Saturday, January 31, 2009

Where Do We Go From Here?

In 1776 the nation's population was over three million, yet it produced leaders like Washington, Franklin, Jefferson and Adams. These were men of integrity, inner-directed, with a strong moral sense. Today America's population is over 300 million, 100 times larger, but our leaders lack vision, integrity and understanding. Part of the difference may be the transition from inner to other directedness that occurred beginning in the late nineteenth century as the media and centralized banking became dominant. This transformation led to professionalization of work, increased specialization, larger scale enterprise and personality that tends to be reflecting instead of visionary. Leadership is not a trait associated with fashionableness or consumerism.

America traded its moral vision for a Model T Ford and a radio broadcast.

The question is not so much where do we go from here, but rather what in ourselves inhibits greatness. America is only as great as its people. But a people addicted to mass consumption, groupthink, conformity and fashionable trends cannot be great.

Americas' coming economic decline is a product of the spiritual mediocrity to which America has been committed since the Progressive era. It is a product of the exchange of consumption for morals. It can be repaired only when Americans insist on thinking for themselves; on educating themselves as to liberty; and on freeing themselves from the addiction to fear, consumption and conformity that has dominated urban American society for the past century. From that transformation leadership and greatness will evolve.

Thursday, January 29, 2009

Obama Slights Military

Bob Robbins and Larwyn have forwarded this Pajamas Media story about how Barack Obama snubbed the military gala on inauguration day. Since 1953 every president has attended it. Obama was the first to decline the invitation.

Barack Obama's election was unquestionably a positive for race relations and for healing the wrongs of the past. However, few voters were willing to ask questions of substance about Mr. Obama's opinions. Mr. Obama has long been associated with anti-American and left wing activists, to include Bill Ayers, ACORN and Jeremiah Wright. Thus, a snub of this kind reveals an underlying contempt for the US military which the left harbors. Undoubtedly Mr. Obama did not consider this move carefully, as he is usually wont to do. Mr. Wolf, the author of the Pajamas Media article, notes that Vice-President Biden attended. The sponsors of the event put a positive spin on President Obama's absence. Nevertheless, a snub of this kind reveals much about Mr. Obama's instincts.

Jesse Petrilla's "Seeds of Liberalism"

Jim Crum e-mailed about Jesse Petrilla's "Seeds of Liberalism" in Frontpagemag. Petrilla traveled to France to learn the effects of political correctness and terrorism on the French population. Apparently, extremist youth are keeping the French captive in their own country. Petrillo argues that France's "problems were brought on by their leftist politicians who feel the need to push socialist and other leftist policies." As well, the French government routinely suppresses free speech due to political correctness and fear:

"It saddened me to see that the conservative movement was truly underground there, for fear of reprisals from employers or angry leftists."

"The most troubling item we learned when speaking with local leaders and law enforcement is the existence of no-go zones around Paris and around other European cities. They are Islamic neighborhoods where police absolutely refuse to enter, and where if you are not a Muslim and you are caught driving through it you will have bricks thrown at your car and may not make it out alive."

There is a considerable degree of overt anti-Semitism among the insurgents, including the murder of Jews that the French government allows to occur repeatedly and with impunity. Amsterdam looks better on the surface, but the future of Holland is that it is going to become an Islamic Sharia state within a generation or two. Geert Wilders, whom Petrilla interviewed, said that the situation is "100 times as bad" as you think. As in France, freedom of speech is prohibited in Holland:

"Mr. Wilders was just brought up on charges the day after we met with him on grounds of inciting hate speech for his producing of the factual film called Fitna, which discussed the ideologies behind our Islamic extremist enemies."

Sharia Law is being enforced and corporal punishment is occurring in various Dutch neighborhoods. Dutch law is being bypassed by kanagroo religious courts.

The best I can assess from Mr. Petrillo's article is that self-destructive fools and cowards run western Europe. It is no longer a place of interest as a tourist destination, and it would seem to me that the days of western Europe's importance as a military ally and trading partner are numbered. If Petrilla's description is accurate, within two generations Holland and France will no longer be part of the western world. By then, of course, the United States will have significantly reduced its own power through economic and monetary incompetence as well. Conservatives who smugly watched George Bush and the Republican Party pursue inflationist subsidies to corrupt banking and Wall Street interests would do well to keep in mind that military strength depends on economic health, and the Republicans under Bush put many nails in the coffin of the nation's economic future, preferring to subsidize incompetently run big businesses to freeing up the economy from regulation, excessive taxation and government spending. The Bush-Obama "bailout plan" and the Bernanke Fed have been destructive of the nation's future. This interacts with military options in the future. The Republicans have done as much to facilitate the decline of the West as the "liberals" have.

The current situation cries for a new American revolution that wrests control of the nation from the self-destruction "progressive" media and the banking interests who now control the nation and the federal government.

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!

Wednesday, January 28, 2009

Barack Obama Starves Hungry Children

A pro Obama poster on this blog argues that Barack Obama is ethical because he didn't spend more than George Bush on his frivolous inauguration. According to the "Common Dreams" website:

"Official statistics show that 12.7 percent (or 37 million) of the population in the U.S. lived in poverty in 2004, while 15.7 percent (45.8 million) lacked health-insurance coverage; 11.9 percent of households (comprising 38.2 million people, including 13.9 million children) experienced food insecurity."

The urban legends website from which the anonymous poster seems to have derived his comment states:

"There's no final tally yet for the Obama inauguration, but given that at least five times as many people attended, security and clean-up costs were surely higher than for the 2005 event. Press estimates currently range around $150 million total, including both private and government expenditures."

Let's see. A hamburger and a glass of juice costs about $1.50. At $1.50, Mr. Obama could have purchased 100 million lunches. So with 13.9 million hungry school children, Mr. Obama could have ended hunger for more than a week. Instead, he chose to starve the children and spend it on a self-serving inauguration party.

Mr. Obama's starvation of children is an outrage. The media, including Fox News, lies and fails to hold the child-starving American president to account.

Jim Crum Meets Hans Sennholz: A Link Between Banking Panic and the New World Order

I just read Hans Sennholz's excellent 1985 essay Money and Freedom, which is available from the Ludwig von Mises Institute for $7.00. Sennholz gives an overview of the case for a free market monetary system and a spontaneous, market-evolved gold standard. In doing so he reviews alternative views. It is a good introduction to free market money. Given the recent failure of the Keynesian ideology and its creature, the unfettered Federal Reserve Bank, to manage the money supply and the banking system competently, and the simultaneous inability of the pissant propagandists, also known as the "mainstream media", to conceptualize alternative solutions, this book is must reading.

Sennholz discusses alternative views to the Austrian free market ones, to include the monetarist ideas of Milton Friedman and the supply-siders such as Robert Mundell, Jude Wanniski and Arthur Laffer. The Austrian theory is by far the most elegant of all economic theories, and it is a tragedy that the pissant propagandists insist on ignoring the Austrian viewpoint and instead publicize failed Keynesian ideas ad nauseum.

Two points in the essay caught my attention. First, Sennholz notes that by the 1970s foreign governments had been receiving dollops of new money from the Fed via commercial bank loans (p.4):

"The dollar standard invited massive credit expansion in both the US and the Eurodollar market, and made foreign governments in less developed countries its primary beneficiaries. Foreign central bank reserves, consisting mostly of dollars, expanded from $92 billion to more than $800 billion in 1981. The Eurodollar market recycled the flood of dollars from the United States to the Organizational of Petroleum Exporting Countries (OPEC) and from there to commercial banks in Euope and the United States, and to debtors all over the globe; it grew from some $100 billion in 1970 to nearly $2 trillion in 1984. The debt of non-OPEC developing countries alone, consisting of commercial bank loans,multinational organization loans and government loans, soared from $75 billion in 1971 to an estimated $520 billion in 1982. The exposure of commercial banks to these countries, consisting of outstanding loans minus deposits, rose from practically none to more than $200 billion worth in 1984."

The Latin American debt crisis, like today's sub-prime crisis, threatened the commercial banking system in the 1980s. The banking system has done these things over and over. It is time to rethink the money-creation privilege that has been granted to the federal government, the Federal Reserve Bank and the banking system. The system has failed, and it is no longer fair to ask Americans to subsidize massive, recidivist incompetence. Free market banking is far superior the Federal Reserve Bank, which proceeded to quintuple overseas dollar holdings in the 1990s to over ten trillion dollars.

The second point that grabbed me (besides the discussion of Hayek's "Denationalization of Money") is Sennholz's discussion of Mundell. The evolution of the international gold standard to an international dollar standard and the rejection of gold have led to current instability in world financial markets. Banks are not capable of managing their money creation privileges. But if there is a failure of the dollar standard, which seems increasingly likely to occur in our lifetime, the alternative may be not a renewal of the gold standard or free market money which would be a return to sanity, but an international unit of money standard, i.e., a new world order based on a global monetary unit.

I am getting science fictiony here, but a global monetary system would seem consistent with an evolution toward an internationalist political system much as the Euro was associated with European political unification.

Sennholz describes Robert Mundell, the original supply sider whose ideas influenced Ronald Reagan and the leadership of the Republican Party since the 1980s as advocating an international monetary structure based on international cooperation and coordination. Mundell would base a global monetary system on gold, but would allow a global banking system to stabilize the price of gold between $300 and $650. Governments would be required to coordinate interest rates, balance of payments, exchange rates and excessive money creation and, as well, participate in "general budgetary policies and, if necessary incomes policies."

After finishing the Sennholz essay I checked my e-mail and noticed this message from Jim Crum concerning Cliff Kincaid of Accuracy in Media's essay concerning Barack Obama's support for global taxation:

>Mitchell, I hope this note finds you well.

>Below is interesting information. If half of it is true, there is reason for concern. I do know Mr. Obama was a champion of the $87 Billion international tax on US Citizens for international development.

>The other problem is that once it starts, once that camel's nose is under our financial tent, we are in serious trouble with absolutely no end in sight, and no accountability. Just look at how the UN handles money, put them in charge of collecting taxes from us and forget it. I say burn the damned UN to the ground before that happens. Talk about taxation without representation, this would be it on steroids.

>As far as a global TV channel, that could really be a source of humor or disgust. There may be truth to the allegory of the tower of babel, and such distinctions that keep us separate may actually be a source of protection- for our own good.


Global Taxes and Global TV Now on the Agenda
By Cliff Kincaid

>President Obama’s pick for Treasury Secretary, Timothy Geithner, is being urged to lay the foundation for “global governance” by considering “international taxation” measures to loot more money from U.S. taxpayers.

>The recommendation is included in the report, “The Global Agenda 2009,” which is being considered by the World Economic Forum (WEF), meeting in Davos, Switzerland, January 28 - February 1. The WEF is not an official government group but does include dozens of government, corporate and labor leaders at its annual m eetings.

>Media companies such as News Corporation (parent of Fox News, the Fox Business Network, and the Wall Street Journal), CNBC, and Forbes are official sponsors of the WEF meeting. News Corporation is listed as one of about 100 “strategic partners” of the World Economic Forum.

“Look for live coverage on CNBC, all day every day,” reports CNBC “Squawk Box” co-anchor Becky Quick. “We kick things off at 6 a.m. Eastern time Wednesday on Squawk, with serious interviews from the headliners.” Her report, however, fails to disclose that CNBC is an “industry partner” of the World Economic Forum this week...

The event’s corporate sponsors, which pay about half a million dollars each to participate, include several failing institutions that have received tens of billions of dollars from U.S. taxpayers. They include Bank of America, Citi, Goldman Sachs, JPMorgan Chase & Co., and Morgan Stanley. These entities are termed “Strategic Partners” of the World Economic Forum...

In a major embarrassment, the WEF has released a report, “The Future of the Global Financial System,” which acknowledges “intellectual stewardship and guidance” provided by a steering committee co-chaired by John Thain, the former Merrill Lynch & Co. chief executive officer who was recently ousted from Bank of America in a scandal. Thain oversaw the disastrous sale of Merrill Lynch to Bank of America and was criticized for lavish spending on office decorations, including a $1,405 waste basket and $87,784 rug.

The other co-chair of the committee was David Rubenstein, co-founder and managing director of The Carlyle Group, who has been quoted as saying that China holds the key to the world economy’s future. One report notes that Rubenstein says Carlyle “was an early investor in the Chinese marketplace,” that its China office “has hired many native-born Chinese, and the company is seeking to build its buyout and growth-capital businesses there.”

“The Global Agenda 2009” report says that “sovereign states do not adequately address problems reaching across borders” and that “international taxation” may be needed to generate the “additional resources” for “global governance.”

Could this become a source of new bailout money here and abroad?

Read Kincaid's whole article here.

The current "crisis" involving the banking system has a funny smell. It is a crisis whose basis is not clearly identified. I looked up house sales on the census bureau. This is what I found

Existing Home Sales 7,076,000 (2005) 6,478,000 (2006) 5,652,000 (2007) 4,912,000 (2008)
New Home Sales 1,283,000 (2005) 1,051,000 (2006) 776,000 (2007)
Total 8,359,000 (2005) 6,478,000 (2006) 6,428,000 (2007)

The new home number for December 2008 is coming out this week. Taking the 8.4 million home sales in '05, the 6.5 million in '06 and the 6.4 million in '07 and multiplying by a price of $250,000 gives $5,325,000,000,000, $5.3 trillion. Just as a thought experiment double it, to ten trillion to give the last six years. If ten percent of the owners give the houses back to banks, the losses would be $10 trillion x 10% = $1 trillion. The one trillion would be reduced by the re-sale value of the houses, which would presumably be about $1 trillion. I just heard a commentator on Bloomberg Radio say that the losses facing financial institutions are $1.8 trillion. How is that possible?

In March 2008 the New York Times reported that the number of loans past due was 7.9 percent. That's not in default, that's past due. On January 27, 2009, CNN reported that defaults in California, which I think is one of the wilder sub-prime states, had fallen by 7.7 percent since a year ago. Thus, the ten percent figure is overstated.

So why the hysteria concerning banks? It would be nice if the pissant propagandists could explain this without scare language, hysteria, or incompetent and uninformed usage of buzz words. But they have not been able to do so. They are as incompetent as bankers. Are the defaults merely hypothetical? Is the problem a fear of a greater real estate market crash?

In any case, one of the outcomes of this banking panic could well be globalization of the monetary system, much as Mundell advocated. It would seem globalization of the monetary system (rather than the much better and more intelligent adoption of a free money system or a voluntary gold standard) would be potentially consistent with political globalization as well. This would fit Jim Crum's concerns.

Monday, January 26, 2009

America Knows No Journalism

I just received this forwarded e-mail from Phil Orenstein. A perfect example. America's pissant propaganda sources are so disturbed, so biased. I avoid them all:

Headlines On This Date 4 Years Ago:

"Republicans spending $42 million on inauguration while troops Die in unarmored Humvees"
"Bush extravagance exceeds any reason during tough economic times"
"Fat cats get their $42 million inauguration party, Ordinary Americans get the shaft"

Headlines Today:

"Historic Obama Inauguration will cost only $120 million"
"Obama Spends $120 million on inauguration;AmericaNeeds A Big Party"
"Everyman Obama showsAmericahow to celebrate"
"Citibank executives contribute $8 million to Obama Inauguration" (Stay tune.....more bailouts to come!!)

97 Years of Media Corruption

"...No longer are the editorial columns of newspapers a potent force in educating public opinion. The newspapers, of course, are still patronized for news. But even as to news, the public is fast coming to understand that wherever news items bear in any way upon the control of Government by business, the news is colored; so confidence in the newspaper as a newspaper is being undermined.

"Cultured and able men are still to be found upon the editorial staffs of all great dailies, but the public understands them to be hired men who no longer express honest judgments and since conviction, who write what they are told to write, and whose judgments are salaried.

"To the subserviency of the press to special interests in no small degree is due the power and influence and prosperity of the weekly and monthly magazines. A decade agao young men trained in journalism came to see this control of the newspapers of the country. They saw this unoccupied field. And they went out and built up great periodicals and magazines. They were free."

---Senator Robert Marion La Follette at the meeting of the Periodical Publishers' Association on February 3, 1912. Quoted in the New York Times, Feb. 4, 1912. La Follete suffered a physical collapse during this speech. The speech and his breakdown were grounds for his withdrawal from the Republican Presidential race in 1912. La Follette left the race to Taft and Roosevelt, who split the Republican vote (Roosevelt via the Progressive Party), enabling the election of Woodrow Wilson, who pushed through establishment of the Federal Reserve Bank in 1913, the following year. Althoug La Follette is remembered as a Populist and "Progressive" he opposed the pro-big business regulations that Roosevelt advocated, in favor of a small business, competitive economy.

Rationality and Decentralization in Montesquieu's Spirit of Laws

In his famous article "The Nature of the Firm", Ronald Coase claimed that firms exist because they are cost minimizing. It is cheaper to coordinate a set of economic processes using methods available to business concerns than on the market. Coase thus suggests that marginal costs of organization will tend to be equated to the returns from organization. In general, the larger the firm the greater the costs of organization. Transactions involved in maintaining complex or large organizations are more costly than transactions involved in maintaining smaller ones. Firms grow to an optimal size given the costs and benefits to scale. Economies of scale refer to declining unit costs because of increasing sized firms' increasing ability to spread overhead over a large number of units. But increasing organization costs, also due to increasing size, may outweigh the costs per unit.

Anticipating Coase by more than two centuries and relying on comparative historical analysis, Charles de Secondat, Baron de Montestquieu, makes a parallel claim about the benefits of scale in the design of republics. Montesquieu writes that the optimal size of republics is small, because large scale republics permit large fortunes, which in turn create immoderate demands by interest groups. The competition of special interests leads to an overemphasis on private concerns and an underemphasis on the public good:

"In an extensive republic the public good is sacrificed to a thousand private views; it is subordinate to exceptions, and depends on accidents. In a small one, the interest of the public is more obvious, better understood, and more within the reach of every citizen; abuses have less extent, and of course are less protected."*

Montesquieu gives as an example the Greek republics, which were small city states. Montesquieu also notes that there are advantages to great as opposed to petty states. Thus, he is arguing for a balance, or optimization, of benefits as opposed to costs. In Book IX Montesquieu notes that small republics may be destroyed by foreign invasions and large repulics are destroyed by "internal imperfections". But, argues Montesquieu "confederate republics" have the advantages of a republic together with the external force of a monarchical government. "Hence it proceeds that Holland, Germany and the Swiss cantons are considered in Europe as perpetual republics." The many states balance power. Insurrections in one state can be quelled by others. But confederacies must consist entirely of republics (this was integrated into the Constitution). I would add that confederacies permit intelligent management of information while permitting economies of scale with respect to defense and economic markets.

Of course, there are many other factors relevant to the nature of government. In writing about the geographical differences between Europe and Asia**, Montesquieu notes that geographical differences facilitate the "slavery" of Asia and identifies large scale with despotism:

"In Asia they have always had great empires; in Europe these could never subsist. Asia has larger plains; it is cut out into much more extensive divisions by mountains and seas; and as it lies more to the south, its springs are more easily dried up...Power in Asia ought, then, to be always despotic: for if their slavery was not severe they would make a division inconsistent with the nature of the country."

In the 1960s and 1970s, Mancur Olson and George Stigler argued that ease of organization of interest groups and the economic benefit per participant due to successful lobbying lead to success or failure of specific groups in economic competition. For a long time physicians formed a successful lobby because they shared common training, common values and attended conferences of the American Medical Association. Geographic advantages would certainly be among the kinds of advantages different interests might enjoy. Geography, argued Montesquieu in 1748, contributes to the nature of political organization, and large geographic scope is most consistent with despotism.

A school of historians, to include William Appleman Williams, Gabriel Kolko, Martin Sklar and James Weinstein, has identified Progressivism, which appeared following the advance of big business and the closing of the American frontier, as a pro-big business ideology; that Progressivism was the ideology of big business even though it was packaged as "liberal" and served to preempt socialism (and end laissez-faire capitalism). Montesquieu did not anticipate Progressivism, but he did anticipate that as nations grow in scope they are more likely to be dominated by economic special interests and that the domination is likely to be authoritarian in nature, which is the claim that Kolko-Williams school makes about Progressivism.

Montesequieu also anticipated the ideas of David Riesmann in his famous book The Lonely Crowd. In Book XIX Montesquieu discusses "Laws in relation to the principles which form the general spirit, the morals and customs of a nation".*** He notes that factors like climate, attitudes toward tyranny, religion, laws, morals and other factors influence "the spirit of mankind". He argues that nations ought to pass laws that fit their temperaments. In a puritanical nation with good character "no one ought to restrain their manners by laws, unless he would lay a constraint on their virtues." For instance, laws that reduce luxury or restrain women might cause the nation to "lose that peculiar taste which would be the source of the wealth of the nation, and that politeness which would render the country frequented by strangers." Thus, it is difficult to be rational with respect to law, and it is easiest to fit the temperament of the populace in designing law. Law should be avoided:

"Let them but leave us as we are, said a gentleman of a nation which had a very great resemblance to that we have been describing, and nature will repair whatever is amiss..our indiscretions joined to our good nature would make the laws which should constrain our sociability not at all proper for us."

If laws are necessary, they should build on existing patterns

One of the key attributes (Book XIX, section 8) is "effects of a sociable temper". This is analogous to Riesmann's other-directedness. Montesequieu writes:

"The more communicative a people are the more easily they change their habits, because each is in a greater degree a spectacle to the other, and the singularities of individuals are better observed. The climate which influences one nation to take pleasure in being communicative, makes it also delight in change, and that which makes it delight in change forms its taste.

"...the desire of pleasing others more than ourselves gives rise to fashions. This fashion is a subject of importance; by encouraging a trifling turn of mind, it continually increases the branches of its commerce."

Riesmann notes that the commercial centers are characterized by other-directedness while rural America is still inner- and tradition-directed. Likewise, David McClelland finds in his book Achieving Society that high achievers couple other-directedness with need for achievement. But McClelland was writing after America's greatest achievements were complete. The inner-directeds' achievements were in building a great nation, the other-directedness in consumption and mass communication. Other-directedness, as in Athens and likely Rome, are associated with decline after the inner-directeds have built their vision.

Montesquieu anticipated 20th century arguments such as Walter Lippmann's claim that the public is incapable of rational democratic decision; Mancur Olson's and George Stigler's claim that in a democracy special interest groups tend to organize along economic contours and extract rents from the public; and James March and Herbert Simon's claim that boundaries on rationality inhibit firms from thinking strategically or clearly.

Montesquieu notes the link between commerce and communication.++ It is likely that other-directedness is most advantageous where coordination is more important, i.e., in large firms and in interpersonally driven-tasks involving diplomacy or sales.

He adds:

"The effects of commerce is riches; the consequences of riches, luxury; and that of luxury the perfection of the arts. We find that the arts were carried to great perfection in the time of Semiramis; which is a sufficient indication that a considerable commerce

This is seen in his claim that the necessities of state and those of the taxpayers need to be balanced in assaying taxes, but that few politicians have "the wisdom and prudence" to limit tax levels.+ The wisdom required in a very large state is greater than the wisdom required in a small one. Much as Coase argued that there are limits to economies of scale, so Montesquieu argued, 220 years before Coase, that there are limits to the advantages of the scale of nations.

*Montesquieu, The Spirit of Laws. New York Prometheus Books, 2002. Translation originally published in New York by the Colonial Press, 1900, p. 120.
**Ibid., Book XVII, section 6, p. 269.
***Ibid., p. 292
+Ibid., p. 207
++Ibid., p. 334.

Sunday, January 25, 2009

Is a New American Revolution Morally Justified?

The United States was founded on a revolutionary ideology that displaced the hierarchical pattern of Europe with a more egalitarian one. More importantly, the ideology of the American revolution was liberal, Lockean, and based on the principle that the state derives limited rights from the direct consent of the governed. Locke did not doubt that there is a right to revolution when the state exceeds the bounds that individuals have set. If one individual feels that the state has exceeded its bounds, he is deterred from revolution by the fact that he will fail unless a majority of his compatriots agree with him. Thus, Locke does not argue that we ever give up the right to revolution but that there are practical reasons to avoid pursuing it recklessly. Thus, Jefferson's claim that there needs to be a revolution every twenty years was tempered by his calling his own election to the presidency in 1800 a revolution. By then, Jefferson had acceded to most of the Federalists' principles, so he had reduced the definition of revolution considerably.

The process by which taxes are set in the United States is less democratic and reflective of popular will than it was in colonial America just prior to the Revolutionary War. Before 1730 the colonies were with exceptions independent of British rule, but beginning in the 1730s Parliament passed the Molasses, Hat and Iron Acts and, more seriously, after 1763 imposed several taxes, such as the Sugar Act, the Stamp Act and the Quartering Act which they had the right to do, followed by the Townshend Acts (1767) and the Coercive or Intolerable Acts (1774). The colonists objected to the process by which the taxes were set, and this led to the Revolutionary War.

Today, the process by which taxes are set depends on a government that purports to represent over 300 million Americans (about 128 million or 61% of whom vote for President). In colonial times, there were about three million Americans. In colonial times the ratio of the number of Congressional representatives to population was 3,000 to one. Today it is 500,000 to one. In colonial times, a disaffected American could follow Roger Williams and leave his colony to found a new one. Today, land is held by the federal government or the people. There is nowhere else to go to escape factional tyranny.

The founders did not believe in unrestrained democracy because they feared that it would breach the liberal principles on which the nation was founded. The Progressives, whom historians such as Gabriel Kolko, William Appleman Williams, James Weinstein and Murray Rothbard have argued represented the interests of big business while claiming to represent "democracy", argued against liberal constraints on democracy. Since the Progressive era, there has been increasing tyranny of special interests, specifically the very big business interests whom the Progressives laughably believed they controlled through the Sherman Anti-trust Act and the Federal Trade Commission.

Thus, America today is characterized by much greater tyranny than it was in the colonial era. This is compounded by the rejection of liberalism by America's other-directed elites and their willingness to unrestrainedly abuse state power to extract hard-earned earnings from ordinary Americans in the interests of incompetently conceived and inevitably corrupt government projects.

There is little doubt that Americans can morally bear arms against the current government in Washington. There are practical reasons why they may not. However, it is a consideration that individualists need to begin considering. This is not a government that represents me. I do not believe that the taxes I pay go for any purpose that I can support. The federal government is suppressive and immoral, as is the state government. Things have not yet gotten bad enough that a sufficiently large percentage of the nation will agree (the tipping point is probably 30 or 40 percent), but I think that there is a good chance, given current Federal Reserve and government attitudes and policies, that this can become a reality.