risk for important private companies in important sectors.

If they invest Y million of their funds to develop X technology, they may find themselves irremediably overtaken by the X project of country Z, funded by the taxpayer in the amount of 2Y million, or 20Y million for that matter. Or private companies may find themselves competing with foreign undercutters determined to drive them out of business, and amply funded for that purpose by their state authorities. As public funding for such purposes is likely to be concealed, a victim company may enter a market quite unaware of its fatal disadvantage.

Geopolitics to Geo-Economics: Logic of Conflict, Grammar of CommerceThe National Interest. Edward Luttwak. 1990.

Years later, Luttwak, who wrote following forward for Ian Fletcher’s Free Trade Does Not Work claimed that “manufacturing is essential”.

Luttwak:

Until the economic debacle of 2008, the power and moral authority of the United States were sustained not only by its political values, cultural magnetism, and military strength, but also by its wealth. From its investment capacity as home of the world’s most sophisticated financial system to its purchasing power as the world’s largest importer, the U.S. had an undoubted primacy. When the latter finally ruined the former—for huge trade deficits tolerated for decades must decapitalize as well as deindustrialize—American diplomacy suddenly had to function without much of its accustomed leverage.

 Some Americans have always been displeased by the magnitude of American power, probably because they project onto the nation at large their own moral discomfort with its exercise. For them, as for assorted dictators, Islamic fanatics, and the few serious communists still breathing, the present weakening of the United States is welcome. But for others, including this writer, this weakening provokes an unwelcome question: how much power can the United States retain without this leverage? And what kind of Hobbesian world order will we face in its absence?

 This is a fact of which both America’s friends and enemies are well aware, and upon which America’s commercial rivals base their own neomercantilist trade policies. The result has been a prolonged failure to safeguard the American economy, especially manufacturing, from foreign predation.

 The reality is that manufacturing is inescapable. Few Americans can work in elite fields like corporate management or investment banking, no matter how large these loom in the consciousness of the governing class. Most service employment, such as restaurant work, pays low wages. Agriculture is a miniscule employer in all developed nations. And for all the glories of high tech, it remains a modest employer: during the auto industry wreck of 2009, Americans discovered that Ford, General Motors and Chrysler, despite of decades of decline, still employed more people than all the famous names of Silicon Valley—from Adobe to Yahoo—combined. As a result, the incomes and living standards of nonpoor Americans must largely rise and fall with manufacturing employment.

8: Form V Reality and Information Corruption.

The foregoing is the political and economic reality in modern Western democracies, but it cannot be the form.

Thus, there must be a formal justification for the many masks that mask the real meaning of how the economy really works in USG. The Ruling Elites need a political formula. They need this political formula or product to look professional and sound persuasive. Thus, a class of middle-men arise to meet this demand. Depending on what element of the political formula is required, different middle-men will be used. When it comes to economics, of course, the middle-men here are called economists.

An unsecure power leads to a regime based on information corruption because Power will select those who are willing to shill for it.

The shilling may be small and relatively trivial to begin with, but this creates a exponential process because an arms race between shills occurs. Power rewards loyalty first and competence second and those economists who come up best and who are lucky will be rewarded with money and influence.

Those economists, however, such as the Austrians, who have no truck with shilling and are willingly to call out the nakedness of the emperor, will be systematically run off the board.

When you cannot refute an opponent with facts and logic, you must defeat them by denying them any credibility and access to power and money in whatever way you can. So, you must prevent them from teaching in the top universities, having access to the mainstream media and working for the government.

In short, it is a zero sum game and the logic of academic politics, like with all other kinds of politics, leads to monopoly.

9: Design Principles for Quacks and Synthetic A Priori Economics.

If you are a quack with a quack system, there are a number of design principles to follow. Firstly, barriers to entry concerning the quack-practice should be costly. Secondly, once in, it should be hard or impossible to leave. Thirdly, the system should be hard or virtually impossible for any outsider to understand and evaluate the content. Fourthly, punish defectors and defend allies.

(Scientology, for example, fits this design to a T. )

In short, look like, sound like and act like real scientists, scholars or advisors.

How can well tell the difference between two people who claim to be economists but who both accuse each other of being quacks?

Suppose both of them have completely different explanations for the last part’s economic anomalies, how could we decide between them?

In our final section, we will examine and explore Austrian economics and its Praxeological methodology, in contrast to qualitative, econometric and neoclassical macroeconomics.

The Grand Master summaries the difference between Austrian economics and the rest in the following passage:

Let’s briefly establish the distinction between these fields. It should be obvious that whatever their respective merits, they are different things and should not be conflated under one name. To indulge in a little Procrustean generalization:

The method of quantitative economics – including both econometrics and neoclassical macroeconomics – is to construct mathematical models of economic systems, ie, systems of independent, utility-maximizing agents. The purpose of quantitative economics is to predict the behavior of these systems, so that central planners can manage them intelligently.

The method of literary economics is to reason clearly and deductively in English about the behavior of economic agents. The purpose of literary economics is to construct and convey an intuitive understanding of causal relationships in economic systems.

And by the standards of quantitative economics, which considers itself a predictive, falsifiable, inductive science, literary economics is simply a nothing. At best, a popularization. It makes no testable predictions. Why anyone would study it in the 21st century is a mystery.

The Grand Master’s conclusion on the failure of quantitative economics is the following:

It is not necessary for us to examine the empirical results of models which purport to predict future events from a mixture of price measurements and subjective quality assessments. We know deductively that no such model can be accurate. We cannot be surprised to learn inductively that they do not, in fact, appear to work. Deduction trumps induction, though it’s always reassuring when the two agree.

Here, however, we will provide a different, foundational and philosophical explanation why mainstream economics is a pseudo-science.

Our argument comes to the same conclusion, of course, but via a different route.

The Simple Reason Why Economics Cannot Be a Predictive Science.

Quantitative, predicative economics cannot work cannot work in principle because economics cannot be a predictive science.

One cannot, in principle, use data, however large or accurate, from the past about prices, spending, saving, productivity etc., etc., to predict and then plan for the future economic behavior of participants in the economy.

You cannot do this, in principle, because inductive arguments cannot guarantee the truth of an inductive conclusion.

More specifically, you cannot use macro-economic data to predict the behavior of an entire economic system because such information necessary to do this is impossible to have in principle. 

It is impossible, because you cannot have the necessary information regarding people’s desires, preferences and calculations in a market.

Market participant’s choices reveal themselves in buying and selling – but this is after the fact.

Their contingent and always subject to change choices depend upon subjective judgments concerning both objective facts, subjective values, and, in principle, unpredictable external events (wars, comets, pandemics, technological innovation) that models will never, in principle, account for.

Furthermore, participants in the market respond to new information. One problem is that if a central planner could predict, based on their models, what will happen, then the market participants will factor in this knowledge when they calculate and make their decisions.

Thus, predictive economics suffers, intrinsically, from a reflectivity problem.

The Philosophical Foundations of Economic Methodology.

Secondly, if the Austrians are right, then economics is not an empirical science but a pure science. That is, its epistemology is rationalist and the principles of economics are called synthetic a priori truths.

Until recently, we thought that the concept of a synthetic a priori truth was a complete impossibility. It was not until we encountered Austrian economics and turned our attentions to its epistemological foundations that we encountered arguments that have forced us to re-think our epistemology from the ground up.

In what follows, we draw upon the master of the Austrian method: Hans Hermann Hoppe and his book Economic Science and the Austrian Method.

Hans Hermann Hoppe explains Praxeology (Austrian epistemology) well in the book’s introduction.

What follows is excerpts, annotated as usual, to draw attention to the key points.

Economics and the Austrian Method. Hoppe:

It is well-known that Austrians disagree strongly with other schools of economic thought, such as the Keynesians, the Monetarists, the Public Choicers, Historicists, Institutionalists, and Marxists.

 Disagreement is most conspicuous, of course, when it comes to economic policy and economic policy proposals. At times there also exists an alliance between Austrians and, in particular, Chicagoites and Public Choicers. Ludwig von Mises, Murray N. Rothbard, Milton Friedman, and James Buchanan, to cite a few names, are often united in their efforts to defend the free market economy against its “liberal” and socialist detractors. Nonetheless, as important as such occasional agreements may be for tactical or strategic reasons, they can only be superficial, for they cover up some truly fundamental differences between the Austrian school, as represented by Mises and Rothbard, and all the rest.

The ultimate difference from which all disagreements at the levels of economic theory and economic policy stem-disagreements, for instance, as regards the merit of the gold standard vs. fiat money, free-banking vs. central banking, the welfare implications of markets vs. state-action, capitalism vs. socialism, the theory of interest and the business cycle, etc.-concerns the answer to the very first question that any economist must raise:

What is the subject matter of economics, and what kind of propositions are economic theorems? Mises’s answer is that economics is the science of human action.

In itself, this may not sound very controversial. But then Mises says of the science of economics: Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts.

They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.

In order to emphasize the status of economics as a pure science, a science that has more in common with a discipline like applied logic than, for instance, with the empirical natural sciences, Mises proposes the term “praxeology” (the logic of action) for the branch of knowledge exemplified by economics. It is this assessment of economics as an a priori science, a science whose propositions can be given a rigorous logical justification, which distinguishes Austrians, or more precisely Misesians, from all other current economic schools.

All the others conceive of economics as an empirical science, as a science like physics, which develops hypotheses that require continual empirical testing. And they all regard as dogmatic and unscientific.

Mises’s view that economic theorems-like the law of marginal utility or the law of returns, or the time-preference theory of interest and the Austrian business cycle theory-can be given definite proof, such that it can be shown to be plainly contradictory to deny their validity.

(In short, Austrian economics is rationalist and all other economics is empiricist. Thus, not only is the content (propositions, explanations etc) different, they are derived via a completely different method. See the following, from Stanford, for the history of this debate between rationalism and empiricism in its broader, philosophical context.)

The following passage makes clear that Austrian economics begins with First or Ultimate cause, all other causes are therefore contingent and proximate:

And John E. Cairnes remarks that while “mankind has no direct knowledge of ultimate physical principles” … “the economist starts with a knowledge of ultimate causes.” … “The economist may thus be considered at the outset of his researches as already in possession of those ultimate principles governing the phenomena which form the subject of his study; the discovery of which in the case of physical investigation constitutes for the inquirer his most arduous task.” “Conjecture [in economics] would manifestly be out of place, inasmuch as we possess in our consciousness and in the testimony of our senses . . . direct and easy proof of that which we desire to know: In Political Economic accordingly hypothesis is never used as a help toward the discovery of ultimate causes and laws.”

The following makes clear the difference in methodology:

Or as a final example: Whenever the quantity of money is increased while the demand for money to be held as cash reserve on hand is unchanged, the purchasing power of money will fall.

Considering such propositions, is the validation process involved in establishing them as true or false of the same type as that involved in establishing a proposition in the natural sciences? Are these propositions hypothetical in the same sense as a proposition regarding the effects of mixing two types of natural materials? Do we have to test these economic propositions continuously against observations·? And does it require a never-ending trial and error process in order to find out the range of application for these propositions and to gradually improve our knowledge, such as we have seen to be the case in the natural sciences?

It seems quite evident-except to most economists for the last forty years-that the answer to these questions is a clear and unambiguous No.

That A and B must expect to profit and have reverse preference orders follows from our understanding of what an exchange is. And the same is the case concerning the consequences of a coerced exchange. It is inconceivable that things could ever be different: It was so a million years ago and it will be so a million years hence. And the range of application for these propositions too is clear once and for all: They are true whenever something is a voluntary exchange or a coerced exchange, and that is all there is to it.

So, Austrian economics are completely different in how economic knowledge is produced.

Next, we see Hoppe explain what a synthetic a priori truth is and why economics is a priori and synthetic.

Hoppe:

Mises provides the solution to this challenge. It is true, as Kant says, that true synthetic a priori propositions are grounded in self-evident axioms and that these axioms have to be understood by reflection upon ourselves rather than being in any meaningful sense “observable.’) Yet we have to go one step further. We must recognize that such necessary truths are not simply categories of our mind, but that our mind is one of acting persons. Our mental categories have to be understood as ultimately grounded in categories of action. And as soon as this is recognized, all idealistic suggestions immediately disappear. Instead, an epistemology claiming the existence of true synthetic a priori propositions becomes a realistic epistemology) Since it is understood as ultimately grounded in categories of action, the gulf between the mental and the real, outside, physical world is bridged.

Mises not only recognizes that epistemology indirectly rests on our reflective knowledge of action and can thereby claim to state something a priori true about reality but that economics does so too and does so in a much more direct way.

Economic propositions flow directly from our reflectively gained knowledge of action; and the status of these propositions as a priori true statements about something real is derived from our understanding of what Mises terms “the axiom of action.” This axiom, the proposition that humans act, fulfills the requirements precisely for a true synthetic a priori proposition. It cannot be denied that this proposition is true, since the denial would have to be categorized as an action-and so the truth of the statement literally cannot be undone. And the axiom is also not derived from observation-there are only bodily movements to be observed but no such things as actions-but stems instead from reflective understanding.

All of these categories-values, ends, means, choice, preference, cost, profit and loss, as well as time and causality-are implied in the axiom of action. Yet, that one is able to interpret observations in such categories requires that one already knows what it means to act. No one who is not an actor could ever understand them. They are not “given,” ready to be observed, but observational experience is cast in these terms as it is construed by an actor. Nor is their reflective reconstruction a simple, psychologically self-evident intellectual task, as proved by a long line of abortive attempts along the way to the just-outlined insights into the nature of action.

You cannot refute Austrian economics on empirical grounds:

And the very possession of such knowledge then can never be disputed, and the validity of these concepts can never be falsified by any contingent experience, for disputing or falsifying anything would already have presupposed their very existence. As a matter of fact, a situation in which these categories of action would cease to have a real existence could itself never be observed, for making an observation, too, is an action.

The following is critical:

Mises’s great insight was that economic reasoning has its foundation in just this understanding of action; and that the status of economics as a sort of applied logic derives from the status of the action-axiom as an a priori-true synthetic proposition.

The laws of exchange, the law of diminishing marginal utility the Ricardian law of association, the law of price controls, and the quantity theory of money-all the examples of economic propositions which I have mentioned-can be logically derived from this axiom.

And this is why it strikes one as ridiculous to think of such propositions as being of the same epistemological type as those of the natural sciences.

To think that they are, and accordingly to require testing for their validation, is like supposing that we had to engage in some fact-finding process without knowing the possible outcome in order to establish the fact that one is indeed an actor.

In a word: It is absurd.

The following captures the three essential pillars of Austrian methodology:

Praxeology says that all economic propositions which claim to be true must be shown to be deducible by means of formal logic from the incontestably true material knowledge regarding the meaning of action.

Specifically all economic reasoning consists of the following: (1) an understanding of the categories of action and the meaning of a change occurring in such things as values, preferences, knowledge, means, costs, etc;

(2) a description of a world in which the categories of action assume concrete meaning, where definite people are identified as actors with definite objects specified as their means of action, with some definite goals identified as values and definite things specified as costs.

Such description could be one of a Robinson Crusoe world, or a world with more than one actor in which interpersonal relationships are possible; of a world of barter exchange or of money and exchanges that make use of money as a common medium of exchange; of a world of only land, labor, and time as factors of production, or a world with capital products; of a world with perfectly divisible or indivisible, specific or unspecific factors of production; or of a world with diverse social institutions, treating diverse actions as aggression and threatening them with physical punishment, etc; and

(3) a logical deduction of the consequences which result from the performance of some specified action within this world, or of the consequences which result for a specific actor if this situation is changed in a specified way.

To simplify all of this down to clear and simple English, economic propositions (particular conclusions) are true if the premises from which they are derived are true and the premises are true because they are self-evidently true.

The scheme is as follows:

1: A particular, contingent fact or set of facts (such as prices, costs of production etc). (This is the minor premise.)

2: A principle from the categories of action (Such as barter or the effects from a violent intervention in the market). (This is the major premise.)

3: A necessarily true conclusion derived from the first two premises.

Science or Pseudo-science?

Thus, if the Austrians are correct, then mainstream economics is not a science but a pseudo-science.

Fabian Tassano, a trained economist, and author of this valuable book comes to this very conclusion and claims that mainstream economist’s penchant for formal, mathematical models is so to hide the emptiness of their claims and to disguise the vacuity of their discipline.

Tassano:

So you might think that mathematicising the problem is not going to prove particularly illuminating. However, this is to misunderstand the role of modern academia, which is not to illuminate but to provide an ersatz product that will conceal the absence of genuinely progressive intellectual activity. This object is achieved by demonstrating technical expertise in a way which is difficult to criticise by outsiders and which also provides, where possible, incidental reinforcement for the prevailing ideology.

See here for the mathematical model. Here is Tassano’s conclusion:

Now this looks very clever. And anyone except another trained economist would find it difficult to recognise that the mathematics does not really add much. This model, which is fairly typical, suffers from several flaws:


  1. a) It does not really contribute anything to understanding the problem.
    b) The conclusions it yields cannot go beyond what could be ascertained by non-mathematical logic.
    c) It conceals its most crucial assumptions,, e.g.
    that individuals are homogeneous,
    – that a meaningful ‘welfare function’ can be constructed as a proxy for an aggregate ‘good of society’,
    – the presupposition of a ‘benevolent dictator’,
    – and the idea that the choices of an exogenous welfare-maximiser shed light on what is desirable in practice for a real economy.

 

10: Conclusion.

If you begin with a regime that has Imperium in Imperio, you end with a regime that is blinded by information corruption.

The problems with information corruption are the following:

1: The state and the Ruling Elite are not always aware of the crisis; indeed, it is only after the fact that they recognize that there is one.

2: If they recognise a crisis, they do not understand what caused it.

3: If they both recognize a crisis and understand what caused it, individual elites and the Technocratic state itself is powerless to do anything about it; indeed, not only can they not do anything but that they MUST not do anything to resolve it.

4: If, in fact, they understand points 1-3, then, at least some of the Ruling Elites will use this knowledge to enhance their own position. (The worse things get, the better they will be.)

That, in short, is the error theory of economics.

Unsecure power corrupts, absolute unsecure power corrupts absolutely.

Democracy requires lies and when you start telling lies, you must keep telling lies. Again, like with creating an economic bubble, you create a cognitive bubble of false information and eventually, like with economic bubbles, the bubble of lies will burst.

In the next part, we will look at the creation and inflation of the Narrative bubble and address the concept of information corruption directly.

 

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13 thoughts on “STEEL-cameralist Manifesto Part 3e: The Error Theory of Economics.

  1. Another great one worthy of the Master. But I have a bone to pick, an issue that I have with the great Mencius himself. Contemporary macroeconomics is most certainly pseudoscience. Economists cannot predict anything, and they provide no real explanation for why things happen. Krugman has a Nobel Prize and if you read him looking for insights, all you will find is POLITICS. It is not just him; it is all of them.

    My problem is that Austrian economics does not really have a better track record, especially focusing on the period since the Financial Crisis. We are going on 10 years now and we have a good sense for what the post-Crisis economic environment is like. Austrians expected that the money printing and government deficit spending would cause inflation, perhaps catastrophic, Weimar-esque inflation. Inflation is at the heart of one of the passages you quote from the Randian Greenspan: “Deficit spending is simply a scheme for the confiscation of wealth.” What is the mechanism of this confiscation? Is it men with guns? No, it is inflation; devaluing dollars as a store of value. Well, here in 2017 (as opposed to 1977), there is no inflation. In fact, the essential nature of the post-Crisis economy is crushing deflation for almost every product, goods and services, except real estate and financial assets. This is not what was expected given the amount of money printing done by central banks.

    The Austrian idea that the business cycle is driven by credit creation is actually pretty common in business and finance, even among people who believe in fiat money and fractional reserve banking (read anything by Ray Dalio). But I would hazard there is no reason to believe this explanation any more than the Keynesian collapse of “aggregate demand.” In fact, I do not think we have any idea what causes the business cycle.

    This may be viewed as only a practical objection. Yours is the first presentation, via Hoppe, that emphasizes that Austrian economics proper cannot and does not make predictions. Many people who call themselves Austrians do in fact make predictions. You can see why “policy makers” would want a tool to predict the future. They don’t appear to have one. But purely from an academic perspective, given the nature of science in the contemporary university, the academy will never accept an economic science based on synthetic aprioris. You might as well as them to kiss the Pope’s ring.

    Bottom line, NRx should be agnostic in debates among the various economic schools. A pox on all their houses . . .

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    1. “Bottom line, NRx should be agnostic in debates among the various economic schools. A pox on all their houses . . .”

      We discovered the Austrian school only a year ago thanks to Mencius. Given our background in philosophy, we turned our attention to the epistemological underpinnings. There we were shocked to find Rationalism.

      So, we reasoned along with the chain and it seemed sound.

      If the Austrians are right, then it is no mystery why their prescriptions are not and will never be accepted by a state, because they really don’t believe in any.

      The Master, himself, was a bizarre (though consistent) mixture of Mises and later Frederich List.

      Thus, a system that combined the strengths of both could be put to work.

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    2. “This may be viewed as only a practical objection. Yours is the first presentation, via Hoppe, that emphasizes that Austrian economics proper cannot and does not make predictions. Many people who call themselves Austrians do in fact make predictions. You can see why “policy makers” would want a tool to predict the future.”

      Yes. When we brought this up with the Undiscovered Jew it seemed like his head exploded. We puzzled over the concept of a synthetic a priori for years and were shocked to find that seemed to have existed because we had concluded that such a thing was simply not possible.

      So yes, the Austrian line would be that they do not make predictions. However, this could be qualified to claim that they do not make predictions like other economists.

      What they can tell you is IF you do X then Y will happen (at some point).

      No empirical evidence can be used against them.

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    3. “The Austrian idea that the business cycle is driven by credit creation is actually pretty common in business and finance, even among people who believe in fiat money and fractional reserve banking (read anything by Ray Dalio). But I would hazard there is no reason to believe this explanation any more than the Keynesian collapse of “aggregate demand.” In fact, I do not think we have any idea what causes the business cycle.”

      Interesting that you bring up Dalio; we have been reading parts of two of his books. He seems a fascinating man. His little YouTube video was an excellent account of the economy.

      Watching it, I was thinking about ATBC and to me it seemed to be consistent with that theory.

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    4. “This is not what was expected given the amount of money printing done by central banks.”

      Austrians, from what I understand, would discount this as irrelevant. The laws of economics can only be delayed but they can never be denied.

      An empiricist would hate this, but if they are correct, then this complaint is like complaining about pure mathematics not making any testable predictions.

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