FDIC and the Austrian School

Working late tonight, but I wanted to float an idea relating to an e-mail I received over the weekend from a friend of mine. He asks, basically, how certain industries (such as airlines, for example) that rely mainly on borrowing up front and realizing a return far in the future could exist without the FDIC. (This is an oversimplification; I am just going to briefly touch on it now, and I’ll get more into it and my responses later in the week, when I have a little more free time).

His argument goes like this: government deposit insurance provides a service that no insurer on the market would. Namely, that service is extending insurance to all depositors at no immediate cost. This relieves them of their risk aversion, thus incentivizing them to freely deposit their savings in any bank, scrupulous or otherwise. These banks, then, are able to turn around and lend out these massive savings to producers in these leverage intensive industries. Without FDIC guarantees, however, none of this would be possible and, since the government is the provider solely capable of behaving in this way, it follows that it should provide said service.

I’ll point out briefly that this logic, divorced from the banking specifics, is actually frequently used to defend universal healthcare. I’ll get back to that later in the week, but for now I think there are also more relevant concerns. I think, for example, that my friend and I may be “thinking past” each other on this issue. His e-mail seems mostly centered on the question of whether or not leverage intensive industries could have developed without something like FDIC guarantees, and he seems to lean against that possibility. I, frankly, don’t know the answer to that question. I think that it would be possible that they might have, but I really don’t have enough knowledge about these things to say. On top of that, of course, is the problem of the counterfactual.

To me, though, the more interesting question here has to do with the way in which the “insurance” is functioning, and with larger questions of fractional reserve banking in general. I am not totally decided on where I stand with regards to these issues but, for now, I’ll just say that I am very intrigued by Walter Block’s arguments. Specifically, I think he is on the right track when he suggests that the fundamental problem at the heart of FRB is that it creates more titles to property than property actually exists. If I deposit $100 and the bank loans $90 of it to you, and yet we still have full command over $100 and $90 in our checking accounts, respectively, then a title has been created for you (on the order of $90) to property that is also entitled to me (as part of my $100). Thus, more titles to property now exist ($190) than actual property (the original $100).

These points may seem disparate now, but I will link them together and try to flesh out a pretty solid discussion of this as the week goes on.

No Chronicle column this week, by the way, so be on the lookout for more on this kind of stuff here this week.

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Atlas Shrugged Part II: Hank Rearden Confuses his Principles

I just this afternoon went to see the second installment in the Atlas Shrugged series. With double the budget of the opening film, this one was a little less poorly executed than its predecessor–the entirely new cast was a little better, the dialogue was a little less stilted, the story was a little more coherent–but, as far as films go, it really left a lot to be desired. (I think it goes without saying that most people expected this).

Anyway, I just wanted to comment briefly on one element of the film. At one point, industrial steel magnate and metal manufacturer Hank Rearden is ordered by the state to sell his Rearden metal to them, which he has up until this point been refusing to do. He is also forced to sign away his rights to the metal, so that the state can distribute its procedure to other manufacturers and it can be universally produced. At this point, Rearden accuses the agent in his office of trying to take his patents from him.

This, to me, is a philosophically complicated position. Now, Ayn Rand, despite taking a position against the government in many cases, was a huge supporter of patents and intellectual property rights. As Stephan Kinsella has pointed out here , Rand endorsed them on a number of occasions:

Patents are the heart and core of property rights.

Intellectual property is the most important field of law.

Without getting into the larger points concerning intellectual property (which Stephan Kinsella covers well here , and which I discussed briefly in the Duke University Chronicle here ), I think that Rearden’s position on this is a bit contradictory. He is indignant that the state would move to deprive him of his patents, thereby also depriving him of the fruits of his labors. But isn’t that what those patents do to others? Don’t they prevent others who develop similar products from bringing them to the market? It is true that, within the context of the film, Rearden plays a heroic producer who alone seems able to keep the steel industry afloat. But this glosses over the daily considerations of intellectual property laws, which are seldom enforced on such a genuine basis.

Furthermore, Rearden’s position seems to me to be a little bit disingenuous. After all, he opposes the state’s use of force. In fact, he constantly pushes state officials to actually endorse the use of force instead of merely allowing it to be implied. At the same time, however, his patents themselves rest on just such a threat. I see this as something of a double standard.

Of course, Rand might respond that the force backing Rearden’s patent is legitimate, since, in her view, patents are themselves legitimate derivations of individual property rights. I don’t agree with this either, but that would require a much more extensive blog post to cover. For now, see my article in the Chronicle on it, and Kinsella’s book, articles, YouTube videos, or even audiobooks available for free from the Mises Institute on iTunes U.

Overall, this is why I think that Ayn Rand’s work largely functions more as a gateway to discovery of free-market ideas rather than as a truly solid foundation for them. In my opinion, much of what Rand was right about is better said by others, and there was a lot that I don’t think she was right about, either.

The Chronicle: Jury Nullification in America

My column in this week’s Chronicle deals with the history and resurgence of jury nullification in America. It actually ran in the paper yesterday, but I’ve been busy so I’m just posting it now. Better late than never, though, I suppose.

You can read it here.

What induced Marx to invent his ideology-doctrine was the wish to sap the prestige of economics. He was fully aware of his impotence to refute the objections raised by the economists to the practicability of the socialist schemes. In fact he was so fascinated by the theoretical system of British classical economics that he firmly believed in its impregnability. He either never learned about the doubts that the classical theory of value raised in the minds of judicious scholars, or, if he ever heard of them, he did not comprehend their weight. His own economic ideas are hardly more than a garbled version of Ricardianism. When Jevons and Menger inaugurated a new era of economic thought, his career as an author of economic writings had already come to an end; The first volume of Das Kapital had already been published several years previously. Marx’s only reaction to the marginal theory of value was that he postponed the publication of the later volumes of his main treatise. They were made accessible to the public only after his death.

Ludwig von Mises, Human Action , p. 78. Emphasis mine.

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The State and the Market: Us vs. Them

I came across an old post from Trevor Burrus on Libertarianism.org today. The post, entitled “On Belonging to Governments or Markets,” tries to explore the reasons behind why people tend to ally themselves either with the market or the government in their political views.

Burrus puts forward an interesting explanation for this, starting with his own party, the libertarians (with a lower case “p” and a lower case “l” here):

Whereas most tend to view the state as “us”–as a collective apparatus through which “we” make decisions on how our world will look–libertarians regard the state as “them”–an alien and possibly illegitimate association grafted onto civil society like a parasite.

He then demonstrates how a similar approach appears to hold true for those who, in general, oppose market solutions to things:

Non-libertarians, particularly from the left side of the political spectrum, tend to view the market, not government, as “them.” The market, particularly in the form of Wall Street and international corporations, is an alien and illegitimate association grafted onto civil society like a parasite.

Burrus then summarizes each of these positions in a way that shows how similar they actually are:

For each side, the “other sphere” derives its otherness from two main sources: 1) a general opinion that the personality traits that bring success in that sphere are not only undesirable but nearly inhuman; 2) a view that the “voucher” for participation in the other-sphere–money for markets; voting for government–is in some way inadequate.

I think that Burrus is spot-on here. The point seems obvious when presented in this way, but I have to confess to having never considered it this way before. I think that most people would generally agree with what Burrus says, but that no one would really change their stance on things as a result. Why is this?

Readers of this blog will know that I tend to hew more closely to the market side of this debate than the state side, and, as such, I have been wondering how, given Burrus’ dichotomy, I can articulate my case for why the market is a better “us” than the state. For one thing, a nit-picky point would be that the two cases that Burrus presents for those who oppose market-based societies–Wall Street and international corporations–actually represent collusion and cronyism more than they do free markets. Of course, his statement could be easily revised, and I’m sure that those who stand for state intervention can bring up issues with my classification of their position, so nothing is really solved by this.

One of the biggest reasons that I see the market as “us” and the government as “them” is that, literally speaking, that’s actually the case. The economy is not really any stand-alone entity, but rather is an abstraction used in order to describe, discuss, and conceptualize the countless number of actions, exchanges, and transactions that take place between individuals every day. The idea of the “economy” actually includes all of this, except for any Crusoe existing somewhere under a condition of total isolation. This is not so with the state. Although those who favor government as “us” do argue that we “are” the government, this is–again, speaking literally–incorrect. I understand the point that they are trying to make, and I understand that this is not a refutation of that point, but it is not meant to be. It should be taken as a clarification of my own position, which is that the government is clearly made up of a select number of individuals who, although they do “represent” us in one way or another, act on their own behalf. My quotidian actions are part of the economy, in other words, but they are not part of the government.

To move away from semantics, though, there is another reason for which I feel that the market is a better “us” than the state. This is because the market is more accommodating to minority and individual needs than the democratic state, by definition, can be. Consider, for example, a presidential election, in which I am supporting Daffy Duck and you are supporting Bart Simpson (or vice versa, depending on your age and taste in cartoons). Speaking in the most direct terms, only one of us can be satisfied by the outcome of this election. Either Daffy Duck will be elected, and I will get what I want, or Bart Simpson will be elected, and you will get what you want. But the two are mutually exclusive, so one of us must go home unsatisfied.

Now, contrast this with a market setting, in which I prefer Coke and you prefer Pepsi. In this case, we can both get what we want. I can purchase a Coke, you can purchase a Pepsi, and we can both be pleased with the outcome. As a result, we also have less to quibble over, since, now satisfied, we might have more of a tendency to live and let live. I think that, even though this is a fairly basic point, it makes a strong case for the market as a far more democratic institution than the typical 20th and 21st century nation-state.

I can’t remember where, but I actually recently saw a direct attempt to refute this idea on a news television. In fact, I think it was on John Stossel’s show, but I can’t remember who the speaker was and couldn’t find the clip (if anybody can, please post in the comments section, or e-mail me so that I can post it). Anyway, the speaker was arguing with the host on just this point, and made the case that markets can actually limit choice. In order to illustrate his point, he used the example of high-speed rail. The market has not provided high-speed rail, he argued, and therefore all of the consumers who wish to use it don’t even have a choice. In this way, he claimed, markets can limit choice, and a government can promote it.

There is no doubt that, in as far as he goes, he is not really wrong about what he is saying. It is true that, in many places, markets have yet to provide high-speed rail. It is also obviously true that this means that consumers who are eager for high-speed rail do not have the choice of using it at the moment. But this particular speaker has made two oversights in his analysis: 1) he has failed to consider the opportunity costs of state action in this case; and, 2) he’s indirectly invoking a form of the “utopia fallacy,” which occurs when someone argues against a particular theory on the basis of the fact that it cannot achieve perfect outcomes (which is obviously always true).

In the first place, the speaker assumes state-implemented high-speed rail without considering the means to achieve it, which themselves were secured by taxation. Taxation is a practice which redistributes wealth from individuals to the state and, we can observe in a value-free and universally agreeable way, thus prevents individuals from using the taxed funds otherwise. So, the solution of state action, even if it is defensible or justifiable on some grounds, can’t be justified by any “increase in net choices”–whatever that would mean–since it is sort of a zero-sum game. Choice is increased for the beneficiaries of the taxation process, but not for the taxpayer.

And, with regards to the utopia fallacy, it’s always important to acknowledge that markets are imperfect, and that they will not always be instantaneous in fulfilling every consumer demand that happens to arise. In fact, if this were the case, there would be no market or labor at all. As Rothbard liked to say, we would be living in the Garden of Eden in which every desire was instantaneously satisfied. So, even though it is true that markets have not yet provided high-speed rail or a host of other goods, the argument is not that the market always provides all goods at all times and in all places. It is that market-based systems do on the whole a better job of increasing the general welfare of the population than state systems do. Whether or not the speaker agrees, he should meet the argument on these terms, and not on those of the utopia fallacy.

These are two cases for why markets might better represent “us” than states, but I am open to hearing more (or rebuttals). Can anybody think of anything else?

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Lately, I’ve been scouring the Mises Institute’s iTunes U page for their free podcasts, lectures, and books-on-tape. I have come across a series of lectures by historian Tom Woods (author of Nullification , Meltdown , and Rollback ) on American history entitled “The Truth about American History,” which I have been absolutely blowing through.

I have to confess that, initially, I was not very taken with Woods. I have been aware of his work for some time, but have hesitated to really get into it. I got the sense, for some reason, that his scholarship was not something that I’d be interested in, but I have been wrong. Woods approaches American history with an emphasis on primary sources that puts a lot of other historians to shame, and which also validates a lot of his Austro-libertarian conclusions. His material is worth reading/listening to for these reasons alone. (For an example, Wood spends an entire two lectures in the aforementioned series on the practices of nullification and secession in order to demonstrate that, up until the Civil War, these practices were observed as legitimate and appeared in relation to a number of issues and from North and South before 1860). It’s also worth adding that Woods meticulously provides sources for further reading, many of which are themselves treasure troves of information and revisionist history. And he is, in general, an engaging writer and lecturer.

Anyway, in light of all this, I wanted to share a Mises Daily article written by Woods a few years ago. This one is particularly good for beginners in Austrian economics, and for those who find themselves encountering economic fallacies on a day-to-day basis. It’s probably even more appropriate after the events of last night.

The article is entitled “Anatomy of an Economic Ignoramus.” Enjoy!

The Chronicle: The Problem of Representative Democracy

Check out my weekly column in Duke University’s Chronicle. This week is on the problems with representative democracy, and how it solves none of the problems of direct democracy. It should be especially relevant on a night like tonight!

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Thomas Szasz and the “Medicalization” of Drugs

An interesting perspective on drugs from Dr. Thomas Szasz. I’ve heard of Szasz before and am aware that he is a quite controversial figure, but I am still relatively unfamiliar with his positions and arguments. I came across the following video on the Libertarianism.org website and, although Szasz doesn’t really delve into a lot of detail and supporting theory for some of his conclusions, I find his classical liberal approach to medicine intriguing to say the least.

I am especially struck by the comparison he makes between choices on engine strength and drug strength for consumers.

My column in the Chronicle this week deals with the rise of low-cost private schooling and its advantages over state-run education in India, Africa, and Pakistan.

Also, you can find the paper I reference on these studies here .

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A great article in this week’s Chronicle, from a like-minded writer: “When I Say Capitalism,” by Michael Cook.

Enjoy!