57 years ago, this man knew what most Americans can’t figure out today.

The Republic Becomes the Empire by Garet Garrett

We have crossed the boundary that lies between Republic and Empire. If you ask when, the answer is that you cannot make a single stroke between day and night. The precise moment does not matter. There was no painted sign to say, “You now are entering Imperium.” Yet it was a very old road and the voice of history was saying: “Whether you know it or not, the act of crossing may be irreversible.” And now, not far ahead, is a sign that reads: “No U Turns.”

If you say there were no frightening omens, that is true. The political foundations did not quake; the graves of the Fathers did not fly open; the Constitution did not tear itself up. If you say people did not will it, that also is true. But if you say therefore it has not happened, then you have been so long bemused by words that your mind will not believe what the eye can see, even as in the jungle the terrified primitive, on meeting the lion, importunes magic by saying to himself, “He is not there.” That a republic may vanish is an elementary schoolbook fact.

The Roman Republic passed into the Roman Empire, and yet never could a Roman citizen have said, “That was yesterday.” Nor is the historian, with all the advantages of perspective, able to place that momentous event at any exact point on the dial of time. The Republic had a long unhappy twilight. It is agreed that the Empire began with Augustus Caesar. Several before him had played emperor and were destroyed.

The first who might have been called emperor in fact was Julius Caesar, who pretended not to want the crown and once publicly declined it. Whether he feared more the displeasure of the Roman populace or the daggers of the republicans is unknown. In his dreams he may have been seeing a bloodstained toga. His murder soon afterward was a desperate act of the dying republican tradition, and perfectly futile. His heir was Octavian, and it was a very bloody business, yet neither did Octavian call himself emperor.

On the contrary, he was most careful to observe the old legal forms. He restored the Senate. Later he made believe to restore the Republic, and caused coins to be struck in commemoration of that event. Having acquired by universal consent, as he afterward wrote, “complete dominion over everything, both by land and sea,” he made a long and artful speech to the Senate, and ended it by saying: “And now I give back the Republic into your keeping. The laws, the troops, the treasury, the provinces, are all restored to you. May you guard them worthily.”

The response of the Senate was to crown him with oak leaves, plant laurel trees at his gate and name him Augustus. After that he reigned for more than forty years and when he died the bones of the Republic were buried with him. “The personality of a monarch,” says Stobart,

“had been thrust almost surreptitiously into the frame of a republican constitution…. The establishment of the Empire was such a delicate and equivocal act that it has been open to various interpretations ever since. Probably in the clever mind of Augustus it was intended to be equivocal from the first.”

What Augustus Caesar did was to demonstrate a proposition found in Aristotle’s “Politics,” one that he must have known by heart, namely this:

“People do not easily change, but love their own ancient customs; and it is by small degrees only that one thing takes the place of another; so that the ancient laws will remain, while the power will be in the hands of those who have brought about a revolution in the state.”

Revolution within the form.

There is no comfort in history for those who put their faith in forms; who think there is safeguard in words inscribed on parchment, preserved in a glass case, reproduced in facsimile and hauled to and fro on a Freedom Train.

Let it be current history. How much does the younger half of this generation reflect upon the fact that in its own time a complete revolution has taken place in the relations between government and people? It may be doubted that one college student in a thousand could even state it clearly. The first article of our inherited tradition, implicit in American thought from the beginning until a few years ago, was this: Government is the responsibility of a self-governing people. That doctrine has been swept away; only the elders remember it.

Now, in the name of democracy, it is accepted as a political fact that people are the responsibility of government. The forms of republican government survive; the character of the state has changed. Formerly the people supported government and set limits to it and minded their own lives.

Now they pay for unlimited government, whether they want it or not, and the government minds their lives — looking to how they are fed and clothed and housed; how they provide for their old age; how the national income, which is the product of their own labor, shall be divided among them; how they shall buy and sell; how long and how hard and under what conditions they shall work, and how equity shall be maintained between the buyers of food who dwell in the cities and the producers of food who live on the soil. For the last named purpose it resorts to a system of subsidies, penalties and compulsions, and assumes with medieval wisdom to fix the just price.

This is the Welfare State. It rose suddenly within the form. It is legal because the Supreme Court says it is. The Supreme Court once said no and then changed its mind and said yes, because meanwhile the President who was the architect of the Welfare State had appointed to the Supreme Court bench men who believed in it.

The founders who wrote the Constitution could no more have imagined a Welfare State rising by sanction of its words than they could have imagined a monarchy; and yet the Constitution did not have to be changed. It had only to be reinterpreted in one clause — the clause that reads: “The Congress shall have power to lay and collect taxes, imposts and excises to pay its debts and provide for common defense and welfare of the United States.”

“We are under a Constitution,” said Chief Justice Hughes, “but the Constitution is what the judges say it is.”

The president names the members of the Supreme Court, with the advice and consent of the Senate. It follows that if the president and a majority of the Senate happen to want a Welfare State, or any other innovation, and if, happily for their design, death and old age create several vacancies on the bench so that they may pack the Court with like-minded men, the Constitution becomes, indeed, a rubberoid instrument.

The extent to which the original precepts and intentions of constitutional, representative, limited government, in the republican form, have been eroded away by argument and dialectic is a separate subject, long and ominous, and belongs to a treatise on political science.

The one fact now to be emphasized is that when the process of erosion has gone on until there is no saying what the supreme law of the land is at a given time, then the Constitution begins to be flouted by Executive will, with something like impunity. The instances may not be crucial at first and all the more dangerous for that reason. As one is condoned, another follows, and they become progressive.

To outsmart the Constitution and to circumvent its restraints became a popular exercise of the art of government in the Roosevelt regime. In defense of his attempt to pack the Supreme Court with social-minded judges after several of his New Deal laws had been declared unconstitutional, President Roosevelt wrote: “The reactionary members of the Court had apparently determined to remain on the bench for as long as life continued-for the sole purpose of blocking any program of reform.”

Among the millions who at the time applauded that statement of contempt there were very few, if there was indeed one, who would not have been frightened by a revelation of the logical sequel. They believed, as everyone else did, that there was one thing a President could never do. There was one sentence of the Constitution that could not fall, so long as the Republic lived.

The Constitution says: “The Congress shall have power to declare war.” That, therefore, was the one thing no president could do. By his own will he could not declare war. Only Congress could declare war, and Congress could be trusted never to do it but by will of the people — or so they believed. No man could make it for them. Even if you think that President Roosevelt got the country into World War II, that was not the same thing. For a declaration of war he went to Congress — after the Japanese had attacked Pearl Harbor. He may have wanted it, he may have planned it; and yet the Constitution forbade him to declare war and he dared not do it. Nine years later a much weaker president did.

President Truman, alone and without either the consent or knowledge of Congress, had declared war on the Korean aggressor, 7000 miles away, Congress condoned his usurpation of its exclusive constitutional power. More than that, his political supporters in Congress argued that in the modern case that sentence in the Constitution conferring upon Congress the sole power to declare war was obsolete.

Mark you, the words had not been erased; they still existed in form. Only they had become obsolete. And why obsolete? Because now war may begin suddenly, with bombs falling out of the sky, and we might perish while waiting for Congress to declare war.

The reasoning is puerile. The Korean war, which made the precedent, did not begin that way; secondly, Congress was in session at the time, so that the delay could not have been more than a few hours, provided Congress had been willing to declare war; and, thirdly, the president as commander-in-chief of the armed forces of the Republic may in a legal manner act defensively before a declaration of war has been made. It is bound to be made if the nation has been attacked.

Mr. Truman’s supporters argued that in the Korean instance his act was defensive and therefore within his powers as commander-in-chief. In that case, to make it constitutional, he was legally obliged to ask Congress for a declaration of war afterward. This he never did. For a week Congress relied upon the papers for news of the country’s entry into war; then the president called a few of its leaders to the White House and told them what he had done.

A year later Congress was still debating whether or not the country was at war, in a legal, constitutional sense. A few months later Mr. Truman sent American troops to Europe to join an international army, and did it not only without a law, without even consulting Congress, but challenged the power of Congress to stop him. Congress made all of the necessary sounds of anger and then poulticed its dignity with a resolution saying the president’s action was all right for that one time, since anyhow it had been taken, but that hereafter Congress would expect to be consulted.

At that time the Foreign Relations Committee of the Senate asked the State Department to set forth in writing what might be called the position of executive government. The State Department obligingly responded with a document entitled, “Powers of the President to Send Troops Outside of the United States — Prepared for the use of the joint committee made up of the Committee on Foreign Relations and the Committee on the Armed Forces of the Senate, February 28, 1951.”

This document, in the year circa 2950, will be a precious find for any historian who may be trying then to trace the departing footprints of the vanished American Republic. For the information of the United States Senate it said (Congressional Record, March 20, 1951, p. 2745):

“As this discussion of the respective powers of the President and Congress has made clear, constitutional doctrine has been largely moulded by practical necessities. Use of the Congressional power to declare war, for example, has fallen into abeyance because wars are no longer declared in advance.”

Caesar might have said it to the Roman Senate. If constitutional doctrine is moulded by necessity, what is a written Constitution for?

Thus an argument that seemed at first to rest upon puerile reasoning turned out to be deep and cunning. The immediate use of it was to defend the unconstitutional Korean precedent, namely, the resort to war as an act of the president’s own will. Yet it was not invented for that purpose alone. It stands as a forecast of executive intentions, a manifestation of the executive mind, mortal challenge to the parliamentary principle. The simple question is: Whose hand shall control the instrument of war? It is late to ask. It may be too late, for when the hand of the Republic begins to relax another hand is already putting itself forth.

Notes

Garet Garrett (1878–1954) was an American journalist and author who was noted for his critiques of the New Deal and US involvement in the Second World War. See his books in the Mises Store. See his article archives. Comment on the blog.

This article was originally published as “The Decline of the American Republic” in The Freeman, February 25, 1952.

THE FAT CAPITALIST-PIG EMPLOYER by Walter Block, 1976

“If not for the minimum wage law and other progressive legislation, the employers, the fat-capitalist-pig exploiting employers, to be precise, would lower wages to whatever level they wanted. At best, we would be pushed back to the days of the sweatshop; at worst, to the days of the industrial revolution and before, when mankind waged an often losing battle with starvation.”

So goes the conventional wisdom on the merits of minimum wage legislation. It will be shown, however, that this conventional wisdom is wrong, tragically wrong. It assumes a villain where none exists. What does the law actually accomplish and what are its consequences? The minimum wage law is, on the face of it, not an employment law but an unemployment law. It does not force an employer to hire an employee at the minimum wage level, or at any other level. It compels the employer not to hire the employee at certain wage levels, namely, those below the minimum set by law. It coerces the worker, no matter how anxious he may be to accept a job at a wage level below the minimum, not to accept the job. It obligates the worker who is faced with a choice between a low-wage job and unemployment to choose unemployment. Nor does the law even push any wage up; it only lops off jobs which do not meet the standard.

How would wages be determined in the absence of minimum wage legislation? If the labor market consists of many suppliers of labor (employees) and many demanders of labor (employers), then the wage rate will tend to be set in accordance with what the economist calls the “marginal productivity of labor.” The marginal productivity of labor is the extra amount of receipts an employer would have if he employs a given worker. In other words, if by adding a given worker to the payroll, the employer’s total receipts rise by $60 per week, then the marginal productivity of that worker is $60 per week. The wage rate paid to the worker tends to equal the worker’s marginal productivity.  Why is this so, in view of the fact that the employer would prefer to pay the worker virtually nothing, no matter what his productivity? The answer is competition between employers.For example, assume the worker’s marginal productivity is equal to $1.00 per hour. If he were hired at 5¢ per hour, the employer would make 95¢ per hour profit. Other employers would bid for that worker. Even if they paid him 6¢, 7¢, or 10¢ an hour, their profit would still make the bidding worthwhile. The bidding would end at the wage level of $1.00 per hour. For only when the wages paid equal the worker’s marginal productivity will the incentive to bid for the worker stop.

But suppose the employers mutually agree not to hire workers at more than 5¢ per hour? This occurred in the Middle Ages when cartels of employers got together, with the aid of the state,to pass laws which prohibited wage levels above a certain maximum. Such agreements can only succeed with state aid and there are good reasons why this is so. In the noncartel situation, the employer hires a certain number of workers—the number which he believes will yield the maximum profit. If an employer hires only ten workers, it is because he thinks the productivity of the tenth will be greater than the wage he must pay and that the productivity of an eleventh would be less than this amount. If, then, a cartel succeeds in lowering the wage of workers with a marginal productivity of $1.00 to 5¢ per hour, each employer will want to hire many more workers. This is known as the “law of downward sloping demand” (the lower the price, the more buyers will want to purchase). The worker whose productivity was, in the eyes of the employer, just below $1.00, and therefore not worth hiring at $1.00 per hour, will be eagerly sought at 5¢ per hour. This leads to the first flaw in the cartel: each employer who is a party to the cartel has a great financial incentive to cheat. Each employer will try to bid workers away from the others. Theonly way he can do this is by offering higher wages. How much higher? All the way up to $1.00, as we have seen before, and for the same reason. The second flaw is that nonmembers of the cartel arrangement would want to hire these workers at 5¢ per hour, even assuming no “cheating” by members. This also tends to drive up the wage from 5¢ to $1.00 per hour. Others, such as would-be employers in noncartel geographical areas, self-employed artisans who could not before afford employees, and employers who had previously hired only part-time workers, would all contribute to an upward trend in the wage level. Even if the workers themselves are ignorant of wage levels paid elsewhere, or are located in isolated areas where there is no alternative employment, these forces will apply. It is not necessary that both parties to a trade have knowledge of all relevant conditions.

It has been said that unless both parties are equally well-informed, “imperfect competition” results, and economic laws somehow do not apply. But this is mistaken. Workers usually have little overall knowledge of the labor market, but employers are supposedly much better informed. And this is all that is necessary. While the worker may not be well-informed about alternative job opportunities, he knows well enough to take the highest paying job. All that is necessary is that the employer present himself to the  employee who is earning less than his marginal productivity, and offer him a higher wage. And this is exactly what naturally happens.

The self-interest of employers leads them “as if by an invisible hand” to ferret out low-wage workers, offer them higher wages, and spirit them away.  The whole process tends to raise wages to the level of marginal productivity. This applies not only to urban workers, but to workers in isolated areas who are ignorant of alternative job opportunities and would not have the money to get there even if aware of them. It is true that the differential between the wage level and the productivity of the unsophisticated worker will have to be great enough to compensate the employer for the costs of coming to the worker, informing him of job alternatives, and paying the costs of sending him there. But this is almost always the case, and employers have long been cognizant of it.

The Mexican “wetbacks” are a case in point. Few groups have less knowledge of the labor market in the United States, and less money for traveling to more lucrative jobs. Not only do employers from southern California travel hundreds of miles to find them, but they also furnish trucks or travel money to transport them northward. In fact, employers from as far away as Wisconsin travel to Mexico for “cheap labor” (workers receiving less than their marginal product). This is eloquent testimony to the workings of an obscure economic law they have never heard of. (There are complaints about the poor working conditions of these migrant workers. But these complaints are mainly from either well-intentioned people who are unaware of the economic realities, or from those not in sympathy with these hapless workers receiving full value for their labors. The Mexican workers themselves view the package of wages and working conditions as favorable compared to alternatives at home. This is seen in their willingness, year after year, to come to the United States during the harvesting season.) It is not the minimum wage law, therefore, that stands between Western civilization and a return to the stone age. There are market forces and profit maximizing behavior on the part of entrepreneurs, which ensure that wages do not fall below the level of productivity. And the level of productivity is itself determined by technology, education, and the amount of capital equipment in a society, not by the amount of “socially progressive” legislation enacted. Minimum wage legislation does not do what its press claims. What does it do? What are its actual effects?

What will be the reaction of the typical worker to a legislated increase in wages from $1.00 to $2.00? If he is already fully employed, he may want to work more hours. If he is partially employed or unemployed, it is virtually certain that he will want to work more. The typical employer, on the other hand, will react in the opposite way. He will want to fire virtually all of the workers he is forced to give raises to. (Otherwise he would have granted raises before he was compelled to.) Now, he has to keep production up, so he might not be able to adjust this situation immediately. But as time passes he will replace his unexpectedly expensive unskilled workers with fewer but more skilled workers and with more sophisticated machinery, so that his total productivity remains constant. Students of an introductory economics course learn that when a price level above equilibrium is set, the result is a surplus.

In the example, when a minimum wage level above $1.00 per hour is set, the result is a surplus of labor—otherwise called unemployment. Iconoclastic as it may sound, it is, therefore, true that the minimum wage law causes unemployment. At the higher wage level it creates more people willing to work and fewer jobs available. The only debatable question is: how much unemployment does the minimum wage law create? This depends on how quickly the unskilled workers are replaced by equivalently productive skilled workers in conjunction with machines. In our own recent history, for example, when the minimum wage law increased from 40¢ to 75¢ per hour, elevator operators began to be replaced. It has taken some time, but most elevators are now automatic.

The same thing happened to unskilled dishwashers. They have been and are still being replaced by automatic dishwashing machinery, operated and repaired by semi-skilled and skilled workers. The process continues. As the minimum wage law is applied to greater and greater segments of the unskilled population, and as its level rises, more and more unskilled people will become unemployed. Finally, it is important to note that a minimum wage law only directly affects those earning less than the minimum wage level. A law requiring that everyone be paid at least $2.00 per hour has no effect on an individual earning $10.00 per hour. But before assuming that the minimum wage law simply results in pay raises for low-wage earners, consider what would happen if a $100.00 per hour minimum wage law went into effect. How many of us have such great productivity that an employer would be willing to pay $100.00 for an hour of our services? Only those thought to be worth that much money would retain their jobs. The rest would be unemployed. The example is extreme, of course, but the principle which would operate if such a law were passed does operate now.

When wages are raised by law, the workers with low productivity are discharged. Who is hurt by the minimum wage law? The unskilled, whose productivity level is below the wage level legislated. The unemployment rate of black male teenagers is usually (under-) estimated at 50 percent, three times the unemployment level of the 1933 depression. And this percentage does not even begin to take into account the great numbers who have given up searching for a job in the face of this unemployment rate. The lost income that this represents is only the tip of the iceberg. More important is the on-the-job-training these young men could be receiving. Were they working at $1.00 per hour (or even less) instead of being unemployed at $2.00 per hour, they would be learning skills that would enable them to raise their productivity and wage rates above $2.00 in the future. Instead they are condemned to street corners, idleness, learning only those skills which will earn them jail sentences at some early future time.

One of the greatest hurdles facing a black teenager is looking for his first job. Every employer demands work experience, but how can the young black get it if no one will hire him? This is not because of some “employer conspiracy” to denigrate minority teenagers. It is because of the minimum wage law. If an employer is forced to pay for an experienced-level worker, is it any wonder that he demands this kind of labor? A paradox is that many black teenagers are worth more than the minimum wage but are unemployed because of it. In order to be employed with a $2.00 an hour minimum wage law, it is not enough just to be worth $2.00. You have to be thought to be worth $2.00 per hour by an employer who stands to lose money if he guesses wrong and may go broke if he guesses wrong too often. With a minimum wage law, an employer cannot afford to take a chance. And, unfortunately, black teenagers are frequently viewed as “risky,” as a class.

When confronted with a reluctant employer, a Horatio Alger hero could stride over manfully and offer to work for a token salary, or even for nothing, for a term of two weeks. During this time our hero would prove to the employer that his productivity deserved a higher wage rate. More important, he would bear with the employer part of the risk of hiring an untried worker. The employer would go along with this arrangement because he would be risking little. But the Horatio Alger hero did not have to do battle with a minimum wage law which made such an arrangement illegal. The law thus insures that there is less chance for the black teenager to prove his worth in an honest way. The minimum wage law hurts not only the black teenager, but the black ghetto merchant and industrialist as well. Without this law, he would have access, in a way which his white counterpart would not, to a cheap labor pool of black teenager labor. The young black worker would be more accessible to him since he tends to live in the ghetto and would have easier access to the job site. He would undoubtedly have less resentment toward, and a smoother work relationship with, a black entrepreneur. Since this is one of the most important determinants of productivity for jobs of this type, the black employer could pay his workers more than the white one could—and still make a profit.

Unfortunate as the effects on young black workers are, a greater tragedy of the minimum wage law concerns the  handicapped worker (the lame, the blind, the deaf, the amputee, the paralyzed, and the mentally handicapped). The minimum wage law effectively makes it illegal for a profit-seeking employer to hire a handicapped person. All hopes of even a modicum of self reliance are dashed. The choice the handicapped person faces is between idleness and governmentally supported make-work schemes which consist of trivial activities and are as demoralizing as idleness. That such schemes are supported by a government which makes honest employment impossible in the first place, is an irony few handicapped people would find amusing. Recently, certain classes of handicapped people (the slightly handicapped) have become exempt from the minimum wage law. It is, therefore, in the interest of employers to hire the “slightly handicapped,” and they now have jobs. But if it has been realized that the minimum wage law hurts the employment chances of “slightly handicapped” people, surely it should be realized that it hurts the chances of others. Why are seriously handicapped people not exempt? If the minimum wage law does not protect the individual it seems designed to protect, whose interests does it serve?  Why was such legislation passed?

Among the most vociferous proponents of minimum wage legislation is organized labor—and this must give us pause for thought. For the average union member earns much more than the minimum wage level of $2.00 per hour. If he is already earning $10.00 per hour, as we have seen, his wage level is in accordance with the law, and is not, therefore, affected by it.  What then accounts for his passionate commitment to it? His concern is hardly with the downtrodden worker—his black, Puerto Rican, Mexican-American and American-Indian brethren. For his union is typically 99.44 percent white, and he strenuously resists the attempts by members of minority groups to enter his union. What then stands behind organized labor’s interest in minimum wage legislation? When the minimum wage law forced up the wages of unskilled labor, the law of downward sloping demand caused employers to substitute skilled labor for unskilled labor. In the same way, when a labor union, composed mainly of skilled laborers, obtains a wage increase, the law of downward sloping demand causes employers to substitute unskilled laborers for skilled laborers! In other words, because skilled and unskilled laborers are, within certain bounds, substitutable for each other, they are actually in competition with one another. It might well be that it is 10 or 20 unskilled workers who are in competition with, and hence substitutable for two or three skilled workers, plus a more sophisticated machine. But of the substitutability itself, especially in the long run, there can be no doubt.

What better way to get rid of your competition than to force it to price itself out of the market? What better way for a union to insure that the next wage hike will not tempt employers to hire unskilled, nonunion scabs (especially minority group members)? The tactic is to get a law passed that makes the wage of the unskilled so high that they cannot be hired, no matter how outrageous the wage demands of the union are. (If minority groups could get a law passed requiring all union wages to rise ten times their present amount, they could virtually destroy the unions. Union membership would decline precipitously. Employers would fire all unionists, and in cases where they could not, or did not, they would go bankrupt.) Do the unions purposefully and knowingly advocate such a harmful law? It is not motives that concern us here. It is only acts and their effects. The effects of the minimum wage law are disastrous. It adversely affects the poor, the unskilled, and minority group members, the very people it was supposedly designed to help.

Ahmadinejad may be a crook, but he’s Iran’s problem.  Establishment loving subhumans like Stephonapolous are our problem.

David in Qatar

“Support the Troops” even if you don’t support the war is among the most widely held beliefs in America.  Another widely held belief, often shared by the same people, is that the Federal Reserve is a necessary institution. Monetary policy and financial regulation must be conducted by a central authority.  These two positions are actually in direct opposition to each other.  The efforts of the Federal Reserve harm the very troops Americans “support.”

Defining Americans’ “Support the Troops” slogan

In order to engage this line of reasoning, we must first decide what Americans mean when they say “Support the Troops.”  To be honest, this is a gray area.  I don’t know what each individual really means when they say it.  Do they support warfighters as a rule of thumb?  Do they believe that the troops provide for their liberty, and so they must be taken care of?  Do they believe that the troops are making great sacrifices?  Or do they just say it because they would rather just repeat the slogan rather than face a backlash of criticism for appearing to not support the troops?  I honestly can not say what each individual American believes.  However, I must start with the basic premise that Americans “Support the Troops” and do not support any action that would bring harm to American troops through no fault of their own.  This harm must include any negligence by their superiors, any wrongful prosecution, undue economic hardships, or any violation of contract by the federal government.  I think we can all agree on that these situations would be things Americans who support the troops would find unfavorable.

The Contract

When a young person enters the military, they enter into a voluntary contract (assuming no draft is in place, which is a form of slavery and a wholly separate issue.) The contract is for a specific time limit.  The pay is lower, on average, than their civilian counterparts, particularly among the officer corps.  The difference, however, is made up in housing, medical, and educational benefits.  These benefits can be quite extraordinary.  The remaining equilibrium of recruiting is made up through the relentless pro-State propaganda that brings in a small fraction of patriotic young people (the number is higher during times of war) and the depressed economic conditions in the country (the number is higher in a depressed economy.)  All of these factors contribute to the make up the initial pool of available men and women that agree to the terms of their first contract.

Things get a bit more complex when the service-member decides to get out or enter into a second contract.  With the average contract being 4 years for enlisted and 6 years for officers, a second contract makes the likelihood of being a “lifer” a much greater probability.  A “lifer” is the military term for a career servicemen.  Career soldiers are important to the service, as they represent the knowledge of previous experiences and the leadership to instruct the new generation.  Regardless of your support of military institutions in general or warfighting in general, if you “Support the Troops” then you will understand that the “lifer” is an important competent of military competency.

The contract decision for a “lifer” then is quite different for the decision of a new recruit. The lifer now has experience and perhaps a technical skill that can be useful in the private sector.  They have completed a higher education, in general, than the recruit.  In order for the government to “negotiate,” they must offer something more.  The bargaining chip employed here is retirement.  After 20 years, the government will provide a generous pension to all service-members.  This is a desirable agreement, and usually puts the second enlistment soldier over the top.  Once a soldier does eight or ten years, it is very likely they will do the final half of their career to earn their retirement.  Once again, labor equilibrium is found.

(Side note: I got out after 10 years. I’m a different bird.)

But what if that promise of retirement was not all it’s cracked up to be?  What if that retirement benefit was destroyed through a reduction of purchasing power?  Would you be willing to support policies that purposely destroyed the government’s ability to fulfill its financial obligation to the soldiers you support?

The Benefit of Inflation

Inflation is defined as a persistent rise in prices.  This is the modern definition, however it is not the only definition.  Persistent price increases happen for a reason.  Here we must distinguish between the fluctuations in commodity prices (think oil last year) and real persistent increases over time, which is a purely monetary phenomenon.  Persistent price increases occur from currency devaluation, an increase in the amount of currency available relative to the market need.  This is the classical definition of inflation.  We refer to it as “printing money out of thin air, ” a cute euphemism for the practice of bringing about inflation.

Supporters of big government, and the Federal Reserve, point out a very obvious benefit of a moderate policy of inflation.  Debts contracted by the government can be paid back more cheaply if the currency used to pay back the debt is less valuable than the currency received.  If the government borrows $100 over 10 years, and then devalues the currency by 3% per year, while the rate of interest is 2%, the government makes a “profit.”  (I use quotation marks because the idea of profit here is completely different from the profit earned in the private sector. It’s a separate discussion but if you wish to delve into it further hit me up in the comments section.)

Certainly many Americans will agree that stiffing the Chinese on money we have borrowed to finance our government is a great idea. (Sarcasm only partially intended.)  Unfortunately, the Chinese are not the only people the American government has obligated to repay.  Not only have they promised Social Security benefits to generations of workers, but they have also promised a definite standard of living to American career soldiers in exchange for their service, as I explained above.  Had they not engaged in this negotiation, there would be fewer career soldiers.  It is part of the give-and-take market process that determines the labor force.

This money is owed to the people serving.  It is owed to the troops you support.  Would you feel comfortable knowing that the government must violate this contract?  That it has no choice?  The reason that it must violate this contract is because the Federal Reserve engages in a practice of inflation and has done so for the 96 years of its existence.

Much ink has been spilled on the Federal Reserve, inflation, the dollar losing 96% of its value since the Fed took over (with the directive to protect the dollar), fiat money, and fractional reserve banking.  I am going to assume that if you are still reading, you have a solid grasp of the basics.  The point of this post is to help you see the interrelationships of these institutions and for you to see that these two beliefs: Supporting the Troops and Supporting the Federal Reserve, are incompatible.

The Federal Reserve destroys the purchasing power of military veterans.  This point is irrefutable.  It has done so for 96 years.  Should the Federal Reserve bring about mass inflation (persistent double digit inflation), veterans will not receive the purchasing power of their obligation from the government at the level they were promised.  This is a violation of their property rights.  It is unethical.  Please do not “Support the Troops” and turn a blind eye to this fact.

Objections

This is a blog post and not an academic paper.  I don’t have time for the latter.  I can think of many objections, and can address them here, or I can let you make the objections and I will address them in the comments.  I’ll take the latter path to save me some time.

The Economic Calculation Problem

Let’s start with a scenario that keeps statists awake at night, checking under their bed for Walmart demons: because of an unregulated, untaxed free market, one company achieved such tremendous economies of scale and such a tremendous competitive advantage that it has driven out all competition in all areas of production.  Basically this company now has a monopoly on every factor of production in the world, they have disregarded the Law of Comparative Advantage by refusing to enter into business agreements with anyone else, and no one can possibly compete with them. This scenario was depicted in the popular animated movie Wall-E.  A megacorporation named Buy N Large has used every conceivable economic and political manipulation to control every resource on the planet.  We’ll discuss at another time whether a free market could produce such an entity.

Quick note: for the purposes of this proof, it does not matter if our company owns all the resources available or that it uses the strong arm of the State to direct all of the resources.  The method is irrelevant to the proof.  As you are about to see, the fact that there is no exchange in the factors of production is the integral aspect.

Choosing to Produce

Let’s pause for a moment and consider the following question: how does a company (or an entrepreneur) decide what to produce and how to produce it?  In a market economy, there are literally millions of ways that the factors of production can be combined to produce a good.  For example, there are thousands of different types of labor (unskilled, skilled, managerial, robotic, and each of those categories are broad brush strokes) and many different natural resources, different types of capital goods (i.e. machines), land, etc.. 

To simplfiy, a company has to do two main things when it embarks on a project.  First, it must attempt to anticipate future prices for the goods it plans to produce.  Second, it has to determine the costs of producing those goods.  If the company correctly anticipates future prices, it will profit.  If it is wrong, it will fail.  We know this.  But what if the company had absolutely no idea what the costs of producing a particular product were?  How would it know if it made the right product in the right way?  What type of feedback would it receive to know that it was heading down the right path or the wrong path?   In a normal market economy, company X may produce a good at $2,500 knowing that the cost of production is $1,500 and that it makes a $1,000 profit.  But what if it didn’t know the cost of production?  How would it know that $2,500 marked a success or a failure?

Now let’s go back to Buy N Large.  In our scenario, they own or direct all the factors of production.  There is no exchange. You can’t exchange with yourself.  Since there is no exchange, there are no prices – certainly not a price system that in any way reflects the value of alternative uses of the factors of production.

Prices arise from exchange.  Not only are consumer goods exchanged in a market economy, but producer inputs are exchanged as well.  The latter can be grouped into four broad catagories: labor, land, natural resources, and machinery.  Each of those categories is a broad aggregation of many hundreds and thousands of categories.  The prices of these factors of production is imputed back from the value of the goods that are produced.  I can’t stress that last sentence enough.  If you don’t grasp that concept, you can never have a full understanding of how a market economy works. I’d be happy to explain it further in the comment section if you desire. 

Know-How, No Matter

So Buy N Large has no costs of production at its disposal.  We can assume that it has all the technical and scientific know-how to produce any item. It still won’t matter.  The question the company has to ask itself and answer is should they produce this good or that good?  Should they?   And how should they produce it?

Should they produce new computers or new cars? Should they use a robotic plant or a plant that relies on more unskilled labor?  Should they close a plant or expand a plant?  Should they cease producing an item altogether or double production?  It depends.  It depends on scarcities of labor, scarcities of related goods, scarcities of other factors.  They don’t know these things.  They can’t know.  They don’t know the value of the alternative uses of their factors of production because they don’t have a unitary measure, a price system, that tells them what it costs to produce them!

So there is absolutely no way that Buy N Large can make production decisions that reflect the output of a market economy – the wants and needs of consumers.  The result would be total chaos and the destruction of capital.  Buy N Large’s situation is impossible.  Even if they were to be incredibly lucky and they correctly anticipated the value of a good they produced, they wouldn’t know if the endeavor was the best use of the factors of production, since they don’t know what it cost them to produce it in the first place.  Likewise, they have no idea if the good they produced was a flop.

Though the situation I have descirbed is based on fiction, it is exactly the scenario that would play out in an entirely Socialist economy, where one entity: the collective, which is really just a State monopoly, owns every resource.

This proof is the Economic Calculation Problem or Economic Calculation in the Socialist Commonwealth.  It proves that a Socialist economy is impossible.  The proof was delivered by a student of Carl Menger named Ludwig Von Mises in 1920.  For 90 years, it has either been ignored or dismissed by academic economists, who have longed for the day when their State masters will ask them to centrally plan the glorious new world economy.

The Machine That Turns to No Effect

The Soviets had a few methods for dealing with the Economic Calculation problem, and it was by no means ever dismissed in Russia.  Their economists had to eventually concede that Mises was right even as Western “intellectuals” were still fawning over Soviet production numbers.  The CIA, for example, thought that Russia was an economic powerhouse because of its constantly rising GDP.  In the end, all that waste accomplished was turning Russia into “Bangladesh with missiles.” 

The Soviet production agency, GOSPLAN, attempted to set production targets for the various industries, and then each industry’s planner would set targets for each firm.  The targets were quantitative measurements, as in x tons of steel, or x tons of nails.  If you exceeded the target, you got a bonus.  If you failed…. well you didn’t want to fail.  But you didn’t want to succeed by too much either, because your target would be raised and you’d have an even tougher task ahead of you.  So it built in a system of mutual lying, where everyone exceeded their targets by just a little bit.  Hence the steadily rising Soviet GDP.  But, and this is the crucial point, the Soviets had no way of knowing the value of anything they produced.  During a famine in the 1980′s, silos sat empty and tractors rusted while laborers were stuck in factories… making more tractors.  The wheel was turning but to no effect.  A popular Russian cartoon joke goes as follows:  a Russian nail factory manager is meeting with his central planner.  In the backround are a train and a giant nail that takes up the entire train.  The factory manager exclaims, “we have met our production target, Comrade!”

Note: a fuller discussion of Soviet calculation would include the bartering between industries, allowing black markets to thrive to help determine costs, copying prices from Western manufacturers, and global exchange of Russian resources – but we’ll cut it short here. The Soviet economy was only fully Socialist during the War Communism period under Lenin.  After that, it mixed in as much Western pricing as possible and more resembled the Post Office in a Capitalist country rather than a Socialist utopia.  Had it remained fully Socialistic, it would have collapsed far sooner than 70 years.

Criticisms

Finally, I’ll address some of the criticisms of Mises’ proof.

The first people to attack Mises were the German economists of the Historical School.  These guys weren’t very bright and they rejected theoretical approaches to economic problems. Their solution was that the State could just add all of the factors of production up, without a unitary measure.  Mises asked, how can you add tons of steel to thousands of hours of unskilled labor to x square feet of plant space etc etc?  You can’t add apples and oranges.  So Mises dismissed them rather easily.  This method ended up being similar to GOSPLAN’s approach, but in practice was completely useless, as Mises predicted.

The Marxists came next, claiming that they had a unitary measure: labor hours.  We’ll just take labor hours as the measure of a good’s cost and determine our profits and losses from there.  But, Mises said, labor hours is purely semantical.  The proper term is labor hours of an engineer, labor hours of a janitor, labor hours of an accountant, etc.  There are thousands upon thousands of different types of labor in a market economy, each with their own market, and even within each category of employment you can’t say that Engineer X and Engineer Y have the same skills and experience and hence the same market value.  Calling it all Labor Hours is a semantic trick and nothing more.  Besides, Mises pointed out, in a market economy value does not come from mere work, but from the marginal utility that a good provides to consumers.  This is the core discovery of the Marginalist Revolution that refuted Marx’s Labor Theory of Value in the first place.  So again, Mises smashed this objection.

In the 1930′s, Mises’ argument was translated to English and the next opposition came from the Neo-Classical school.  Their solution was more nuanced, but ultimately just as flawed.  They proposed a trial and error method, known as the Lange-Lerner-Taylor solution.  The idea would be to leave everyone in place in their current capacity in the market economy, and have the central planners estimate price changes through trial-and-error.  If there is a surplus of an item, lower the price.  If there is a shortage, raise the price.  This child’s game, and that is what Mises called it, actually became the Orthodox defense of central planning in American universities until the fall of the Soviet Union temporarily shook the academic world.  Mises’ objection was very fundamental and insightful (and roundly ignored or dismissed.)  Mises said, you are completely ignoring three important facts:

First, as I talked about above, prices are imputed back.  Just because there is a shortage in laptop computers, that doesn’t tell the central planner the best way to produce them at a lower the cost or whether lowering the cost or producing them at all is the best use of resources.  You still  don’t have any costs of production to measure the alternative uses. 

Second, even if you could collect and process the level of shortages and surpluses throughout the entire market economy (consider that in an American grocery store alone there 70,000 products on average), using super computers to calculate all of these factors, and imputing all of these values back to the producer goods, you are missing a key point.  Many plants and machines in existence today shouldn’t be in existence.  How do you account for capital depreciation, and the current wasteful production processes that would otherwise be replaced when the market no longer values those resources.

And finally, these economists fail to understand the impact of the entrepreneur in a market economy.  The best way to explain this is through an example.  In the early 1980′s, IBM had the technology to produce personal computers. At the time, their CEO said we’re not going to do it because we don’t think businesses will use them.  They are just going to be a game platform for bored rich consumers.  They were clearly wrong.  Steve Jobs disagreed, manufactured the Mac, then Microsoft came in, and the rest is history.  Imagine Steve Jobs trying to explain to a central planner why the factors of production in his plant should be used to produce a technology that no one is certain will be useful.  And imagine the plant manager and the planners trying to determine if the costs of production justify the demand they discovered if they actually went through with it.

Yet, thse objections were ignored. To this day, every country, including the United States, engages in some level of central planning.  Every country employs central planning of the money supply.  Mises himself was barred from teaching in America, land of the free and the greatest market economy of his day, because of his economic theory.  Central planning continues to charm the ruling class despite Mises’ work.

So I hope this post enlightened you and stimulates thought for your weekend.  I’d be happy to engage any questions or objections in the comment section.

Have a great weekend!

David in Qatar
(p.s. a debt of gratitude is owed to Professor Joseph Salerno for his excellent explanation of economic calculation at Mises U 2009.)

Sources and some further reading:

Economic Calculation in the Socialist Economy by Ludwig Von Mises
The End of Socialism and the Calculation Debate Revisited by Murray N. Rothbard
Intellectuals and Socialism by F.A. Hayek
An Interview with Yuri Maltsev by LvMI
The Decline and Fall of Gorbachev and the Soviet State by Yuri Maltsev
Why A Socialist Economy is Impossible by Joseph Salerno

From a contrarian perspective, not all recessions are created equal and many of the recessions of the 20th century were minor, with a few notable exceptions.  It is also true that the 19th century also had many recessions, about the same average of one every 5 years or so.  Although it is difficult to accumulate accurate economic data for the 19th century (or any period with government collected data), we are now seeing that certain presumed disasters were quite mild in retrospect.  The “Long Depression” of the 1870s is now nearly universally regarded as a period of tremendous prosperity and growth, contrary to the original academic view that focused only on a contraction in the money supply, and assumed therefore that the economy was stagnant.  It turns out, the economy grew during the 1870s despite monetary contraction.  Academic historians are left to lament supposed wealth inequalities as if merely mentioning that some people have more than others is enough to cast a shadow on any era.  Socialists are so pathetic.

The recessions (or worse) of the 20th century are as follows:

1918-1919
1920-1921
1923-1924
1926-1927
1929-1933
1937-1938
1945
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980
1981-1982
1990-1991
2001
2007-present

Perhaps we cannot stabilize the business cycle by manipulating monetary policy and interest rates.  It seems to be a preponderous intrusion on our liberty and our Constitution for such meager results (if you can even call them that.)  If we can’t “stabilize” the business cycle, perhaps we should look at alternatives that don’t result in a revocation of property rights, increased militarization and police statism, increased lobbying, and decreasing purchasing power.  That is quite the high price for such a small return.

Think about it. If a government bureaucrat spits out wrong numbers, bad info, etc… what is the consequence? Does he/she get fired? Does the government go bankrupt? No. Nothing happens. So not only is there no incentive to be right, there is little disincentive to not be wrong! In the private sector, the manager of such a disreputable company section would be cast off or the company would suffer the economic consequences of so many poor practices (unless they’re a big bank and the government works with them to fleece the people.)

David in Qatar

Is America Struggling With Hunger? by Jeremie T.A. Rostan

“One in eight Americans is struggling with hunger.”

If you haven’t heard that line, then you must not have a TV. And if you haven’t read it, even if you can’t be bothered to open a newspaper, then you must live in some very, very, remote part of the country.

“One in eight Americans is struggling with hunger.” Everybody knows that. And everybody is talking about it. That statistic caught on like wildfire, striking everyone with a feeling of collective emergency.

My reaction was quite different; not because I don’t care about the satisfaction of my neighbors’ primary needs, but only because I am more suspicious than sensitive.

One in eight, I thought, that’s 12.5 percent — a huge proportion. That’s thirty-seven million, five hundred thousand people, a huge number — incredible, really. I said to myself, how can it be that so many Americans struggle with hunger, and yet I see so little of it?

So I did what few people do: I checked. Where does that “one in eight” come from? And what does it mean?

The now-famous statistic comes from the annual Food Security Survey (FSS) of the United States Department of Agriculture.[1] The first thing to point out is that this level of hunger is not new: contrary to what one may infer from the current campaign, the recent economic crisis has little to do with it. In fact, while food insecurity in America has increased slightly under recent economic conditions, it has been more or less stable for the last 15 years, affecting around 11 percent of households.[2]

Another interesting tidbit of information is that until 2005, the FSS divided food insecurity into “food insecurity without hunger” and “food insecurity with hunger.” It then replaced those labels, without any change in their statistical definition, with “low food security” and “very low food security,” respectively. Thus, the famous “one-in-eight” hungry Americans include all Americans living in households that, until 2005, were described as food insecure, but without hunger.

So, just how many Americans do face hunger? Well, households with “very low food security” have represented a consistent third of all food-insecure households in past years — around 4 percent of total households. Yet, this still does not mean that one in twenty-five Americans struggles with hunger.

Indeed, what do these statistical categories mean? This question is essential, because it is only deceptive definitions that allow activists and the mass media to foster the myth that “one in eight Americans is struggling with hunger.”

In the survery, households were counted as having low food security if they reported, for instance, that in the past year they had been “worried whether [their] food would run out before [they] got money to buy more.”

This is a good description of an obviously very unsatisfying condition: a feeling of insecurity concerning food. But it does not imply and must not be confused with actual insecurity concerning food, i.e., actual threats to one’s ability to afford food.

Other criteria were the incapacity to afford “balanced meals,” or the need to rely on a “few kinds of low-cost food.” Moreover, such conditions need not be a household’s constant situation, but only the case “sometimes” during the past year.

Once again, a feeling of insecurity, or the dependence on cheap food is certainly very undesirable. Still, it seems an outright lie to describe as “struggling with hunger” those households (accounting for two-thirds of all food-insecure households) which reported “few, if any, indications of reduced food intake” at anytime during the year.

What about households with very low food security? The distinction between low and very low food security can best be described as a distinction between subjective and objective food insecurity.

The “defining characteristic” of households with very low food security “is that, at times during the year, the food intake of household members is reduced and their normal eating patterns are disrupted because the household lacks money and other resources for food.”[3]

Now, even this hardly fits in the definition of hunger as formulated by the Committee on National Statistics: “a potential consequence of food insecurity that, because of prolonged, involuntary lack of food, results in discomfort, illness, weakness, or pain that goes beyond the usual uneasy sensation.”[4]

In fact, households with “very low food security” include all those that, because of reduced food intake, sometimes felt the “usual uneasy sensation” of hunger — not hunger in the sense of a day-to-day struggle to maintain one’s health and strength.

Likewise, publicizing the disastrous situation of America in the face of hunger, activists obviously point out the case of children. Yet, a close look at the actual data reveals that less than 1 percent of households with children had very low food security among children.[5]

One would expect food insecurity to be closely linked to household resources. However, half of the households categorized as having very low food security have incomes well above the poverty line.[6] “On the other hand,” the 2005 report states, “many low-income households (including almost two-thirds of those with incomes below the official poverty line) were food secure.” Indeed, only 15 percent of households with incomes below the poverty line have very low food security.[7]

This means that 2 percent of all American households sometimes feel the “usual uneasy sensation” of hunger due to a lack of economic resources — and the vast majority of those with children manage to spare them from hunger.[8]

Certainly, this constitutes a problem; even more certainly, the truth is far from the collective-emergency myth that “one in eight Americans is struggling with hunger.”

Notes

[1] A brief summary is accessible at the US Department of Agriculture website.

[2] Household Food Security in the United States, 2005, Economic Research Services, United States Department of Agriculture, p. 10.

[3] US Department of Agriculture.

[4] Household Food Security in the United States, 2005, p. 6.

[5] US Department of Agriculture.

[6] Household Food Security in the United States, 2005, p. 13.

[7] Household Food Security in the United States, 2005, p. 16.

[8] The criterion I use to classify households as “lacking economic resources” is the Poverty Line x 1.3 ratio.

Jérémie T.A. Rostan is “agrege de philosophie.” He teaches philosophy and economics in San Francisco, California.

The first article is about Mark Twain, the great American writer, classical liberal, champion of the working man and free enterprise (yes, you can be both – in fact, you have to be if you wish to be consistent.)  Twain was also a vicious critic of the State.  In his view, government was nothing more than a den of theives. Twain’s opinions on politics mirror those of Ron Paul’s mentor, Murray N. Rothbard, who once charactized the State as a gang of criminals writ large.

The second article (hat tip to Drudge):
Both national party committees spend big chunks on fancy ……

Both the national Democratic and Republican party committees spend about two-thirds of the money they take in on the care and comfort of committee staffs and on efforts to raise more funds, with lavish spending on limousines, expensive hotels, meals and tips, an analysis of the latest financial disclosure data shows.

Third article (my apologies for sending you to NeoCon News):
U.N.’s Ballooning $732 Million Haiti Peacekeeping Budget ……

The United Nations has quietly upped this year’s peacekeeping budget for earthquake-shattered Haiti to $732.4 million, with two-thirds of that amount going for the salary, perks and upkeep of its own personnel, not residents of the devastated island.

In this argument:
Mark Twain 2, The State 0

In your pocketbook:
The State 2, Taxpayers 0

I don’t think the statists want us to keep score.

* I like the definition of the State as a minority that has a comparative advantage in force/violence in a given territory.

Inflation in American history, even considering the unprecedented actions of the Fed since 2008, pales in comparison to just about every country in the globe. In the 20th century, nearly every government in the world devalued their currency at a faster rate than America.

Before the Federal Reserve, under the gold standard, America suffered from deflation for most of its first 140 years (interrupted only when the government went off the gold standard to pay for wars.)

Considering this history, if inflation was a good thing, wouldn’t America be economically backward, handicapped by its strict, unforgiving monetary policy in comparison to the rest of the world, which has been markedly pro-inflation over the last 230 years?

Well, shucks, I guess we just got lucky.

Obviously, inflation isn’t the panacea for economic growth. In Milton Friedman and Anna Schwartz’s book A Monetary History of the United States, they correctly point out that America’s money supply shrunk consistently from 1870-1913, and yet, during this same period American industry was revolutionized, the standard of living for every American rose at a faster pace than any other time in world history, and real wages rose. They rose because labor became more productive. If your nominal wage falls 1% and prices fall 2%, guess what? You just became 1% richer. If your nominal wage rises while prices fall, that’s even better.

Someone recently wisecracked that if I do indeed hold a job, would I really want to see my nominal wage fall? If prices fell further than my wage, why wouldn’t I? And that’s exactly what happened in America for its first 140 years or so of existence. Boy, those poor American workers must have been looking around their world in envy of those lucky ones living in inflationary regimes.

What about the scientific sounding term ‘price stability?’ Fed apologists on this site like to reference the Fed’s goal of maintaining ‘price stability,’ whatever that is. Prices change because tastes change. They change because production costs change. Prices change every instant. Look up a stock price. Now look it up again. Well, whaddya know? Its price changed.

So what is ‘price stability?’ Is it a price control? We have 4,000 years of evidence that price controls do not work. Are we trying to maintain constant prices for an entire complex market economy now? To the Fed apologist, that is somehow a smarter idea.

Not to mention the Fed’s idea of price stability has brought you $1100/oz. gold.

In this blog, I am going to attempt to explain that we need more economic inquiry while also showing why current mainstream economic thought is so dramatically flawed.

I’ll Trade You St. Charles Place for Marvin Gardens

We all played the Monopoly game as children and many of us still play. It’s a fun game of luck and strategy. But it’s just that – a game. Unfortunately, for mainstream econ, Monopoly is representative of real life in all the wrong ways. What do I mean by this?

Let’s say you land on the Red properties (Illinois, Indiana, Kentucky.) You purchase them, build them up with hotels, and start collecting rents. Your rival lucks into the Green properties with higher initial costs, but higher rents. All other things being equal, your chance of beating your rival is very low. He has an unbeatable competitive advantage.

This situation, very common in a board game, does not in any way represent real life. In real life, there are an infinite number of ways, limited only by your imagination, that you can reclaim a competitive advantage. Your hotels on the board are homogeneous. You can’t do anything to make your Red property hotels more attractive to increase your rents. In real life, the only thing stopping you from differentiating your product is YOU.

Competition is the dynamic rivalrous process of discovery that coordinates the actions of market participants.

The above definition of competition was the standard one up until the 1920′s/1930′s.

First off, what does the definition say? It says that entrepreneurs engage in a process of discovery. That means they are going out and looking for ways to satisfy consumers. It says that this process is crucial and essential because it coordinates market participation, i.e winners make money and are rewarded for satisfying consumer wants and losers lose money because they failed at this task.

Notice that it doesn’t say that entrepreneurs are always right.
It doesn’t say that consumers know what they want or are omniscient.
It doesn’t say that there is no luck involved.

The definition makes none of these assumptions. There can be luck. There can be genius. There can be stupidity. There can be any combination of the aforementioned attributes. All of these things come together, but in the end the final verdict is whether or not consumer wants are satisfied.

Entrepreneurship is an essential element of economics. Ignore it at your own peril, and that is exactly what modern econ has done, starting with the scientistic revolution that occured in the 1920′s (circa).

We Can’t Model Human Behavior So We Pretend It Doesn’t Exist

So what happened? The physical sciences had been extremely successful in explaining the physical realities of our world. Their spectacular success made them somewhat the envy of the academic world. Academics is a rather thankless job. If your ideas do not translate into immediate, tangible results that common people can grasp, acclaim is rare. Despite what romantics tell you, scientists and academics, just like every other human on this planet, find praise to be flattering.

The success of the physical sciences led many academic economists to break away from theoretical ideas and attempt to copy/mimic the physical sciences. After 80 years, the results have been completely disastrous. The theoretical schools saw this coming. You can’t model human behavior. Humans do not bounce around in jars like atoms, reacting exactly the same way to outside forces. Humans react differently, they think differently, and they are unique entities with their own beliefs, goals, motivations, etc.

Nowhere is the failure of modern econ more striking than in the areas of entrepreneurship, competition, and monopoly.

The Textbook Challenge

I want you to take up the following challenge: get a hold of a college level Econ textbook, flip to the index and look up the word entrepreneur. I bet you will find nothing more than a quick reference to its existence, perhaps a page or two. Some recent texts (mid 1990′s and beyond) have started to reflect an inreased desire to understand entrepreneurship and may dedicate a whole subsection.

Modern scientistic econ modelers can not develop a model of entrepreneurship and so it was almost completely removed from modern economic thought. Does this sound like a good idea to you? To remove one of the most essential economic forces from the study of economics? Do you see now why modern econ is challenged to come up with explanations for market phenomenon?

This willful ignorance had a terrible effect on modern econ’s view of competition. How does modern econ view competition? Well, a lot like that basic Monopoly game described above. Competition was replaced by Perfect Competition, a non-existent fairy tale that magically fits econ models.

Perfect Competition has a few different forms, but the main elements are as follows: many market participants producing homogenous goods at pretty much the same amount of profit with no cost for entry/exit in the market. If any of those elements are not present, competition is said to be monopolistic. Yeah, ok. That’s realistic!

I Have A Monopoly on Being Awesome

Can you think of a market, not just today but since the beginning of market economies, that has ever fit the description above? There is none. Even if two companies produce the identical product, it’s still not the same product as there are many ways that two companies can differentiate the product – through superior service, for example. If the customer’s view of the two products differs in the slightest manner, then it’s not the same product.

So Perfect Compeition is a ridiculous fantasy. It’s a child’s game like Monopoly. Yet, it is a foundation of modern econ, replacing the study of entrepreneurship and real market discovery.

What a shame. What a waste. This type of nonsense has been taught to college students for decades, most notably in Paul Samuelson’s best selling econ textbook written in 1948 (Samuelson’s book remained a best seller for over 30 years.)

Fun Fact: Samuelson was so enamored by the production numbers released in the USSR that he exclaimed one day they’d outproduce America! Samuelson, like his student Krugman, does not differentiate between production that is useful and that which is wasteful. With an economic model of perfect competition as his core theory of market participation, how could he?

Where Are We Going Next? Straight to Jail.

I have to stop here for now. This is the ground work for understanding an upcoming post on the folly of Antitrust regulation.

People need to understand the basic precepts of economics as easily as they understand long division. These concepts are not so difficult that they can’t be taught to your children. We would do our families and future generations a great deal of good if we come to understand these concepts and pass them on. Failing to do so allows crackpots like Samuelson to infect entire generations of college students with nonsensical and worthless economic models built upon fallacies.

David Burns