Happy Easter--Enjoy the Coming Economic Collapse

The Econdata site has posted the above graph of the Consumer Price Index, CPI, since 1800.  I'm not sure how they calculated it for the 19th century because the Bureau of Labor Statistics didn't start its series until the first or second decade of the twentieth century.  There were various attempts to measure inflation in the 19th century so approximations can be made.   I can't vouch for their numbers but let's assume they're correct.

Notice that most of the inflationary peaks are around wars.  There's a peak following the War of 1812, a peak right at the end of the Civil War, a peak around 1920, following World War I, and then an upswing that starts around 1940 and doesn't abate. Around 1970 (the gold standard was abolished in 1971) the inflation rate surges. It surged at a faster rate in the 1970s than during 1980 to 2010, which is probably why many Americans believed that inflation had ended in the 1980s, which it had not.  It just began increasing at a decreasing rate instead of an increasing rate.

Compare the deflation that occurred after the post-Civil War peak with the deflation that occurred during the Great Depression of the 1930s.  During the Gilded Age, from 1865 to 1910,  the deflation was proportionately greater than in the period from 1930 to 1940 (notice that the twenties, which are usually considered a boom period, also saw some deflation).  The Gilded Age was the period of greatest rates of innovation, expansion and immigration.  Fundamental inventions like the telephone, the railroad (actually pre-Civil War but largely developed post-Civil War), the automobile, radio, A/C electricity, movies, all were created in that period.  As well, there was across the board innovation in processes and methods to a far greater degree than today, despite the lip service paid to total quality management and reengineering.  Moreover, on a proportional basis there was heavy immigration, a few years reaching as high as 500,000 on a base of less than 90 million.

Yet the rapid progress occurred during the largest deflation in American history.  The deflation during the 1930s was much milder, yet the employment effects far more severe.  Yet, academic economists base their arguments on the grievous harm that deflation causes.

Here is the reason.  In the Gilded Age businessmen and Wall Street complained endlessly. The deflation created political instability because real estate investors and farmers who were anticipating real estate profits suffered losses.  But the skimpy profits led to intensification of competition.  Reducing labor costs was hardly sufficient to compete. This led to innovation.

Wall Street, the real estate investors, farmers and businesses complained about the deflation, but the average American was better off.  There was an election that emphasized this issue in 1896, and the pro-gold (but pro-tariff) McKinley defeated the pro-silver Bryan.   Despite this victory, within seventeen years in 1913, the year of JP Morgan's death, Woodrow Wilson established the Fed, which was modeled after a recommendation that Morgan's associates had previously devised.

The depression of the 1930s was accompanied by a rapid expansion of the state and by continued missteps in monetary policy (especially in the late 1930s by Mariner Eccles, the Fed chairman, who caused a second stock market collapse).  The crash of 1929 was a second leg to the correction of the 1920 inflation that the Fed had caused.  The unemployment was intensified by federal policy.  For instance, Herbert Hoover, the last Progressive president, "jaw boned" corporations into not cutting wages.  This forced a much higher layoff rate than would have otherwise occurred (see Murray Rothbard and Ronald Radosh's New History of Leviathan for information about Hoover's role and Hoover's long standing commitment to price fixing and cartelization).  Following Hoover's loss to FDR, the nation embarked on a long term socialization policy that integrated Hoover's Progressive ideas (public works and cartelization via FDR's failed National Industrial Recovery Act) as well as additional ideas that the New Deal Democrats added--regulation of wages via the Fair Labor Standards Act; Social Security; the National Labor Relations Act; and price fixing for agriculture, the Agricultural Adjustment Act, which paid farmers not to grow.  As well, the Smoot-Hawley tariff, enacted in 1930, raised tariffs to the highest levels at any time in US history save in 1828.

The period of inflation from 1940 to today has been the worst in American history for the average worker.  The claim that deflation during the 1930s caused the massive unemployment is contradicted by the fact that a larger deflation in the late nineteenth century was not accompanied by such severe unemployment. 

In other words, the Democrats used the failure of their policies to justify intensification of their policies.  They are doing it again with health care.

Happy Easter!

Todd Seavey to Give Ayn Rand Speech at Brooklyn College, Yale and Columbia

I just received this e-mail from Todd Seavey via the New York Republican Liberty Caucus:

As journalists everywhere should be documenting, I am trekking to three campuses this year to give Ayn Rand's speech "Faith and Force: Destroyers of the Modern World" on the fiftieth anniversary of her delivery of it in these places (beginning with Yale and ending with Columbia).  This Sunday (coincidentally Easter), April 4, 2010, at 11am, I will give the speech (followed by Q&A) on the steps of the library of Brooklyn College, facing the main green.  Join me there or travel with me from Manhattan on the F train by rallying at precisely 10am that morning on the western steps of Bryant Park.  Nothing can possibly go wrong.

Polisphilia: A Modern Mental Disorder

"Polisphilia" means love of the state.  During the age of Pericles in fifth century (BC) Athens, the new governmental form of democracy gave birth to political leaders who had to persuade others. Sophists were the first teachers of legal and interpersonal skills necessary to the task of political success. Among their students were the first polisphiliacs, individuals obsessed with love of the Athenian state.

The modern obsession with the state grew out of German historicism.  Hegel thought so highly of the German state that he saw it as the end of history.  Marx hated the freedom and progress associated with laissez faire capitalism and yearned for a return to manorial servility, which would only be possible through the totalitarian restructuring of society.  He fantasized a statist dictatorship of the proletariat that would supplant liberty and suppress all who might disagree with his ideas.  Hitler, as well, saw the Third Reich as an object of veneration that would return Germany and the world to a romantic feudal order ruled by a barbaric master race through a totalitarian state that paralleled Stalin's ("socialism in one country") Soviet state and was embodied in Hitler's persona.

Polisphilia arrived in America from related sources.  Americans had been trained to distrust the state and to limit its powers.  But during the Gilded Age after the Civil War more than 10,000 Americans went to German graduate schools. They returned to found the American research universities at Johns Hopkins and Clark University and to reinvent Harvard.  As well, Richard T. Ely founded the American Economics Association, which initially was aimed to encourage institutionalist or historicist economics.

The Americans who returned from Germany educated others, and the leading Progressives of the 20th century such as John R. Commons, Herbert Croly and Walter Weyl advocated ideas that closely followed the historicist model.  This model considered the state to be the paramount human achievement.

Besides the large number of Americans educated in Germany after the Civil War, Americans were susceptible to the Progressive message because they had become suspicious of big business and hoped for a means of addressing the threat that they believed big business posed. The solution that the Progressives offered was big government.  But big government was not and could not be instituted without the succor of big business.  In fact, what the public objected to about big business was its ability to corrupt government.  The Progressives'  solution to the power of big business was to make government bigger. As polisphiliacs, the Progressives did not anticipate that the size of government would not change the motivations of government officials. To a polisphiliac, the state can do no wrong, and has a supernatural ability to solve all problems.  The Progressives could not believe that the bureaucrats and politicians employed in a larger government might be just as or even more corrupt than those employed in a smaller government.  There is no conceivable reason why the size of government should change human motivation.  But Progressive polisphiliacs beat the drum of big government relentlessly, regardless of its prospects.  Hence, from the beginning there was an element of irrational fanaticism in polisphilia.

Theodore Roosevelt, a Republican from New York, was the most important Progressive politician. He established the Federal Trade Commission (which aimed to be the first step toward socialist control of the economy through price controls) and his successor-cum-opponent William Howard Taft aimed to prosecute trusts under the Sherman Anti-trust Act.  But Roosevelt and Taft did not aim to attack all trusts, only "bad" trusts that might violate common law principles. Part of the reason was that the Sherman Anti-Trust Act never aimed at doing anything other than apply common law principles at the federal level.  Due to a surprise decision led by Justice John Marshall Harlan in the late 1890s, large companies, even if compliant with common law principles, were held to violate the Sherman Anti-trust.  The year of Harlan's death, 1911, the Supreme Court reversed this and held that large companies did not necessarily violate the anti-trust law merely because they were big.  However, the Sherman Anti-trust Act is clear that collusion among small companies violates the anti-trust law. So the ultimate effect of Roosevelt's and Taft's anti-trust project was to encourage the merger of companies and to harm smaller businesses which could no longer stabilize prices through collusive agreement.  The end result was, of course, increasing concentration of business, quite in the interest of large firms.   

Despite the dismal history that Progressive polisphiliacs had on offer, polisphiliacs demonstrated an obsessive unwillingness to revise their unflagging faith in government.  The reason is that in the late nineteenth century a doctrine called the Social Gospel transformed Christian faith into a social movement. Jane Addams and other Progressives were directly influenced by the Social Gospel.  The Social Gospel remains influential in the mainline Protestant churches.  It is a small step from saying that social action has a religious justification to saying that the state, as an instrument of such social action, is the object of religious veneration.  Thus, the advocates of the Social Gospel have a tendency to worship the state rather than God.

Not to be outdone, left-wing Catholics have since the 1970s advocated "liberation theology".  Outside of the Orthodox Jewish faith, Social Gospel Judaism is the dominant faith among American Jews.  Like their mainline Protestant and Liberation Theology brethren, Social Gospel Jews worship the state rather than God. This admixture of religious fervor and Progressivism results in the mental disorder known as polisphilia.

The fixation on the state as an object of worship likely has grounds in the anxiety that people feel in the face of freedom.  Being free to make one's own decisions, to make mistakes, to suffer the humiliation and financial loss of a failed business, is threatening to the self-concept.  Moreover, many who follow the Social Gospel faith rely on the state for their sustenance, as academics, school teachers, attorneys, bureaucrats, Wall Street bankers who receive ongoing subsidies from the Federal Reserve Bank, corporate executives who rely on government for contracts, support and protection, and the like.  These recipients of government welfare need to displace the guilt that they feel at (1) being wealthier than most taxpayers and (2) exploiting government and those poorer than themselves to further their own personal gain.  The response to such guilt is to claim that government is necessary to help humanity and that they are interested in expanding government primarily to help the poor, not themselves. 

Of course, polisphiliacs suffer from considerable cognitive dissonance or mental conflict. On the one hand they claim to care mainly for the poor. On the other, their standard of living and livelihoods depend on extracting gains from the poor in order to satisfy themselves.  This cognitive dissonance results in obsessive, often extreme degrees of delusional fantasy and at times hallucinations.  To wit:

-Polisphiliacs frequently believe that the public education system, which has rendered American students innumerate, illiterate,historically ignorant and lacking in the most basic of social skills is functioning successfully

-Polisphiliacs have a tendency to fantasize that government does a great job of maintaining streets and highways as well as infrastructure of all kinds

-Polisphiliacs believe that the Post Office is a major success

-Polisphiliacs believe that the New York City subway is a major success and therefore government should run the health system

-Polisphiliacs believe that socialism worked so well in India, the USSR, North Korea, Cuba and China that it should be imported here

-Polisphiliacs believe that the economies of Europe are as creative and innovative as the economy of the Untied States

-Polisphiliacs believe that the reason that 4 out of 5 new businesses fail but less than 3% of government programs fail is that the government programs are better executed and that government bureaucrats are more talented than private sector entrepreneurs

-Polisphiliacs believe that when government provides a service it is necessarily excellent and not to be criticized but that anything that private sector firms do is faulty


Polisphilia as a mental illness is spread via schools and universities.  Because psychologists and psychiatrists themselves are, as frequent beneficiaries of state largess, polisphiliacs, they are unwilling to classify it as a mental illness in the Diagnostic and Statistical Manual of Mental Disorders.

Pinni Bohm Admitted to NYU Master's Program

I have had many, many fine students through the years. Among my favorites is Pinni Bohm.  When he took my conflict and negotiation class, Pinni "aced" the exam with a 98, the highest score on the exam in my ten year history of teaching the course (I have given the exam as both a closed book and open book exam, and Pinni's 98 was the highest in either category, but he took it as closed book). Pinni also worked with me on an independent study and began an Intercollegiate Studies Institute group at Brooklyn College.

Pinni went on to Cardozo Law School, where he has been involved with the Federalist Society and the Law Review.  Despite this heavy workload, Pinni still finds time to post on my blog.

Recently, Pinni e-mailed that he has been admitted to the Masters in Taxation at the NYU Law School, the leading program in its category in country.