Building the Friedman Myth

Richard Ebeling, president of The Foundation for Economic Education, editorialized last month about Milton Friedman's "deep and determined allegiance to human liberty." Presumably, we are indebted to Friedman and many of his University of Chicago colleagues for explaining that free markets "are the institutional guarantor of choice, opportunity, and limits of government control over people's lives."

Friedman, Ebeling suggests, was the freeman's bulldog, defending him from state encroachment. The author quotes from Friedman's popular Free to Choose (1980):

Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.

While these words might have a nice ring to some libertarians, on closer inspection they're burdened with problems. For one thing, why split freedom into categories? We're either free or we're not. If a government can take away our freedom in one area, by what principle is it constrained in another?

And how exactly does the existence of some degree of economic freedom "reduce the area over which political power is exercised"? The State views the economy as a wolf does an unguarded flock of sheep. That there are sheep still remaining doesn't mean they won't be eaten. As Thomas Paine tells us, government "watches prosperity as its prey."

To Ebeling's credit he does contrast the Chicago school with its chief competitor in market defense, the Austrian school of economics, which he says is led by Ludwig von Mises and F. A. Hayek. Ebeling doesn't say this, but Austrians are laissez-faire, and especially since the latter half of the twentieth century, anti-state. How many members of the Chicago school embrace laissez-faire and see the existence of the state as incompatible with freedom? Could it be Friedman and his Chicago cohorts believe unalloyed liberty just doesn't work, that people need slave masters (but preferably gentle ones), that some degree of government regulation of the economy is needed to support "justice" and avoid disasters such as the Great Depression? Indeed, if we are to take their writings seriously, they do. So why is an eminent scholar and economist like Richard Ebeling not telling us these things? Why, in other words, is he trying to protect the reputation of Milton Friedman and the Chicago school?

He also says that each school has radically different starting points "in reaching their pro-market positions." Friedman outlined his approach in a "famous" 1953 essay called "The Methodology of Positive Economics." According to Ebeling, Friedman argued

that the goal of science was successful quantitative prediction and that any hypothesis, no matter how unrealistic its assumptions, was good if it resulted in better predictions.

What might this mean in the real world? Ebeling goes on to explain:

Thus, as one critic pointed out, if a strong correlation was found between the anchovy catch off the coast of Peru and business cycle fluctuations in the United States, this would be considered a good predictive theory, regardless of any real causality between these two measured events.

With this as Friedman's foundation, it's not surprising the economic edifice he built relied on State support.

The Chicago School of economics began to grow in influence when Friedman joined the faculty in 1946 and after his long-time friend, George A. Stigler, did the same in 1958. "Friedman revolutionized macroeconomics, while Stigler helped to do the same in microeconomics," Ebeling tells us. In particular,

Friedman challenged the dominance of Keynesian economics in the postwar period, and Stigler’s writings undermined many of the rationales for government regulation of business.

Thus, the Chicago school supports the traditional split of economics into the micro and the macro. Murray Rothbard, the Austrian giant unmentioned in Ebeling's essay, critiqued this division as follows:

The idea is that there are two sharply separated and independent worlds of economics. On the one hand, there is the "micro" sphere, the world of individual prices determined by the forces of supply and demand. Here, the Chicagoans concede, the economy is best left to the unhampered play of the free market. But, they assert, there is also a separate and distinct sphere of "macro" economics, of economic aggregates of government budget and monetary policy, where there is no possibility or even desirability of a free market.

In common with their Keynesian colleagues, the Friedmanites wish to give to the central government absolute control over these macro areas, in order to manipulate the economy for social ends, while maintaining that the micro world can still remain free. In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.

No commentary on Friedman would be complete without mentioning his views on the Depression, and Ebeling doesn't disappoint us. He says that

Friedman looked at Federal Reserve policy in the 1920s and saw that the general price level had remained relatively stable [and] concluded that Fed policy had done nothing wrong. The only error by the Fed was in the early 1930s, when it did not print more money to counteract the price deflation that was occurring at that time.

Of course, the Fed had been printing money (inflating) throughout the 1920s, but to Friedman and other Chicagoites this didn't constitute inflation because prices weren't rising; productivity improvements kept pace with the Fed's printing presses. The prices of stocks and real estate did shoot up but most people saw it as a reflection of the general mood of optimism, rather than a red flag. (Mises was a notable exception.) A few years ago Ben Bernanke apologized to Friedman publicly for the Fed's failure to inflate during the early 1930s and promised it would not make the same mistake again.

By contrast, Austrians hold that monetary inflation creates the boom which leads to the remedial bust. Following Friedman, Bernanke promises to cure the disease with more of the disease. As Rothbard wrote:

For while the Austrians hold that [the expansionist monetary policies of Benjamin Strong, who ran the Fed from New York,] made a later 1929 crash inevitable, [the Chicago school represented by Irving Fisher and Friedman] believe that all the Fed needed to do was to pump more money in to offset any recession. Believing that there is no causal influence running from boom to bust, believing in the simplistic "Dance of the Dollar" theory, the Chicagoites simply want government to manipulate that dance, specifically to increase the money supply to offset recession.

The gold standard, of course, restricts government's ability to increase the money supply, and it's not surprising that Friedman favored cutting all ties to gold and going on a complete fiat dollar standard, with the Fed having total control of the money supply. Friedman advised the Fed to use its power responsibly, however, and recommended it increase the money stock at a fixed rate of 3-4 percent annually. Is this what is meant by Friedman's "deep and determined allegiance to human liberty"? Rothbard:

. . . we must realize that Friedman’s automatic inflationist policy is simply another variant in his pursuit of the same old Fisherine-Chicagoite aim: stabilization of the price level – in this case, stabilization over the long run. Thus, Milton Friedman is, purely and simply, a statist-inflationist, albeit a more moderate inflationist than most of the Keynesians. But that is small consolation indeed, and hardly qualifies Friedman as a free-market economist in this vital area.

Nevertheless, Ebeling concludes thusly:

. . . in the face of Keynesian domination after 1945, Milton Friedman, with courage, determination, and intellectual integrity, went against the tide and, along with only a few others, succeeded in stopping the advance toward ever-increasing government control of society.

Let the man's record speak for itself. His rhetoric about freedom and the wonderful blessings of the free market notwithstanding, Milton Friedman pushed hard for policies and programs that cost us dearly in lost freedom. If he really did succeed "in stopping the advance toward ever-increasing government control," as Ebeling asserts, why is the state so much more intrusive and belligerent today than it was yesterday, or ten years ago, or thirty years ago? Nothing has stood in the way of Leviathan's growth. Friedman's state-sponsored "freedom" has failed.

The real-life Preston

The hero of the novel I'm writing is Preston Mathews, who is completely fictional. His first name, however, is borrowed from someone quite real, my two-year-old (almost) grandson. Recently his mom, one of my daughters, was having fun with him and the iMac's Photo Booth application. I've been pretty good about not flooding this blog with pictures of him, but I wanted to include this.

My novel hammers at the Giant Con of central banking and fiat money. It would be great if future generations lived under monetary freedom. For me, using Preston's name keeps that goal in mind.

On a completely unrelated note, switched from DSL to cable yesterday, using a Motorolla Surfboard purchased at Wal-Mart. I'm not in the least sophisticated about networking, but so far it seems happy working with Airport.

Honest Money Means Few Wars

Another Morgan Reynolds column I liked last year was Don’t Make Me Laugh: The Fed and Kept Media. In it, he lampoons an article by Marilyn Geewax called "New Fed chief to start amid growing Asian sway" that appeared in the Arkansas Democrat Gazette. Reynolds' critique is full of good points but I'm only going to mention one:

Wars would be rare if governments did not have access to fresh, new money. . . [The terrorist attacks in 2001] immediately became the pretext for military invasions and enormous government expansion, and that leads back to the Fed and its enabling operation.

How many people have made this observation, crucial as it is? Not enough.

Prince of Paper Ascends the Throne

Among the most insightful articles I read in 2006 were several authored by Morgan Reynolds, Ph.D., former U.S. Chief Economist, Department of Labor 2001-2, economist and Professor Emeritus at Texas A&M University. He issued Prince of Paper Ascends the Throne sometime in early 2006 as an open letter to the public -- most of whom, I'm sure, don't even know it exists.

What should the public be paying attention to? Reynolds tells us:

Name the three most important issues in politics: War in Iraq? Abortion? Domestic spying? None of the above. Nothing is more important than money, money, money - its quality and who controls it. We all know it in our gut - money means our livelihoods, our retirements, the life-blood of commerce plus an obese government feasting on newly printed moolah daily.

Ben Bernanke became chairman of the Fed on February 1, 2006, succeeding Alan Greenspan. Bernanke got the post, Reynolds explains, because:

Bernanke's resume is unmarred by real-world experience, so he is perfect for the job. He will be a disaster because he is wrong about virtually everything. He claims devotion to "long-run price stability" and "continuity" with the policies of the Greenspan Fed. He cannot be both. Greenspan's inflationary policies have boosted the government's consumer price index by 67%. That is the opposite of "long-run price stability." Consumer prices have risen every year for a half-century. I detect a pattern here, it's called a rip-off of the consumer's purchasing power.

Moreover, Bernanke's inflationist credentials

will make Greenspan look like a tight-money man. Bernanke's paper trail tells us because he fears falling money prices as the biggest risk of all, so he stands ready with "an invention called the printing press" to combat this evil. He promises faster inflation in response to the next financial crisis, supplying the "liquidity" the system needs. "Helicopter Ben" has even promised to drop money from the air, but he won't drop any on you or me. Insiders get it first.

Mr. Ph.D. does not understand why a bust happens. That makes him extra dangerous. Every bust is caused by the preceding boom and its excesses. The bust is curative. And what caused the credit boom? The Fed! Its artificial pumping of money and credit through the banking system induces boom-bust cycles. When Bernanke fights the market by injecting new credit in the next crisis he will sustain unsound debt, weak debtors and lousy companies, prolonging depression.

Reynolds continues:

Sound money is the fount of prosperity yet the Fed was created to supply an "elastic currency" for the nation and coordinate expansion of cheap bank credit on behalf of Wall Street and bankers. The Fed was designed to flee from sound money. It is an inflationary menace to everyone and we are on the verge of a dollar crack up.

How can we escape the devastation of Fed money management? Reynolds suggests some ways:

First, shift investments toward hard assets like silver, gold, oil, timber.

Second, shift from the prince's paper toward hard money in your transactions. Hard money has meant silver and gold since the dawn of civilization.

We want good money and we want it now, before the greenback tanks. The easiest way to use gold and silver today is to rely on the competitive marketplace to supply it, like the Liberty Dollar, because it's .999 fine silver, it is readily available, and functions 1:1 with Bernanke's paper dollars.

But don't we have to use the Fed's fiat money? No!

There is no legal barrier to using a new currency like the Liberty Dollar, in specie, real paper or electronic digits that are 100% redeemable in silver and gold.

America wants a bottom-up, inflation-proof, market-driven money, not a top-down, debt-based money controlled by the power elite. Let the competitive market in money roar. With each individual choosing what currency to use, the superior money will triumph.

Financing the empire

Today on Lew Rockwell a Canadian writer, Daniel M. Ryan, discussed the connection between inflation and empire. His main point, as I understand it, is that the U.S., being a superpower, will not likely suffer a currency collapse anytime soon, though of course we're headed that way. He parallels our situation with the currency debauching ancient Rome, which circulated bad money for centuries before going down. Our hegemon status also makes our current trade deficit a "winning by losing" proposition:

. . . the modern mercantilist can easily conclude that a supposed trade deficit is a real advantage for the United States, because it is made up of fiat money. In fact, "losing" fiat dollars to "foreigners" makes for a good excuse to create more of them. Provided that the national worthies, and members of the public, are not riled by the sight of "foreigners" buying up "our assets," a continual trade deficit position looks like a rather sweet deal for a fiat-currency economy.

It’s made even sweeter by foreigners investing in U.S. government obligations, which is where the bulk of the capital inflows go. How can a nation foreclose on the government with the most powerful military in the world, one with the power (also) to cut off the world’s most reliable consumers from a "rogue trading partner?"

Ryan further reminds us that inflation not only grows the empire, it is what brought us here. The two world wars put us on top of the heap militarily, both heavily financed through monetary expansion.

As the old book Business And The Banking Cycle relates, on pp. 14–15, World War 1 was 75% financed by borrowing and currency expansion. Only 25% of the financing for it was done through taxes. Since the Federal Reserve System inflates through the credit market, and was already up and active as of 1917, there is no way to precisely gauge the amount of war financing done by inflation. The active support of the Fed in dishing out reserves to aid banks in financing loans for War Bond purchases, though, implies that the bulk of the borrowing was disguised currency expansion.

Favorite quotes

Everyone has quotes they're especially fond of. These are some of mine.

"It is scarcely possible to touch on any subject, that will not suggest an allusion to some corruption in governments." --Thomas Paine, Rights of Man notes #24

"Thus the sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system." -- Ludwig von Mises, Theory of Money and Credit, Ch. 21

"If voting changed anything, they'd make it illegal." -- Emma Goldman

"What all the enemies of the gold standard spurn as its main vice is precisely the same thing that in the eyes of the advocates of the gold standard is its main virtue, namely, its incompatibility with a policy of credit expansion."
Ludwig von Mises, Theory of Money and Credit

"Inflation is the fiscal complement of statism."
-- Ludwig von Mises, The Theory of Money and Credit

"The true remedy for most evils is none other than liberty, unlimited and complete liberty, liberty in every field of human endeavor."
Gustave de Molinari

"[T]he ills [ascribed] to liberty—or, to use an absolutely equivalent expression, to free competition—do not originate in liberty, but in monopoly and restriction." Gustave de Molinari

"He who dares not offend cannot be honest."
Thomas Paine, Forester Letter #3

"Not a place upon earth might be so happy as America. Her situation is remote from all the wrangling world, and she has nothing to do but to trade with them . . . America will never be happy till she gets clear of foreign [interventions]. Wars, without ceasing, will break out till that period arrives." -- Thomas Paine, The American Crisis I

"To say that any people are not fit for freedom, is to make poverty their choice, and to say they had rather be loaded with taxes than not."
Thomas Paine, Rights of Man

"A free and prosperous society has no fear of anyone entering it. But a welfare state is scared to death of every poor person who tries to get in and every rich person who tries to get out." -- Harry Browne

"No country with really elaborate home theater has ever risen in revolt" -- Bill Bonner, Daily Reckoning, Jan. 21, 2004

"It is not because a part of the government is elective, that makes it less a despotism, if the persons so elected possess afterwards, as a parliament, unlimited powers. Election, in this case, becomes separated from representation, and the candidates are candidates for despotism." -- Thomas Paine, Rights of Man, Part II.

"If they can get you asking the wrong questions, they don't have to worry about the answers." Thomas Pynchon, Gravity's Rainbow

"'Need' now means wanting someone else's money. 'Greed' means wanting to keep your own. And 'Compassion' is when a politician arranges the transfer." -- Joseph Sobran

“Nothing contributes so much to tranquilize the mind as a steady purpose” -- Mary Shelley

"Man is not the enemy of man, but through the medium of a false system of Government." Thomas Paine, Rights of Man Part I

"The first condition of any monetary reform is to halt the printing presses." Ludwig von Mises, On the Manipulation of Money and Credit

"The people and the economy can only wax fat and prosperous when their government is starved and puny." - Murray Rothbard, "Repudiating the National Debt"

The End of Dollar Hegemony

On Feburary 15, 2006 Rep. Ron Paul of Texas delivered a speech before the U.S. House of Representatives called "The End of Dollar Hegemony." Lew Rockwell published it on his web site a few days later. I consider it one of the finest speeches I have ever read, and rank it among the top intellectual products of 2006. Ron Paul shows how the government's fiat money, backed by the world's mightiest military, is bringing us to ruin -- politically, economically, and morally.

Paul begins with a few basics about money:

It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.

Then government stepped in and asserted monopoly control over money. They discovered how to inflate their currencies by reducing the amount of gold in each coin, enabling them to outspend the taxes they collected. It was an early form of inflation, but too crude to fool their subjects for very long.

Governments figured if they couldn't get away with diluting their coins, why not conquer other nations and steal their gold? So the strong ones did. In addition to stealing the conguered people's gold, the invaders enslaved the people or forced them to pay tributes to help support the invader's growing empire. As Paul notes:

This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.

That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations – those with powerful armies and gold – strived only for empire and easy fortunes to support welfare at home, those nations failed.

With gold no longer used for money, the political truth has become: "'He who prints the money makes the rules' -- at least for the time being." The goals, Paul says, are the same:

compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people – just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

First there was "gunboat diplomacy" of the late 19th century, followed by "Dollar Diplomacy" of the early 20th century, both expressions of the U.S. government's "'obligation' to protect our commercial interests from Europeans." The switch from dollar "diplomacy" to dollar "hegemony" came after government created the Federal Reserve System in 1913. Between the Fed's inception and 1971, the U.S. central bank

. . . found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress – while benefiting the special interests that influence government.

Where has this brought us today? According to Paul,

Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change . . .

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

The Criminality of the State

The State, as force, is the nullification of reason, man’s supreme tool of survival. Since eliminating the State should be man’s goal politically, I’ve selected a few articles I consider among the best of 2006 in moving us toward that end. More blog entries will follow in which I present other outstanding articles that illuminate the nature of the State and its threat to our well-being.

I begin with The Criminality of the State by Alfred Jay Nock. It first appeared in the March, 1939 issue of The American Mercury but was brought back to life this past year by Lew Rockwell:

All our institutional voices – the press, pulpit, forum – are pitched to the note of amazed indignation at one or another phase of the current goings-on in Europe and Asia. This leads me to believe that our people generally are viewing with wonder as well as repugnance certain conspicuous actions of various foreign States . . .

I am cordially with them on every point but one. I am with them in repugnance, horror, indignation, disgust, but not in astonishment. The history of the State being what it is, and its testimony being as invariable and eloquent as it is, I am obliged to say that the naive tone of surprise wherewith our people complain of these matters strikes me as a pretty sad reflection on their intelligence. Suppose someone were impolite enough to ask them the gruff question, "Well, what do you expect?" – what rational answer could they give? I know of none.

Here is the part I thought made Nock's article more than exceptional:

Polite or impolite, that is just the question which ought to be put every time a story of State villainy appears in the news. It ought to be thrown at our public day after day, from every newspaper, periodical, lecture platform, and radio station in the land; and it ought to be backed up by a simple appeal to history, a simple invitation to look at the record. The British State has sold the Czech State down the river by a despicable trick; very well, be as disgusted and angry as you like, but don't be astonished; what would you expect? – just take a look at the British State's record! The German State is persecuting great masses of its people, the Russian State is holding a purge, the Italian State is grabbing territory, the Japanese State is buccaneering along the Asiatic Coast; horrible, yes, but for Heaven's sake don't lose your head over it, for what would you expect? – look at the record! [Emphasis added.]

But he doesn't stop there:

That is how every public presentation of these facts ought to run if Americans are ever going to grow up into an adult attitude towards them. Also, in order to keep down the great American sin of self-righteousness, every public presentation ought to draw the deadly parallel with the record of the American State. The German State is persecuting a minority, just as the American State did after 1776; the Italian State breaks into Ethiopia, just as the American State broke into Mexico; the Japanese State kills off the Manchurian tribes in wholesale lots, just as the American State did the Indian tribes . . .

In 1935, Nock published his magnum opus Our Enemy, the State, which came to this despairing conclusion:

Taking the sum of the State's physical strength, with the force of powerful spiritual influences behind it, one asks again, what can be done against the State's progress in self-aggrandizement? Simply nothing. So far from encouraging any hopeful contemplation of the unattainable, the student of civilized man will offer no conclusion but that nothing can be done. He can regard the course of our civilization only as he would regard the course of a man in a row-boat on the lower reaches of the Niagara . . .

Yet four years later, in The Criminality of the State, he wants all commentaries to shout the truth about the State in whatever form they take. The criminal nature of the state "ought to be thrown at our public day after day, from every newspaper, periodical, lecture platform, and radio station in the land." Why bother if our situation is hopeless? Obviously, it isn't.