When the Ignorant Opine: the Case of EJ Dionne

Writing in Forbes, George Leef has analyzed EJ Dionne's Washington Post article about Austrian economics.  I logged on to Dionne's article out of morbid curiosity.   I was surprised that many people still read the Washington Post.  Given how wrong the pro-bailout media has been on so many subjects, from Viet Nam to the tech bubble of '99 to Obama's healthcare reform (no, it didn't reduce costs), the readers must be true believers who, like Dionne, voice opinions about authors they've never read and maintain religious faith in government. No matter how badly or how often the government fails, Dionne and The Washington Post will stand ready to generate lies to defend it.

Anyone who questions the "state activist liberal" religion is subject to angered attack. Hence, Dionne concocts a series of lies: Ron Paul's ideas have been adopted throughout the Republican Party,  those ideas are associated with the Republican Congress, and Austrian economics is influential within the Republican Party.  Dionne seems to be unaware that Paul lost the primary election to a Progressive, Mitt Romney. I very much doubt that more than five or six Republican congressmen can explain or have even read about Austrian ideas.  Since Dionne can't explain them and hasn't read about them either, his explanations fit the crime. An idiot Democrat attacking idiot Republicans about a subject he doesn't understand. How characteristic of Obama's dumbed-down America.

Dionne accuses the Austrians of not understanding history, but in doing so he reveals a lack of understanding of, for example, the reconstruction of Europe after World War II, which was led by Chancellor Konrad Adenauer, who repeatedly said that he was influenced by von Mises and the Austrians and so adopted a market-based economy for Germany rather than the socialistic one that Hitler and his National Socialist (Nazi) Party had created. (See Guenter Reimann's firsthand account of the socialistic Nazi economy, much like the American economy of the Obama years, in his book The Vampire Economy.)

The reason for Dionne's and his fellow "state activist liberals'" religious fanaticism about big government goes back to Richard T. Ely, the economist who brought the ideas of the German historical school, which contested the Austrian viewpoint of von Mises's predecessor, Carl Menger, to America.  Followers of "state activist liberalism" like Dionne are, from an historical perspective, heirs to Ely and Ely's predecessors in Germany. American liberals are mouthpieces of the German historical school economists, whose ideas were transmitted here via Ely, John R. Commons, and the Hegelian John Dewey.

The last proponent of the German historical school, Werner Sombart, became increasingly nationalistic in his socialism; his last important work was about "German socialism."  He collaborated with the Nazis and signed the letter than evicted Ludwig von Mises, a Jew, from the German Sociological Association.  Thus, there is a direct link between American state-activist liberalism and Nazism; the link affected von Mises personally.  It is not surprising that von Mises, a victim of Nazism who was forced to flee Europe, might see in his opponents' followers in America similar tendencies.

Moreover, von Mises was right.  I see little difference between the totalitarianism that evolved in Germany between 1880 and 1930 and the evolution of Progressivism toward totalitarianism here.   The willingness of propagandists like EJ Dionne to concoct lies about Austrian economists whom he has not read is very much like the propaganda that appeared in Nazi Germany and the Soviet Union.

The great public choice theorist Mancur Olson outlines in his Rise and Decline of Nations how the destruction of economic special interest groups, the destruction of the infrastructure of big government, led to the economic growth in postwar Germany and Japan.  The public choice debate does not trouble Dionne, who is unread on many subjects, so he blithely and ignorantly attributes the recovery in Europe to government spending.  Such explanations fly when a totalitarian state is supported by a collaborative media that serves as a mouthpiece to gangsters like Obama.

Aristotle on the Middle Class and the Socialist Banking Oligarchy

Aristotle is the most prominent ancient advocate of freedom. However, his argument is imperfect because he supports the institution of slavery and opposes equality of women.  It is asking much of a philosopher to overcome the prejudices of his era.  Certainly no philosopher did so perfectly.  But the fundamentals of the argument for freedom are in Aristotle's Politics. In this he differs markedly from Plato, who was a totalitarian.  Aristotle's arguments against Plato's Republic suggest the arguments that the Austrian economists used nearly a century ago to show why socialism inevitably fails to operate efficiently.

One of the points that Aristotle emphasizes is the importance of the middle class to the functioning of constitutional government.  As well, he notes that kingly government was characteristic of "barbaric" Europeans.  He writes:

"For barbarians, being more servile in character than Hellenes, and Asiatics than Europeans, do not rebel against a despotic government.  Such royalties have the nature of tyrannies because the people are by nature slaves; but there is no danger of their being overthrown, for they are heditary and legal.  Wherefore also their guards are such as a king and not such as a tyrant would employ, that is to say, they are composed of citizens, whereas the guards of tyrants are mercenaries. For kings rule according to law over voluntary subjects, but tyrants are involuntary..."

Thus, writing in the fourth century BC, Aristotle outlined the nature of medieval Europe.  For following the decline of Rome in the fifth century AD, 900 years later, the same European barbarians conquered the former Roman Empire and established barbaric kingly rule across Europe, which remained intact until the 1800s (and in several cases is still intact today).  Today's socialist Europe reflects the evolution of the servility of Europeans to the kingly state that goes back for millennia.


The claim of some conservatives that retention of the barbaric kingships is "conservative" is a matter of perception.  For it would have been more "conservative" to re-institute the dictatorial Roman Empire than to retain barbaric kingly rule, or more conservative still to re-institute the kings of the other primitive barbarians such as the Celts that go back further.  Democracy would be the conservative path for someone wishing to "conserve" Athenian culture.  Personally, I prefer the "conservatism" of Aristotle, who believed in pluralism, freedom and constitutional rule, to the conservatism of barbarians or the reactionary socialist primitivism of Plato and Marx.

Aristotle's Politics  anticipated Book I of Karl Popper's Open Society and Its Enemies by 2,400 years.  For like Aristotle, Popper outlines the totalitarian nature of Plato's Republic, fleshing out Aristotle's argument in the opening chapters of Politics.  

Concerning the middle class, in Politics Book IV, chapter 11 (1296) Aristotle writes:

"...it is manifest that the best political community is formed by citizens of the middle class, and that those states are likely to be well administered in which the middle class is large, and stronger if possible than both the other classes, or at any rate than either singly; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant.  Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing, there may arise an extreme democracy, or a pure oligarchy; or a tyranny may grow out of either extreme--either out of the most rampant democracy or out of an oligarchy; but it is not so likely to arise out of the middle constitutions and those akin to them...The mean condition of states is clearly best, for no other is free from faction; and where the middle class is large, there are least likely to be factions and dissensions.  For a similar reason large states are less liable to faction than small ones, because in them the middle class is large; whereas in small states it is easy to divide all the citizens..."

The considerable harm that the Federal Reserve Bank's and the illegitimate socialist federal government does to democracy and to freedom.  For in creating money and distributing it to wealthy investment bankers, the Fed harms the middle class; and in taxing the middle class further and redistributing the wealth to the lumpenproletariat, the middle class is harmed further still.  As America is pushed into a two-tier society, dominated by wealthy socialists who provide just enough to the lumpenproletariat to keep them happy, fewer and fewer can sustain a middle class lifestyle; the lumpenproletariat grows; and the socialist banking elite becomes an oligarchy.

Elastic or Inelastic Money Supply?

Constance writes:

>Prof Langbert,

I have just started to “self-educate” on economics and have found your blog very useful. I am currently reading a book by Jesus Huerta de Soto called “Money, Bank Credit, and Economic Cycles’. He is of the Austrian school and supports sound money backed by precious metals and a 100% reserve requirement for demand deposits. In his book he argues that a gold-backed money would be inelastic and would prevent serious deflations as experienced during the Great Depression. I have always heard that one of the advantages of our present economic system (fractional reserves and a central bank) was that the Fed could “manage the money supply” which I take to mean expand or contract the supply of money.

If you had the time and inclination, it would be great if you could write a blog post on the advantages/disadvantages of an elastic versus inelastic money supply.

My reply (edited for the blog):

There is no need for an elastic money supply. I will put de Soto on my list, but I do not believe that deflation is as important a problem as he says.

I'll be glad to answer but let me give you a little background about myself. I'm not really an economist. I studied labor issues in graduate school and teach business and human resource management. I finished my Ph.D. in 1991 and have taught management ever since. In the 1970s I had gotten involved in the libertarian movement in New York City right after Murray Rothbard dropped out of what was then called the Free Libertarian Party. There I met Howard S. Katz who has written a great deal about the money issue on his blog http://www.thegoldbugnet.blogspot.com..

Since 2004 I renewed my interest in this subject because of current events. What seemed bad in '04 has turned into a worst case scenario over the past year. I decided to pursue a new research topic concerning decentralization. I decided to make the monetary issue a part of that topic, so I have begun to familiarize myself with it. Perhaps we can form a study group!

I recommend these books to begin your pursuit of understanding money:

Hans Sennholz, Money and Freedom, available through the von Mises Institute (www.vonmises.org)
Murray Rothbard, The Mystery of Banking and What Has Government Done to Our Money?
Howard S. Katz, The Paper Aristocracy

I read William Greider's book Secrets of the Temple last fall. Greider is a Keynesian and the book is full of inconsistencies (such as that the Federal Reserve system helps the poor but the banks lend hundreds of billions to big business boondoggles; inflation is good for the middle class, etc.).

Business and banking interests have always said that flexibility in money, an elastic money supply, is desirable. However, the history of the nineteenth century was that when money was tightest, from 1879 to 1900, progress was most rapid in technology and innovation. The three central banks that existed before the Fed, The Bank of North America, The First Bank of the United States and The Second Bank of the United States, were all associated with corruption, high inflation and economic dislocation.

Business interests favor central banks because the banks create money out of thin air and then lend it to favored business interests. The business interests can make investments at pre-inflation levels, and as the money filters through the economy and the banking system multiplies it, prices go up as do asset values. The businesses repay their loans in depreciated dollars and enjoy increased asset values and diminished loan values (because the loan is for a fixed dollar amount but the asset goes up with inflation). The gain in real wealth that the business interests enjoy has to come from somewhere. It generally comes from those who own the least assets, average workers whose wages lag the inflation.

Thus, the real hourly wage (not family income--families have compensated for declining real wages by holding multiple jobs) has been in decline since the gold standard was abolished in 1971. However, the stock market has climbed steadily higher. This is because artificially low interest rates boost the stock market but the inflation caused by monetary expansion reduces workers' real (inflation-adjusted) wages. Thus, central banks allocate money from the average worker to hedge fund managers and stock holders. It is telling that one of the themes of William Greider's book is that inflation hurts asset owners. That would be true if asset owners held their assets in bank accounts, which hasn't been true in 100 years. Greider's book is testimony to my long standing belief that the left's aim is to support Wall Street and the wealthy at the expense of those whom it claims to represent, the poor. Thus, leftists are granted academic posts and are hired by capital to dominate the mass media and expatiate on why inflation is good for the poor.

Children like candy, and if you asked a nine year old whether they should have cake and ice cream for breakfast they would say "Yes, an elastic diet is good for me. You let me eat cake and ice cream when I choose." Naturally businesses like cheap credit. But if you look historically, the late nineteenth century was when most of the American innovation occurred, and it was a period of deflation. Competition is painful to business but it breeds productivity. No pain no gain. Today's business executive is a self-indulgent, other-directed narcissist who pays himself a high salary in order to move plants overseas and cannot come up with new ideas to save his or her life.

Also, there was proportionately more immigration into America the late nineteenth century despite the depressions of the 1870s, 1880s and 1890s. Yet real wages were rising. Yes they were. Despite cheap immigrant labor in the late nineteenth century, there was more innovation than at any other time in history and rising average real wages but deflation. Yet, most economists you hear on television tell you that deflation is the worst thing imaginable. If you can find it in a library, a great book on that topic is David Ames Wells' Recent Economic Changes published in 1889.

The pro-inflation position has been the mainstream view of the economics profession. Not coincidentally, the economics field enjoys benefits from the banking industry. For instance, many economists find work there, banking interests donate to universities and the like. The mass media only gives air time to the Keynesian viewpoint, there are almost never Austrian or monetarist economists on TV these days.

The ideas of John Maynard Keynes came out of the Populist movement in America. In the late nineteenth century there was deflation. The deflation hurt property owners. Farmers formed a mass movement to protest the gold standard. Earlier in American history there had been a bi-metallic standard. Historians who study this topic do not ask the right questions. They look at the income level of the farmers but not their asset holdings. They conclude that the Populists were low income farmers who needed loans to finance their crops. But it is likely that many of the Populist supporters were land holders who had obtained land via the land grant acts of the mid nineteenth century. Holding land might have represented hope for a good investment to many, but deflation made farming much less attractive. It is difficult to know the extent of that phenomenon. In general, falling food prices help workers but hurt farmers. Historians paint the picture that falling food prices were bad because the farmers didn't like them, but they ignore the effects on other kinds of workers. Also, it is not clear that real wages of agricultural labor were falling. There is a difference between farm profit and farm wages. Profits in general were falling in the late nineteenth century, and much of the protest about the gold standard was from business owners who resented deflation that caused falling profits. Perhaps farming was no different. As laborers, farmers may have been receiving increasing wages, but as real estate investors farmers may have been suffering even bigger losses.

There were two investment bankers who picked up on the Populist inflationist concept, I forget their names but the title of their book was something like "Road to Plenty". They argued that inflation could create wealth. The banker Mariner Eccles made similar arguments and FDR later appointed him head of the Fed. John Maynard Keynes wrote his General Theory after the Populists, the Road to Plenty guys and Eccles had written about inflation stimulating investment and social welfare. No one denies that Keynes derived his ideas from these movements.

The history of the Fed was that it was established Christmas week 1913 and it is likely that neither Wilson nor the Congressmen who voted it in totally understood it. They believed the "elastic" argument. Within two years World War I began and the Fed initiated its first inflation, leading to a contraction and depression of 1920. There was a mild inflation in the 1920s, and there was a second credit contraction in the late 1920s which led to the Great Depression. During the 1920s there was increased use of consumer credit in the form of car loans and margin buying on stocks, and neither of these had existed before.

The Great Depression began with Roosevelt illegalizing ownership of gold and abolishing the gold standard. He re-inflated in 1933 and there was a 75% stock market rise in 1933. He appointed Eccles to be Fed chairman and the recovery was stopped in 1935 or 6 by another Fed contraction. The massive inflation of World War II ended the Depression. Since then, there has been consistent inflation. The result has been a considerable degree of economic miscalculation. Excessive real estate construction, one corporate boondoggle after the next, excessive financing of corporate waste. For instance, the Hunt Brothers' attempt to corner the silver market in 1980 was bank financed and could not have happened without the Fed. Likewise, the Latin American debt crisis in the 1980s, the tech bubble, Long Term Capital Management. Oh, and did I mention the stagflation of the 1970s? Who paid for all this waste? Not university professors, who live off fresh Fed money funneled through government grants. Not Wall Street bankers and business executives who were responsible for one incomprehensible business boondoggle after the next, but the average American, who has passively racked up big credit card bills while allowing the Fed and its academic boosters to run amok. This generation of Americans is a disgrace to the memory of Andrew Jackson.

If you're ambitious, the next book I plan to read is : Ludwig von Mises, Theory of Money and Credit.

Hope that helps!

A Nobel Prize in Astrology?

Phil Orenstein just left a comment on a prior blog that Paul Krugman was awarded the Nobel Prize in economics. Given that Krugman is a quack and the field of economics that Krugman represents has the same status as a science as does astrology, I urge the Nobel Prize committee to be fair and to institute a Nobel Prize in astrology to complement the Nobel Prize in economics. I'm sure that there are many smart astrologers out there whose contribution to human knowledge exceeds Krugman's.

Rationality, Progressivism and the Market

The market and progressivism pose two alternative approaches to rationality. Progressives argue that social deliberation can be purposeful and that incentives that might distort rationality in deliberative decision making, such as special interest group incentives to lobby for political benefits, do not distort deliberative processes sufficiently to outweigh the benefits from deliberation. Market theorists argue that rationality depends on information appropriate to a given time and place that cannot be communicated or discerned by a deliberative body, and less so by society at large. Economic actors have specialized knowledge such as price and technological knowledge that is difficult to communicate and far too complex to be known by outsiders. This knowledge is not the knowledge of general experts, economists or the like but rather of people who understand narrow production and market demand problems because the information required is very specific. For instance, do the people of Oshkosh like a different kind of Italian food from the people of Rochester or of Madison? Do bagel consumers in Manhattan have a different taste from those in Queens, Brooklyn or Wisconsin? This kind of information can be learned through trial and error.

The organizational life cycle and organizational learning would be critical to the second kind of information but not the first. In order to survive, organizations would need to obtain and utilize the second form of information, and the incentive to do so would be the threat of organizational death. In contrast, organizations need not learn if knowledge is deliberative. All that would be required were knowledge deliberative in nature would be the hiring of outside experts to maintain or improve institutions.

This has been the claim of Progressives and New Deal social democrats who have instituted an increasing degree of government intervention. Knowledge is general in nature and so requires the help of experts trained in general theory.

There should be empirical tests available as to which approach to rationality works better. Where there are more bankruptcies, over a 40 year period do economies do better or worse? If they do better, then there would be some support for the market-based model of rationality. If they do worse over the long term, then the social democratic-progressive model would be better supported. Likewise, the possibility of organizational birth would be associated with the market-based model of rationality. Where there are more organizational births, one would expect to see greater economic vitality according to the market-based model. Deliberative processes would tend to lead to stability, hence organizational learning, death and volatility would be associated with long run economic vitality under the market-based model. But more gradual change, which would be limited by economic and scientific theory, would be associated with success under the social democratic-progressive model. Volatility and risk associated with responsiveness to price and demand fluctuations would be associated with economic success under the market-based model but not under the social-democratic-progressive model.

Another importatn question is where do innovations occur most frequently under this continuum:

total state control--->social democracy---->limited state

Which of the three is associated with the most innovation? This can be viewed within the United States. Does innovation occur more in states with the least government intervention or the most? Did innovation occur more frequently in the nineteenth century or the twentieth century?

Progressive-Liberal Economists Murder Children

Economist Ben Bernanke


Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.

Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.

Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.

Howard S. Katz's "Bad News"

Howard S. Katz has posted a fascinating blog entitled "Bad News" which I reproduce below:

>"I have bad news for all young Americans.

"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.

"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.

"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)

"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.

"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?

"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.

"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.

"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.

"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)

"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)

"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)

"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”

"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.

"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."