Sunday, November 30, 2008

Larry Summers: Heavyweight Centrist or Lightweight Leftist?

A recent New York Times article provides two significant pieces of information about Larry Summers, the man designated by President-Elect Obama to be head of the National Economic Council and, as such, according to The Times, “his lead economic adviser inside the White House.” (David Leonhardt, “The Return of Larry Summers,” November 26, 2008, p. B1.)

First, The Times’ article informs its readers that Summers, a former Secretary of the Treasury under President Clinton, and later President of Harvard University, so impressed Henry Kissinger that years ago “Kissinger suggested that Mr. Summers be given a White House post in which he was charged with shooting down or fixing bad ideas. Mr. Summers’ loyal protégés — Timothy Geithner, who beat him out to become the next Treasury secretary; Peter Orszag, the next budget director; Sheryl Sandberg, the chief operating officer of Facebook; and others — say that Mr. Summers can make them smarter in ways that almost no else can.”

The second significant piece of information provided by The Times’ article describes the nature of Mr. Summers’ own ideas. It describes how “His favorite argument today…goes like this: To undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago.”

The Times’ reporter has apparently known about Mr. Summers’ redistributionist ideas, as well as his closeness to Mr. Obama, for at least a year and a half. As a professional journalist, he had a moral obligation to share such important knowledge with the general public. But he, and many others, similarly so informed, did not bother to do so. Instead, even in the face of the substantial public upset in connection with the question about redistribution posed to Mr. Obama by the now famous “Joe the Plumber,” they chose to remain silent.

They personally favored the election of Mr. Obama and his ideas on the subject of redistribution. Badly lacking in professional standards and personal morals, they placed their own political agenda above their professional obligation to inform the public about a matter vital to an intelligent decision as to how to cast its ballots.

And now, when they openly describe the redistributionist egalitarianism of Mr. Summers and, implicitly, Mr. Obama, they try to make a far-left agenda more palatable by depicting these gentlemen as belonging to the “center” of the political spectrum.[1]

Summers apparently does not see, or if he does see, does not care, that in presenting his proposal for redistribution, what he is urging is armed robbery on a massive scale. That is the essence of any policy of “redistribution,” whether advocated by Summers and Obama or by Lenin, Stalin, or Mao.

For what is going to make each of the top 1 percent of income earners pay an extra $800,000 in taxes? The only thing that would make them pay it is fear of being arrested and imprisoned. And who will arrest and imprison them? Armed thugs wearing the uniforms and badges of officers of the United States Government, who would give them no other choice but to pay the money or be hauled off to jail and clubbed or shot if they resisted. (What a total perversion this would be of what the United States Government once stood for: a transformation from an institution designed for the protection of individual rights into a gang of bandits massively violating individual rights.)

How does this differ in any essential respect from those who are to receive the loot, in the form of $10,000 checks, taking matters into their own hands and simply robbing the homes and businesses of the top 1 percent of income earners to the extent of $10,000 each? They would give the homeowners and businessmen the same choice, of their money or their lives.

And why should it stop at $800,000 in extra taxes and $10,000 each for the looters? If the economic inequality represented by that $800,000 per capita of the top 1 percent of income earners must be done away with, why should not all economic inequality be done away with? Why not make everyone an equal owner and equal income recipient, i.e., why not go straight for communism? That’s the logic in what Summers is advocating.

Not only is Summers advocating the kind of evil committed by criminals, but he also displays a degree of lack of thought that is often found among criminals.

One of the implications of his proposal is that an individual who increased his earnings by just one dollar could be liable for an additional $800,000 in taxes. Based on the most recent available data, which are for 2006, an individual who increased his earnings from $388,806 to $388,807 would thereby be thrust into the top 1 percent of income earners and thus be made subject to the $800,000 of additional taxes urged by Summers. This, of course, would leave such an individual with an after-tax income of minus $411,193. (In addition, of course, all of the ordinary income taxes for which he would be liable at that level of income would also have to be subtracted, throwing him still further into Summers’ Alice-In-Wonderland world of negative after-tax income.)

Summers is probably unaware of this, because he appears to focus on the $1.7 million average income of the top 1 percent of income earners. This enables him to ignore all the below-average incomes of members of that group that would be rendered negative on an after-tax basis if his scheme were imposed.

A proposal this hare-brained makes Summers come across more as an intellectual lightweight than as any kind of brilliant thinker able to identify the errors in others’ thoughts.

There is actually a reason for Summers’ advocating a scheme that implies negative after-tax income for many upper income taxpayers. That’s the fact that that is what is necessary to make it appear that redistribution can constitute any kind of significant gain to large numbers of people. If one rules out taxes that imply negative after-tax income, and also taxes that serve to reduce the demand for labor or capital goods, it turns out that there is very little to “redistribute.”

First of all, all of the wealth of businessmen and capitalists that is in the form of capital (which in the case of large businessmen and capitalists, is almost all of their wealth) already benefits the entire population. It does so by virtue of serving to produce the goods and services that everyone buys and by virtue of constituting the source of the demand for the labor that wage earners sell.

The wealth of Exxon, General Motors, Dell, etc. is in the means of production that bring gasoline and heating oil, automobiles and SUVs, computers and monitors to the masses. Their wealth and that of all other firms is also the source of the demand for the labor that wage earners sell. Thus there is a twofold general benefit from privately owned means of production: the benefit to the buyers of products and to the sellers of labor.

Exactly the same is true of profit and interest income and of capital gains and inheritances to the extent that they are saved and invested, which, in the case of large incomes and inheritances is overwhelmingly the case as a rule. The only special benefit of the businessmen and capitalists, i.e., the only benefit that they obtain which the non-owners of the means of production do not obtain, is the additional personal consumption that their wealth makes possible, plus the satisfaction of knowing that if necessary they could consume their wealth.

The truly personal consumption of businessmen and capitalists is insignificant in the scheme of things. For Warren Buffet, the world’s richest man, it appears to be on the order of an extra ice-cream soda per billion dollars of additional capital accumulated, plus mosquito nets to fight malaria in Africa. The few dozen or even few hundred mansions, yachts, and personal jets of other very wealthy businessmen and capitalists, pale into insignificance alongside the tens of millions of ordinary homes, automobiles, refrigerators, freezers, washer-dryers, air-conditioners, television sets, and computers of the general population. A major, probably the greater part of the consumption of the leading businessmen and capitalists takes the form of the support of such institutions as universities, hospitals, opera companies, libraries, and the like. When all this is taken into account, it turns out that in the first place there is simply not very much to redistribute that the intended beneficiaries of the redistribution do not already have.

It also turns out that attempts to redistribute the wealth of businessmen and capitalists serve almost entirely to reduce the supply of means of production and the demand for labor. It is a self-destructive policy of eating the seed corn. Summers and Obama are ignorant of such facts. Never having studied the works of Mises, they have no way of knowing them. (For elaboration of these points, see the author’s Capitalism: A Treatise on Economics, pp. 297-303, 622-639.)

It speaks volumes that apparently no one to whom Summers presented his “favorite argument” had the ability to find any moral or practical flaws in it.

Summers should be fired. He’s too shallow and ignorant and his ideas too evil for him to serve in the United States Government in any capacity. Although generally viewed as a prominent professional economist, his actual knowledge of the subject is minimal. This conclusion follows from the fact that the essential subject matter of economics is capitalism. And Summers' ideas on redistribution reveal that he fails to understand the nature of the most essential feature of capitalism, namely, private ownership of the means of production and the indispensable role it plays in the standard of living of the average person.

His views may qualify him to be an economic advisor to Hugo Chavez of Venezuela or Robert Mugabe of Zimbabwe, but certainly not to be an economic advisor to the President of the United States. Before anyone assumes that position, he should know and understand the ideas of Ludwig von Mises, who is far and away the leading theorist of capitalism, and whose works explain its operation as it is has never before been explained. In the absence of extensive knowledge of Mises, one is, simply put, an economic ignoramus, irrespective of the degrees, awards, and public acclaim one may enjoy.

[1] These are the same kind of reporters who define laissez-faire capitalism in an equally bizarre way. Just as you supposedly can be an egalitarian and a Marxist and still be a centrist, so too you allegedly can have virtual economic fascism and it will still be laissez-faire capitalism. And it will be laissez-faire capitalism which is then blamed for all of the evils of economic fascism. Thus, irrespective of the present-day magnitude of taxation and government control over economic life, irrespective of the massive government intervention in the form of credit expansion and of laws compelling the making of loans to unqualified borrowers, which in fact caused our present financial crisis, laissez-faire, they say, still existed and it is what is responsible for the crisis. They claim that laissez faire existed because financial innovations were able to take place without their first being thoroughly understood by government bureaucrats and only then being allowed to occur. Never mind that the major flaw in the innovations was the mistaken belief, held almost universally, but first and foremost by government bureaucrats and by their allies in the media, that the Federal Reserve had made the existence of depressions impossible. (For elaboration on the attempt to blame the crisis on laissez-faire, see the author’s “The Myth that Laissez Faire Is Responsible for Our Financial Crisis.”)

Copyright © 2008, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title Capitalism: A Treatise on Economics and then saving the file when it appears on the screen.

Friday, November 28, 2008

Why We MUST Invoke Our Individual Rights—Now, By Gen LaGreca

America today is a nation in trouble. The great fortress of liberty, the country of the most productive, prosperous, and happy people in the world, is now in grave danger. America is under siege by the Dark Side, the forces of statism, while its Knights of Liberty are disarmed, demoralized, and suffering near-fatal wounds.

The country that once elected leaders whose ideas upheld liberty now elects leaders whose sweet-sounding platitudes and woozy promises are all that is required, and whose actual, dangerous ideas need not be examined until after Election Day.

The country that defended property rights now seizes 40-percent of our income in a myriad of taxes imposed by all levels of government—with even larger levies on incomes, profits, investments, and savings on the horizon.

The country that championed capitalism now vilifies our industries, cripples them with regulations, seizes their profits, then declares that the free market has failed and government must take over.

The country that made possible the great industrial titans—the Henry Fords, Thomas Edisons, and others whose productive genius moved mankind forward—now thinks that government can run things better, and that government should own, operate, and finance our corporations, deciding which will survive and which will die, creating a new kind of soup kitchen where emaciated companies stand in a bread-line waiting for their bailout.

The country that protected the individual now protects polar bears, spotted owls, caribou, and the wilderness at the expense of human life.

The country that fought a revolution to end the abuse of power now elects politicians who wallow in power like hippos in mud, such as members of congressional subcommittees who hold hearings threatening the prosperity or very existence of American business firms, and then let the hearings end with little or no result when the hapless firms make sufficient contributions to the reelection campaigns of the congressmen.

The country of the American eagle, flying proud and free, now pens its people up like chickens in a coop, waiting to feed at the welfare state’s trough.

America is a nation whose government is on the ascent and whose people, consequently, are on the descent.

What can explain our alarming plunge into statism? At the dawn of our country we held a powerful weapon to fight our first battle for liberty, an ideological weapon that emboldened an upstart group of colonists, against all odds, to topple the British Goliath and to ignite a firestorm of liberty that in time led to the abolition of slavery, the suffrage of women, and the spread of freedom around the globe. What ideal ushered in a glorious new age for mankind?

This year’s award-winning mini-series on HBO, “John Adams,” captures the answer. It portrays the moment when Adams reads the stirring document that is the soul of the new nation, the Declaration of Independence, and exclaims to its author, Thomas Jefferson: “This is not only a declaration of our independence, but of the rights of all men!”

The weapon that toppled a king and transformed the world, America’s shining sword, was the doctrine of individual rights.

Our Founding Fathers were imbued with the spirit of the Enlightenment, with the glory, power, and moral rightness of the individual unshackled and free. America’s great distinction is that it reined in government to unleash individual liberty.

The result was amazing. America triggered an explosion of scientific and industrial advancement and a standard of living unmatched in history. The American Dream became the worldwide symbol of boundless opportunity and achievement. A great civilization arose, a country of confident, resourceful, hard-working, wealth-creating, and life-loving people.

All of this rested on a bedrock of liberty—on a government that protected the rights of the individual.

But things changed. The doctrine of individual rights was not always expressed unambiguously or applied consistently in our founding. Cracks in our armor, such as clauses in the Constitution allowing Congress to regulate interstate commerce and to promote the general welfare, gave the Dark Side of Statism an opening to enlarge government far beyond its original purpose.

And our enemies on the Dark Side got stronger as Western thought turned its back on the individual and his right to exist unencumbered by the state. Later thinkers claimed that a person must serve a purpose allegedly higher than his own life and happiness, a purpose dictated by the government. This notion led to communism and fascism. Sadly, it has now spread across America.

Barack Obama states in the Chicago Reader, “[I]ndividual actions, individual dreams, are not sufficient. We must unite in collective action, build collective institutions and organizations.” John McCain urges in his speeches that Americans serve “a national purpose that is greater than our individual interests.” Is there any fundamental difference between these exhortations of the candidates of our two major parties and that of the Nazi Party’s “the common good before the individual good”?

Today America has dropped its saber of individual rights. We stand disarmed and vulnerable to what could be fatal wounds to our liberty. This is why we urgently need to rediscover the meaning of our rights and rekindle our devotion to them. Then we must define a strategy for picking up our sword again, sharpening it, shining it, and using it adroitly to win the most important battle of our age, the battle to rescue our lives and liberty from the Dark Side of Statism. So, let us begin.

The Meaning of Our Individual Rights

The Declaration of Independence proclaims that our rights include “life, liberty, and the pursuit of happiness,” or as described in one state document, the 1784 Constitution of New Hampshire, our rights include “enjoying and defending life and liberty; acquiring, possessing, and protecting property; and in a word, of seeking and obtaining happiness.” What does this really mean? The following are ten characteristics of individual rights.

1. Our Rights are Unalienable
They are inherent in our nature as human beings. No government gives us our rights, and no government can take them away. In Jefferson’s Summary View of the Rights of British America, he states that free people claim their rights “as derived from the laws of nature, and not as the gift of their Chief Magistrate.” Exercising our rights is like breathing. We need not ask the government’s permission to breathe, nor to exercise our rights.

Remember this when you the hear statists like Mr. Obama say in a speech in Roseburg, Oregon: “We can’t drive our SUVs and eat as much as we want and keep our homes on 72 degrees . . . and then just expect that other countries are going to say okay.” How can we claim our unalienable rights if we can be prevented by the state from enjoying a standard of living that somehow offends another country?

2. Our Rights are Rights to Take Action
They are not entitlements to the free goods and services of other people. In a letter to Isaac Tiffany, Jefferson defines liberty as “unobstructed action according to our will within limits drawn around us by the equal rights of others.” This means we may work for the things we want. We may earn money and buy a house, but we may not
expect the government to seize taxpayers’ money to provide us with a house for free.

As James Madison said on the floor of our country’s newly formed Congress: “I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.” According to the Father of the Constitution, charity is a private matter. You may spend your own money to help your fellow man, but the state cannot seize your money and force you to be charitable. How can we fail to conclude that today’s entire welfare state and the redistribution of wealth fueling it are illegitimate and must be stopped?

3. The Pursuit of One’s Own Happiness is a Right
A person is not a pawn in the service of the state’s aims. When Hillary Clinton, echoing her party’s platform, declares in a San Francisco speech, “We’re going to take things away from you on behalf of the public good,” how can this mean anything other than her intention to seize your property and infringe on your happiness so that she and her party’s voting base can pursue their happiness at your expense?

4. The Majority Cannot Violate the Rights of the Individual
Because individual rights are unalienable, they are not subject to any majority vote. Our Founders were as suspicious of democracy, or unlimited majority rule, as they were of monarchy. In a letter to P.S. Dupont de Nemours, Jefferson states: “[T]he majority oppressing an individual is guilty of a crime . . . and by acting on the law of the strongest breaks up the foundations of society.” If you have a bigger bank account than your neighbors, they cannot steal your money and redistribute it among themselves. By the doctrine of individual rights, neither can the government. If Congress votes to increase your taxes to pay for a prescription drug plan for seniors, or a mortgage bailout for homeowners, it is telling you that a majority can rob you of your rights. When a neighborhood gang steals your money, you can call the police; but when the perpetrator is Congress, who can you turn to for help?

5. There are No Rights of Groups
Rights belong to individuals. If pizza eaters lobby Congress for a “right” to a free pizza every Thursday, and if Congress, out of concern for their nourishment or their votes, grants their wish, it acts illegitimately. There are no special rights of seniors, workers, farmers, women, minorities, people with blue eyes, left-handed people, etc.

The Founders tried to protect the individual not only from the tyranny of a monarch, but also from the control of what they called “factions,” i.e., special interest groups seeking government privileges and entitlements to benefit their members at the expense of other citizens. In the Federalist Papers, Number 10, Madison addresses the danger of a democracy bringing factions into power: “[S]uch democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property . . .” How can we fail to see how today’s Godzilla-like factions have invaded our country, crushing the individual under their massive feet? How can we fail to realize that today we have a government of the factions, by the factions, and for the factions?

6. Our Rights Include the Right to Property
Without property rights, no rights are possible. If the state can seize the fruits of your labor, doesn’t that make you “a laborer legally bound to and obliged to serve a master,” which is the definition of a serf? And if you are a business owner, with the state now regulating virtually every aspect of your enterprise, doesn’t that make you “someone whose actions are controlled by the will of others,” which is the definition of a puppet?

Consider Mr. Obama’s answer to the now-famous Joe the Plumber, who questioned the senator’s plan to tax him: “I think when you spread the wealth around, it's good for everybody.” How can it be clearer that Mr. Obama intends to punish success, seize the money of productive people, and give it away to those who haven’t earned it?

Does a rich person have less of a right to property than a poor one? John Adams writes in A Defense of the Constitutions of Government of the United States, “[I]t must be remembered that the rich are people just as well as the poor; that they have rights as well as others; that they have as clear and as sacred a right to their large property as others have to theirs which is smaller; that oppression to them is as possible and as wicked as to others.” By the doctrine of individual rights, how must we rate the endless schemes of today’s politicians to “tax the rich”? Doesn’t this seem like a pack of wolves and a few lambs deciding what to have for lunch?

And what are we to make of the recent YouTube-captured lament by U.S. congressman Jim Moran of Virginia, who says, “[W]e have been guided by a Republican administration who believes in this simplistic notion that people who have wealth are entitled to keep it and they have an antipathy towards the means of redistributing wealth”? Isn’t the loot-and-plunder agenda of the statists becoming more blatant than ever before? Is this the civilized society in which people’s rights have Constitutional protection?

7. Our Rights Include the Right to Intellectual and Spiritual Independence
Our rights rest on the fundamental freedom of every person to use his own mind, think for himself, form his own beliefs, and the liberty to act on these judgments. Jefferson’s Act for Establishing Religious Freedom in Virginia was an achievement he valued so highly that he had it acknowledged on his tombstone. This bill stopped the government’s practice of paying clergy with public funds because, in Jefferson’s words, “to compel a man to furnish . . . money for the propagation of opinions which he disbelieves is sinful and tyrannical.”

Jefferson fought for a “wall of separation between church and state” and was “against all maneuvers to bring about a legal ascendancy of one sect over another.” By the doctrine of individual rights, what must we conclude about today’s faith-based initiatives, which allocate public funds to religious organizations, and the attempts by religious lobbyists and elected officials to dictate public policy based on their faith? What must we conclude about the America-damning Chicago pastor, Jeremiah Wright, who, according to Fox News, received $15 million in federal grants for his organization? Why should people who disagree with his vile preaching be taxed to support Jeremiah Wright, or any other person or organization—religious or secular—whose beliefs, values, and causes they do not share?

Our right to intellectual freedom extends to all beliefs, be they in science, art, philosophy, or any other field, including politics. In an address to the Danbury Baptist Association, Jefferson makes clear that “the legislative powers of government reach actions only, and not opinions.”

With our newly elected Democratic Congress already planning to pass a law that will suppress commentators on talk-radio who oppose them, how can we fail to see the emboldened, Hugo Chavez-like force now being unleashed in the halls of our government? How can we fail to see that the statists’ euphemistically named “Fairness Doctrine” is really a “Censorship in America Doctrine”? How can we fail to realize that this vile scheme must be defeated before it takes away the most potent weapon we have in our fight, our sacred right to freedom of speech?

8 Our Rights Rest on Reason
People are capable of self-government because they possess reason. Says Jefferson in a letter to Peter Carr: “Fix reason firmly to her seat and call to her tribunal every fact, every opinion.” Our Founders expected people to use their own minds to control their own lives. For example, Jefferson gently chastised his teenage daughter, Martha, when she relied on her teacher’s help to read an ancient Roman history text. He wrote her in a letter: “If you always lean on your master, you will never be able to proceed without him. It is part of the American character to consider nothing as desperate—to surmount every difficulty . . . ” Contrast this call for self-sufficiency to today’s welfare state, which destroys our capacity to think and act for ourselves and transforms us into helpless dependents.

9. Our Rights are Violated Only by Force
Only acts of physical force or fraud violate our rights. In Jefferson’s Notes on Virginia he states: “The legitimate powers of government extend to such acts only as are injurious to others.” If I pick your pocket, break your leg, or breach a contract with you, then I violate your rights and the government can and must stop me.

But if I draw a cartoon that offends you, I haven’t violated your rights. If I make a windfall profit on Wall Street, I do not violate the rights of people who didn’t invest as I did. If I offer you a job at a wage lower than you would prefer, I haven’t violated your rights. You are free to seek a better job. However, the government certainly violates my rights if it compels me to hire you on terms I don’t accept. The peaceful economic and personal activities of private persons exercising their liberty do not violate the rights of others and cannot be abridged by the state.

10. Government’s Sole Job is to Protect Individual Rights
Wise government, explains Jefferson in his First Inaugural Address, “shall restrain men from injuring one another . . . shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.” And that’s it. That’s the whole of the job of government.

Bear this in mind when you consider Mr. Obama’s views on American government, given in an uncharacteristically candid 2001 interview with WBEZ radio in Chicago. He expresses regret that the Supreme Court “never entered into the issues of redistribution of wealth” because it “didn’t break free from the essential constraints that were placed by the Founding Fathers in the Constitution.” However, Mr. Obama sees a way around these Constitutional constraints: “[O]ne of the, I think, tragedies of the civil-rights movement . . . was a tendency to lose track of the political and community organizing activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributive change.” How are we to interpret this? Will pressure-group warfare and intimidation by community thugs be the means of bypassing the Constitution and bringing about the “major redistributive change” that Mr. Obama envisions? How can we not be alarmed by these statements? How can we not see that government today has become the greatest threat to our lives, liberty, and property?

Six Strategies for Using Individual Rights in the Fight for Freedom

To win the battle for freedom, we must invoke individual rights, and we must invoke them now, before it’s too late. The statists have become emboldened by their recent election victories; their ranks have degraded to include officials that talk like thugs; their attacks on our rights have become more open and virulent. This brings us to what could be a watershed moment in American history. We must invoke individual rights because they bring morality to our side, and the moral argument is the most powerful weapon of all. The person whose position stems from correct and compelling moral principles will win any argument, just as our Founders won their cause in establishing America. Let’s examine six strategies for employing individual rights in the fight for freedom. These six points will be formulated using the word RIGHTS, which, conveniently for us, contains six letters.

R = Reason with Moral Principles, Not Just Practicality
For example, consider the draft (and the same arguments would hold for other forms of obligatory “national service,” which Mr. Obama seems to be entertaining). When we periodically hear calls for a military draft, the friends of freedom often argue that a volunteer army is more efficient. This is true and definitely deserves to be said. However, giving only the bad consequence (the inefficiency) of an act of government usurpation without explaining why the policy is wrong in principle reduces the argument to a mere practical discussion of the effectiveness of different armies, with no pressing moral issue at stake to rally the public to one side or the other. If the statists can raise plausibility that the draft is efficient, then the friends of liberty have no leg to stand on.

Giving the practical argument from the inefficiency of a draft is like trying to walk with one leg. Adding the moral argument from individual rights gives us two legs—plus a spine. The argument from individual rights asserts that the draft is wrong because it represents involuntary servitude, i.e., it violates a person’s right to life and liberty. A person has the right to decide for himself what he wants to do with the precious years of his life. Government exists to protect that sacred right, not to violate it. A person is free to chose his employment, including a job with the government, especially one that could risk his life. It would be clearly tyrannical for the state to draft its public school teachers, police officers, or mail carriers against their will. How then can the government claim the power to compel someone to serve in the military?

Furthermore, the argument from rights strengthens the practical argument by giving the underlying reason why the draft is inefficient, namely, because people do not perform well when their rights are violated and they are working under compulsion.

The argument from rights deals a mortal blow to the statists. It elevates the issue from a technical matter of military efficiency to a moral issue involving nothing less than our fundamental Constitutional rights. The moral argument is unanswerable, unless you want to be on the side that violates individual rights. This is what we are aiming at—a moral crusade for the sanctity of individual rights as our answer to the statists.

I = Invoke Private Solutions to Life’s Problems
Living in a free society means that we citizens take care of ourselves, and we relish doing so. We’re Americans, the most resourceful people on earth. Each of us is master of our fate and captain of our soul, and that’s the glory of life. Because the nanny state destroys self-esteem and self-reliance, we need to help people discover that they can blow their noses without the nanny holding the handkerchief. Here are just a few self-help tips for living in a free society:

—If you don’t go to school and don’t work hard to get ahead, then don’t expect the same rewards as those who do. You haven’t earned them.

—If you default on a loan, lick your wounds and don’t make the same mistake again. But don’t expect the government to bail you out with money fleeced from taxpayers who pay their debts on time.

—If you want to develop a new enterprise, invention, or source of energy, then work for the removal of all government regulations standing in your way and convince private investors to support you, but don’t try to get a billion-dollar government boondoggle. Be an entrepreneur, not a leech.

—In short, don’t expect any free lunches. Everything worth having in life requires effort to obtain. And there are no guarantees. You can lose your job, your investments can fail, and your fiancé can leave you. Stop trying to use the government to shield you from life’s risks. Take the plunge and feel the tingle of life.

In fighting for freedom, hold people responsible for their own lives.

G = Get Behind Capitalism
We must defend the free market because it is the expression of our individual rights in the economic and material sphere of life. By pursuing profit, we further our lives and happiness. By engaging in economic activities unfettered by the government, we exercise our liberty. As Ayn Rand observed: “[A] free mind and a free market are corollaries.”

The Dark Side’s resentment of capitalism is unrelenting. Capitalism is to a socialist what a stake in the heart is to a vampire. It is the living proof of the power of freedom to create unlimited wealth and prosperity, without the need for power-hungry politicians to run things for us. This is why the Dark Side’s attacks on capitalism are so virulent, and why we must resoundingly defeat them.

For example, consider a CEO’s pay. The statists call for government to limit a CEO’s compensation. Friends of freedom explain that a company is unable to attract the best candidate for CEO with a salary lower than the person can obtain elsewhere. Furthermore, they explain, CEOs deserve their salaries because they bring additional revenue into the company that vastly surpasses their pay, revenue that expands the business, creates more jobs, increases wages of employees, and lowers prices for customers. This argument is crucial in educating the public on the remarkable benevolence of the free market and on its unmatched effectiveness in bringing prosperity to everyone. We need to disseminate this information in order to combat the countless misconceptions of capitalism and ignorance of economics that poison our culture.

But, we can’t stop there. We need to strengthen our case for capitalism by adding the argument from individual rights, which asserts the following: Any government regulation to cut a CEO’s pay sends a message to all Americans to beware. If you make too much, you’re no longer covered by the Constitution; your rights to your life and property are no longer protected; they’re subject to seizure by the police force of the state. Where would it stop? What about a baseball player, or a rock star, or a brilliant surgeon—are they too successful? Does their pay also need chopping by Congress? Will the government seize their livelihood and destroy the American Dream for them, too? CEOs are citizens, which means they have rights, including the right to accept any compensation offered to them. Would the government use its police power to cut the salary of a janitor? If the janitor is free to work for the highest possible salary he can get, then why would the Constitutional rights be different for a company executive? Why would the janitor’s rights be protected, but the CEO’s rights trampled?

The argument from rights shows how government tampering with anyone’s pay represents a tampering with the Constitution and bedrock of America.

H = Hammer the Government for Using Force Against Innocent Citizens
The more we unmask the use of force, the more people will see the thuggery involved in the regulated state.

During a Congressional hearing with oil company executives, Congresswoman Maxine Waters of California castigated them for the rise in gasoline price and threatened a complete government takeover of their industry. Based on this incident, can anyone fail to see the thin line that exists between the welfare state and the police state? The answer to Maxine Waters should be something like this:

The property rights of the millions of shareholders who own these corporations are guaranteed by the Constitution and are unalienable. That means there is never a situation in which you could expropriate that property, even if the price of gasoline hit $1,000 a gallon. This hearing should be adjourned and another one started to remove you from office because you are threatening a level of tyranny characteristic of communism, namely, a police-state seizure of an industry. The rights of every American are at risk with you in office.

If enlightened citizens speak out like this, maybe next time a company executive will have the courage.

T = Talk Straight and Unmask the Enemy’s Evasions
We must translate the honey-coated language of the Dark Side into plain English.

“Redistributive justice” means looting and plundering those who produce in order to give benefits to those who haven’t earned them.

“Government investments in new technology” means replacing real investments—private people taking careful risks with their own money and expecting results—with government squandering of taxpayers’ money in subsidies, grants, and boondoggles that need never turn a profit, that need never show results, with every special-interest group under the sun in line for the bounty.

The most honey-coated of all the statists’ expressions, their constant refrain, is: “We just want to help people.” The notion of government, the exclusive wielder of police force, as a helper in the peaceful affairs of citizens is absurd. Government intrusion necessitates the use of compulsion. As George Washington is reputed to have said: “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master. Never for a moment should it be left to irresponsible action.”

When politicians say they just want to help people, they neglect to mention that they are garnering dangerous, unchecked powers for themselves and destroying our liberty in the process. We must not allow them the excuse of good intentions. No one can take away our rights, be their intentions good or bad.

For example, the daughter of a presidential candidate appears on television to say: “My dad is a wonderful man. He wants to give free healthcare to the people.” What’s the answer to this? What about giving their rightful freedom to the people? What about the freedom of doctors? Are they now excluded from the Constitution? Do they no longer have the liberty to practice their profession by their own judgment and conscience? Under state-run medicine, doctors lose this freedom and must take orders from bureaucrats.

Another scenario involves farm subsidies. I saw a kind and gentle Republican senator say on television: “We only wanted to help farmers.” She didn’t realize that ethanol mandates for gasoline would contribute to rising prices of gas and food and would lead to food riots in the world. We must translate her words into plain English for the good senator: You mean you only wanted to rob the taxpayer to pander to the farm vote. You wanted to pass regulations favorable to farmers but disastrous to other citizens. The Constitution does not give you the power to take money out of my pocket and put it into a farmer’s pocket. And the Constitution does not give you the power to meddle in somebody’s business, mandating what goes into a product.

We need to find principled public officials to defend our rights, rather than the typical Republicans, who accept the statists’ premises because they want to please everyone and never raise eyebrows. The first Americans had the courage to face the enemy musket to musket. The least that officials on our side can do is summon the courage to raise a few eyebrows.

S = Stand as One People Against the State, Not as Pressure Groups Against One Another
Today the vast majority of politicians are invested in their special interest groups, which means they are intensifying the welfare state and stifling our liberty. They are breaking us into warring tribes—pitting the seniors against the young, the patients against the doctors, the consumers against the oil companies, the home buyers against the mortgage companies—with more and more government regulation as the alleged answer to our woes. We must see beyond this scam. We must take up the sword as one people in one fight against statism.

Defending any person’s individual rights is scoring a point for all of us. Therefore, we need to be the one non-special interest group that places the individual in the center of the battle for liberty. In each instance in which we want to fight for freedom, we need to ask ourselves two questions:

—1. Whose individual rights are being violated?
—2. What can I say or do to defend them?

For example, instead of the typical practice of businesses lobbying for regulations favorable to their enterprises or detrimental to their competitors, imagine if a consortium of companies banned together in a massive media campaign addressed to the public, not to the legislators, asserting the individual rights of each of them to operate without government interference. How shocking it would be to learn that business owners have Constitutional rights and they are asserting them! The consortium must risk vehement denunciations by the Dark Side and hold its ground. Such a battle would refocus the American people on the true meaning of rights, educate the young (who apparently never learned of America’s greatest legacy in school), and eventually win the country. Wouldn’t that be a better way to spend millions of dollars than to obtain some range-of-the-moment concession from the statists while reinforcing their system of political pull?

And in education, instead of parents’ groups fighting each other over what curriculum should be taught in public schools, what if the enlightened among them banned together to fight for the right and responsibility of every parent to control his child’s education? This would be a fight to privatize schools and establish a free marketplace of education. Such a fight would rescue the precious minds of the young from the control of the state.

We have now refreshed our understanding of individual rights, the only doctrine that stands between us and tyranny and that makes a civilized society possible.

There is much concern that we are losing our distinctive American values, and we are right to feel this concern, because we are losing them. However, the exact nature of the values that made us the greatest country in the world often eludes us. Let us always remember with pride that our unique American values are: a respect for individual rights and all that implies—i.e., limited government, personal liberty, and laissez faire capitalism.

We have established six strategies for asserting and defending our rights in the battle for freedom. These six strategies can be condensed into a single battlecry: Argue from individual rights. In your letters to the editor, op-eds, articles, calls to radio talk-shows, e-mails to television news shows, discussions with your town councils, neighbors, family, and friends, argue from individual rights. For those holding or seeking public office, in your campaign speeches, in the positions you take, and in your presentations in the halls of government, argue from individual rights. It is the only way to win the battle for freedom. It is the only way to rescue our lives and country. And may the force of this powerful and noble weapon be with you.

Copyright © 2008 by Genevieve LaGreca.
Gen LaGreca is the author of Noble Vision, a ForeWord magazine Book-of-the-Year award-winning novel about liberty. Permission is given to post or publish this article with attribution to the author and to

Tuesday, October 21, 2008

The Myth that Laissez Faire Is Responsible for Our Financial Crisis

The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism.

The attempt to place the blame on laissez faire is readily confirmed by a Google search under the terms “crisis + laissez faire.” On the first page of the results that come up, or in the web entries to which those results refer, statements of the following kind appear:

“The mortgage crisis is laissez-faire gone wrong.”

“Sarkozy [Nicolas Sarkozy, the President of France] said `laissez-faire’ economics, `self-regulation’ and the view that `the all-powerful market’ always knows best are finished.”

“`America’s laissez-faire ideology, as practiced during the subprime crisis, was as simplistic as it was dangerous,’ chipped in Peer Steinbrück, the German finance minister.”

“Paulson brings laissez-faire approach on financial crisis….”

“It’s au revoir to the days of laissez faire.”

Recent articles in The New York Times provide further confirmation. Thus one article declares, “The United States has a culture that celebrates laissez-faire capitalism as the economic ideal….”
[2] Another article tells us, “For 30 years, the nation’s political system has been tilted in favor of business deregulation and against new rules.”[3] In a third article, a pair of reporters assert, “Since 1997, Mr. Brown [the British Prime Minister] has been a powerful voice behind the Labor Party’s embrace of an American-style economic philosophy that was light on regulation. The laissez-faire approach encouraged the country’s banks to expand internationally and chase returns in areas far afield of their core mission of attracting deposits.”[4] Thus even Great Britain is described as having a “laissez-faire approach.”

The mentality displayed in these statements is so completely and utterly at odds with the actual meaning of laissez faire that it would be capable of describing the economic policy of the old Soviet Union as one of laissez faire in its last decades. By its logic, that is how it would have to describe the policy of Brezhnev and his successors of allowing workers on collective farms to cultivate plots of land of up to one acre in size on their own account and sell the produce in farmers’ markets in Soviet cities. According to the logic of the media, that too would be “laissez faire”—at least compared to the time of Stalin.

Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above. Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual’s rights against the initiation of physical force. This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual’s own government. This last is accomplished by such means as a written constitution, a system of division of powers and checks and balances, an explicit bill of rights, and eternal vigilance on the part of a citizenry with the right to keep and bear arms. Under laissez-faire capitalism, the state consists essentially just of a police force, law courts, and a national defense establishment, which deter and combat those who initiate the use of physical force. And nothing more.

The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States.

1) Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted “bailouts.” What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.

2) There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.

3) The economic interference of today’s cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.

4) To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been “tilted in favor of business deregulation and against new rules.” Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.

5) And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.

What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state than to laissez-faire capitalism. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez-faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.

Government Intervention Actually Responsible for the Crisis

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one’s money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.

All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.

Perhaps as much as a trillion and a half dollars or more of new and additional checkbook-money capital was channeled into the housing market as the result of the artificially low interest rates caused by the presence of an even larger overall amount of new and additional money in the loan market. Because of the long-term nature of its financing, housing is especially susceptible to the effect of lower interest rates, which can serve sharply to reduce monthly mortgage payments and in this way correspondingly increase the demand for housing and for the mortgage loans needed to finance it.

Over a period of years, the result was a huge increase in the production and purchase of new homes, rapidly rising home prices, and a further spiraling increase in the production and purchase of new homes in the expectation of a continuing rise in their prices.

To gauge the scale of its responsibility, in the period of time just since 2001, the Federal Reserve caused an increase in the supply of checkbook-money capital of more than 70 percent of the cumulative total amount it had created in the whole of the previous 88 years of its existence—that is, almost 2 trillion dollars.
[5] This was the increase in the amount by which the checking deposits of the banks exceeded the banks’ reserves of actual money, that is, the money they have available to pay depositors who want cash. The Federal Reserve caused this increase in illusory capital by means of creating whatever new and additional bank reserves as were necessary to achieve a Federal Funds interest rate—that is, the rate of interest paid by banks on the lending and borrowing of reserves—that was far below the rate of interest dictated by the market. For the three years 2001-2004, the Federal Reserve drove the Federal Funds Rate below 2 percent and from July of 2003 to June of 2004, drove it even further down, to approximately 1 percent.

The Federal Reserve also made it possible for banks to operate with a far lower percentage of reserves than ever before. Whereas in a free market, banks would hold gold reserves equal to their checking deposits, or at the very least to a substantial proportion of their checking deposits,
[6] the Federal Reserve in recent years contrived to make it possible for them to operate with irredeemable fiat money reserves of less than 2 percent.

The Federal Reserve drove down the Federal Funds Rate and brought about the vast increase in the supply of illusory capital for the purpose of driving down all market interest rates. The additional illusory capital could find borrowers only at lower interest rates. The Federal Reserve’s goal was to bring about interest rates so low that they could not compensate even for the rise in prices. It deliberately sought to achieve a negative real rate of interest on capital, that is, a rate below the rate at which prices rise. This means that a lender, after receiving the interest due him for a year, has less purchasing power than he had the year before, when he had only his principal.

In doing this, the Federal Reserve’s ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large-scale unemployment.

As matters have turned out, the Federal Reserve got its wish for a negative real rate of interest, but to an extent far beyond what it wished. It wished for a negative real rate of return of perhaps 1 to 2 percent. What it achieved in the housing market was a negative real rate of return measured by the loss of a major portion of the capital invested. In the words of The New York Times, “In the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion.”

This vast loss of capital in the housing debacle is what is responsible for the inability of banks to make loans to many businesses to which they normally could and would lend. The reason they cannot now do so is that the funds and the real wealth that have been lost no longer exist and thus cannot be lent to anyone. The Federal Reserve’s policy of credit expansion based on the creation of new and additional checkbook money has thus served to give capital to unworthy borrowers who never should have had it in the first place and to deprive other, far more credit worthy borrowers of the capital they need to stay in businesses. Its policy has been one of redistribution and destruction.

The capital it has caused to be malinvested and lost in housing is capital that is now unavailable for such firms as Wickes Furniture, Linens ‘N Things, Levitz Furniture, Mervyns, and innumerable others, who have had to go bankrupt because they could not obtain the loans they needed to stay in business. And, of course, among the foremost victims have been major banks themselves. The losses they have suffered have wiped out their capital and put them out of business. And the list of casualties will certainly grow.

Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners’ equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment.

A discussion of the housing debacle would also not be complete if it did not mention the role of government guarantees of many mortgage loans. If the government guarantees the principal and interest on a loan, there is no reason why a lender should care about the qualifications of a borrower. He will not lose by making the loan, however bad it may turn out to be.

A substantial number of mortgage loans carried such guarantees. For example, a New York Times article describes the Department of Housing and Urban Development as “an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans.” The article describes how HUD progressively reduced its lending standards: “families no longer had to prove they had five years of stable income; three years sufficed...lenders were allowed to hire their own appraisers rather than rely on a government-selected panel...lenders no longer had to interview most government-insured borrowers face to face or maintain physical branch offices,” because the government’s approval for granting mortgage insurance had become automatic.

The Times’ article goes on to describe how “Lenders,” such as Countrywide Financial, which was among the largest and most prominent, “sprang up to serve those whose poor credit history made them ineligible for lower-interest `prime’ loans.” It notes the fact that “Countrywide signed a government pledge to use `proactive creative efforts’ to extend homeownership to minorities and low-income Americans.”
[8] “Proactive creative efforts” is a good description of what lenders did in offering such bizarre types of mortgages as those requiring the payment of “interest only,” and then allowing the avoidance even of the payment of interest by adding it to the amount of outstanding principal. (Such mortgages suited the needs of homebuyers whose reason for buying was to be able to sell as soon as home prices rose sufficiently further.)

Just as vast numbers of houses were purchased based on an unfounded belief in an endless rise in their prices, so too vast numbers of complex financial derivatives were sold based on an unfounded belief that the Federal Reserve System actually had the power it claimed to have of making depressions impossible, a power which the media and most of the economics profession repeatedly affirmed.

Derivatives have received such a bad press that it is necessary to point out that the insurance policy on a home is a derivative. And many of the derivatives that were sold and which are now creating problems of insolvency and bankruptcy, namely, “credit default swaps (CDSs),” were insurance policies in one form or another. Their flaw was that unlike ordinary homeowners’ insurance, they did not have a sufficient list of exclusions.

Homeowners’ policies make exclusions for such things as damage caused by war and, in many cases, depending on the special risks of the local area, earthquakes and hurricanes. In the same way, the more complex derivatives should have made an exclusion for losses resulting from financial collapse brought on by Federal-Reserve-sponsored massive credit expansion. (If it is impossible actually to write such an exclusion, because many of the losses may occur before the nature of the cause becomes evident, then such derivatives should not be written and the market will no longer write them because of the unacceptable risks they entail.) But decades of brainwashing by the government, the media, and the educational system had convinced almost everyone that such collapse was no longer possible.

Belief in the impossibility of depressions played the same role in the creation and sale of “collateralized debt obligations (CDOs).” Here disparate home mortgages were bundled together and securities were issued against them. In many cases, large buyers bundled together collections of such securities and issued further securities against those securities. As more and more homeowners have defaulted on their loans, the result has been that no one is able directly to judge the value of these securities. To do so, it will be necessary to disentangle them down to the level of the underlying individual mortgages. Such tangles of securities could never have been sold in a market not overwhelmed by the propaganda that depressions are impossible under the government’s management of the financial system.

Finally, a discussion of the housing debacle would not be complete if it did not include mention of forms of virtual extortion that served to encourage loans to unworthy borrowers. Thus, the online encyclopedia Wikipedia writes:

The Community Reinvestment Act [CRA] a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods... CRA regulations give community groups the right to comment or protest about banks'on-compliance with CRA. Such comments could help or hinder banks' planned expansions.
The meaning of these words is that the Community Reinvestment Act gives the power to “community groups,” to determine in an important respect the financial success or failure of a bank. Only if they are satisfied that the bank is making sufficient loans to borrowers to whom it would otherwise choose not to lend, will it be permitted to succeed. The most prominent such community group is ACORN.
Part and parcel of the environment that has made an act such as the CRA possible, is threats of slander against banks for being “racist” if they choose not to make loans to people who are poor credit risks and also happen to belong to this or that minority group. The threats of slander go hand in glove with intimidation from various government agencies that exercise discretionary power over the banks and are in a position to harm them if they do not comply with the agencies’ wishes. The same points apply to mortgage lenders other than banks.

What this extensive analysis of the actual causes of our financial crisis has shown is that it is government intervention, not a free market or laissez-faire capitalism, that is responsible in every essential respect.

The Laissez-Faire Myth and the Marxism of the Media

The myth that laissez faire exists in the present-day United States and is responsible for our current economic crisis is promulgated by people who know practically nothing whatever of sound, rational economic theory or the actual nature of laissez-faire capitalism. They espouse it despite, or rather because of, their education at the leading colleges and universities of the country, When it comes to matters of economics, their education has steeped them entirely in the thoroughly wrong and pernicious doctrines of Marx and Keynes. In claiming to see the existence of laissez faire in the midst of such massive government interference as to constitute the very opposite of laissez faire, they are attempting to rewrite reality in order to make it conform with their Marxist preconceptions and view of the world.

They absorb the doctrines of Marx more in history, philosophy, sociology, and literature classes than in economics classes. The economics classes, while usually not Marxist themselves, offer only highly insufficient rebuttal of the Marxist doctrines and devote almost all of their time to espousing Keynesianism and other, less well-known anti-capitalistic doctrines, such as the doctrine of pure and perfect competition.

Very few of the professors and their students have read so much as a single page of the writings of Ludwig von Mises, who is the preeminent theorist of capitalism and knowledge of whose writings is essential to its understanding. Almost all of them are thus essentially ignorant of sound economics.

When I refer to the educational system and the media as Marxist, I do not intend to imply that its members favor any kind of forcible overthrow of the United States government or are necessarily even advocates of socialism. What I mean is that they are Marxists insofar as they accept Marx’s views concerning the nature and operation of laissez-faire capitalism.

They accept the Marxian doctrine that in the absence of government intervention, the self-interest, the profit motive—the “unbridled greed”—of businessmen and capitalists would serve to drive wage rates to minimum subsistence while it extended the hours of work to the maximum humanly endurable, imposed horrifying working conditions, and drove small children to work in factories and mines. They point to the miserably low standard of living and terrible conditions of wage earners in the early years of capitalism, especially in Great Britain, and believe that that proves their case. They go on to argue that only government intervention in the form of pro-union and minimum-wage legislation, maximum-hours laws, the legal prohibition of child labor, and government mandates concerning working conditions, served to improve the wage earner’s lot. They believe that repeal of this legislation would bring about a return to the miserable economic conditions of the early nineteenth century.

They view the profits and interest of businessmen and capitalists as unearned, undeserved gains, wrung from wage earners—the alleged true producers—by the equivalent of physical force, and hence regard the wage earners as being in the position of virtual slaves (“wage slaves”) and the capitalist “exploiters” as being in the position of virtual slave owners. Closely connected with this, they regard taxing the businessmen and capitalists and using the proceeds for the benefit of wage earners, in such forms as social security, socialized medicine, public education, and public housing, as a policy that serves merely to return to the wage earners some portion of the loot allegedly stolen from them in the process of “exploitation.”

In full agreement with Marx and his doctrine that under laissez-faire capitalism the capitalists expropriate all of the wage earner’s production above what is necessary for minimum subsistence, they assume that the government’s intervention harms no one but the immoral businessmen and capitalists, never the wage earners. Thus not only the taxes to pay for social programs but also the higher wages imposed by pro-union and minimum-wage legislation are assumed simply to come out of profits, with no negative effect whatever on wage earners, such as unemployment. Likewise for the effect of government-imposed shorter hours, improved working conditions, and the abolition of child labor: the resulting higher costs are assumed simply to come out of the capitalists’ “surplus value,” never out of the standard of living of wage earners themselves.

This is the mindset of the whole of the left and in particular of the members of the educational system and media. It is a view of the profit motive and the pursuit of material self-interest as inherently lethal if not forcibly countered and rigidly controlled by government intervention. As stated, it is a view that sees the role of businessmen and capitalists as comparable to that of slave owners, despite the fact that businessmen and capitalists do not and cannot employ guns, whips, or chains to find and keep their workers but only the offer of better wages and conditions than those workers can find elsewhere.

Not surprisingly, the educational system and media share the view of Marx that laissez-faire capitalism is an “anarchy of production,” in which the businessmen and capitalists run about like chickens without heads. In their view, rationality, order, and planning emanate from the government, not from the participants in the market.

As I say, this, and more like it, is the intellectual framework of the great majority of today’s professors and of several generations of their predecessors. It is equally the intellectual framework of their students, who have dutifully absorbed their misguided teachings and some of whom have gone on to become the reporters and editors of such publications as The New York Times, The Washington Post, Newsweek, Time, and the overwhelming majority of all other newspapers and news magazines. It is the intellectual framework of their students who are now the commentators and editors of practically all of the major television networks, such as CBS, NBC, ABC, and CNN.[9] And it is this intellectual framework within which the media now attempts to understand and report on our financial crisis.

In their view, laissez-faire capitalism and economic freedom are a formula for injustice and chaos, while government is the voice and agent of justice and rationality in economic affairs. So firmly do they hold this belief, that when they see what they think is evidence of large-scale injustice and chaos in the economic system, such as has existed in the present financial crisis, they automatically presume that it is the result of the pursuit of self-interest and the economic freedom that makes that pursuit possible. Given this fundamental attitude, the principle that guides contemporary journalists so-called is that their job is to find the businessmen and capitalists who are responsible for the evil and the government officials who set them free to commit it, and, finally, to identify and support the policies of government intervention and control that will allegedly eliminate the evil and prevent its recurrence in the future.

Their fear and hatred of economic freedom and laissez-faire capitalism, and their need to be able to denounce it as the cause of all economic evil, is so great that they pretend to themselves and to their audiences that it exists in today’s world, in which it clearly does not exist even remotely. By making the claim that laissez faire exists and is what is responsible for the problem, they are able to turn the full force of their hatred for actual economic freedom and laissez-faire capitalism against each and every sliver of economic freedom that somehow manages to exist and which they decide to target. That sliver, they project, is part and parcel of the starvation of the workers in the inhuman exploitation of labor that, in their ignorance, they take for granted is imposed by capitalists under laissez faire. Their brainwashed audience, as much the product of the contemporary educational system as they themselves, then quickly follows suit and obliges their efforts to arouse hatred.

The result is summed up in words such as these, which appeared in one of the same New York Times articles I quoted earlier: “`We now have a collective anger, disgust, over our whole financial system and it’s obvious we’re going to get a regulatory backlash…’” [with] “a spillover effect to other industries because voters have the perception that ‘big companies are animals and they need to be put in their cages.’”

In this way the enemies of capitalism and economic freedom are able to proceed in their campaign of economic destruction and devastation. They use the accusation of “laissez faire” as a kind of ratchet for increasing the government’s power. For example, in the early 1930s they accused President Hoover of following a policy of laissez faire, even as he intervened in the economic system to prevent the fall in wage rates that was essential to stop a reduced demand for labor from resulting in mass unemployment. On the basis of the mass unemployment that then resulted from Hoover’s intervention, which they succeeded in portraying as “laissez faire,” they deceived the country into supporting the further massive interventions of the New Deal.

Today, they continue to play the same game. Always it is laissez faire that they denounce, and whose alleged failures they claim need to be overcome with yet more government regulations and controls. Today, the massive interventions not only of the New Deal, but also of the Fair Deal, the New Frontier, the Great Society, and of all the administrations since, have been added to the very major interventions that existed even in the 1920s and to which Hoover very substantially added. And yet we still allegedly have laissez faire. It seems that so long as anyone manages to move or even breathe without being under the control of the government, laissez faire allegedly continues to exist, which serves to make necessary yet still more government controls.

The logical stopping point of this process is that one day everyone will end up being shackled to a wall, or at the very least being compelled to do something comparable to living in a zip code that matches his social security number. Then the government will know who everyone is, where he is, and that he can do nothing whatever without its approval and permission. And then the world will be safe from anyone attempting to do anything that benefits him and thereby allegedly harms others. At that point, the world will enjoy all the prosperity that comes from total paralysis.

*Copyright © 2008, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title Capitalism: A Treatise on Economics and then saving the file when it appears on the screen.

[1] See

[2] Steve Lohr, “Intervention Is Bold, but Has a Basis in History,” October 14, 2008, p. A14.

[3] Jackie Calmes, “Both Sides of the Aisle See More Regulation,” October 14, 2008, p. A15.

[4] Landon Thomas Jr. and Julia Werdigier, “Britain Takes a Different Route to Rescue Its Banks,” October 9, 2007, p. B7.

[5] I arrive at these figures by calculating total checking deposits in January of 2001 and in August of 2008 as the sum of those contained in M1, the “sweep” accounts compiled by the Federal Reserve Bank of St. Louis, and money market mutual fund deposits, both retail and institutional. From these respective totals I subtract total bank reserves as of the same dates. I then subtract the result for 2001 from that for 2008 and divide the difference by the sum calculated for 2001.

[6] If the creation of checkbook money in excess of currency holdings is in fact an attempt at cheating, as I described it earlier, then it follows that a free market would actually require a 100 percent reserve.

[7] Joe Nocera, “Shouldn’t We Rescue Housing?, October 18, 2008, p. B1.

[8] David Streitfeld and Gretchen Morgenson, “The Reckoning, Building Flawed American Dreams,” October 19, 2008, p. A26.

[9] For a comprehensive refutation of all aspects of this intellectual framework, see George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996), chapters 11, 14, and passim.

Jackie Calmes, loc. cit.

Saturday, August 30, 2008

Barack Obama and Sarah Palin on Taxing Oil Companies and Giving the Money to Others

From the website of Barack Obama:
• Immediately Provide Emergency Energy Rebate. Barack Obama will require oil companies to take a reasonable share of their record‐breaking windfall profits and use it to provide direct relief worth $500 for an individual and $1,000 for a married couple. The relief would be delivered as quickly as possible to help families cope with the rising price of gasoline, food and other necessities. The rebates would be fully paid for with five years of a windfall profits tax on record oil company profits. This relief would be a down payment on Obama’s long‐term plan to provide middle‐class families with at least $1,000 per year in permanent tax relief. The Obama energy rebates will: offset the entire increase in gas prices for a working family over the next four months; or pay for the entire increase in winter heating bills for a typical family in a cold‐weather state.
From “Sarah Palin, an Outsider Who Charms” (The New York Times, August 30, 2008):
One of her most significant accomplishments as governor was passing a major tax increase on state oil production, angering oil companies but raising billions of dollars in new revenue. She said the oil companies had previously bribed legislators to keep the taxes low. She subsequently championed legislation that would give some of that money back to Alaskans: Soon, every Alaskan will receive a $1,200 check.

Comment by George Reisman: On this fundamental issue, not just of oil and energy, but, wider, of morality and economics in general, there is no difference in principle between these two. Both advocate legalized theft, in the expectation of doing good.

Obama thinks he can do good to the oil companies’ customers by depriving the oil companies of the means to expand production, which expansion they would quickly undertake and achieve if not prevented year after year by his leftist, environmentalist cronies in Congress and the courts. It is that gang of cronies that is responsible for the high price of oil and, indirectly, for the very high profits of the oil companies. The more they restrict the supply of oil, and of competing forms of energy, such as atomic power, the higher they drive its price and thus the profits of its producers. Whoever is unhappy about the high price of oil and oil products should blame the leftist/environmentalist bloc in Congress and in the courts, and the environmental movement behind it. These are the parties actually responsible.

Obama also fails to see another major aspect of the absurdity of his proposal. Namely, that more money placed in the hands of poor buyers of gasoline and heating oil will serve simply to drive the prices of the limited supplies of gasoline and heating oil presently available still higher. This will make it impossible for people a little higher up on the economic ladder to afford them. Obama does not, perhaps will not, perhaps cannot, see that only more production can enable anyone to have more oil and oil products without others having less.

The first of the criticisms I just made of Obama’s plan applies equally to that of Sarah Palin. The two plans differ somewhat in the extent of their destructiveness. The destructiveness of Palin’s plan is limited by the fact that it can be applied only within the confines of the State of Alaska. But within the State of Alaska, it gives away more money to the individual recipient than does Obama’s plan: $1,200 versus $500.

A major consequence that both Obama’s and Palin’s plans overlook is that even insofar as the oil companies are presently prevented by drilling restrictions from using their funds for expanding oil production, their funds still perform a valuable economic function. Namely, they provide the capital for carrying on production elsewhere in the economic system. To the extent that the oil companies simply put their funds in the bank, buy Treasury bills, repurchase their own stock, or pay out extraordinary dividends, those funds are then available in the financial markets, all of which are interconnected. Their presence makes it easier for other businesses to obtain loans or sell stock and thereby have the funds to carry on their business activities.

Sarah Palin probably never thought of this when she dipped her hand into the oil companies’ till and withdrew $1,200 for every Alaskan. What she was actually doing in her ignorance was helping to make the credit crunch that the United States has been experiencing that much worse. She was helping to deprive businesses around the country of capital they would have had, if that capital had not been made available to be consumed to the extent of $1,200 for each and every Alaskan.

Obama and Palin are both obviously ignorant of economics. John McCain, who picked Palin to be his running mate, has admitted his own lack of knowledge of the subject. Knowing little or nothing of the subject himself, he could not be expected to realize that Palin knew nothing of the subject either. An examination of the record of Obama’s running mate, Senator Joseph Biden, would probably turn up a more extensive record of comparable ignorance of economics, given his greater number of years in public life as a leading spokesman for the Democratic Party.

This is certainly frightening. What is even more frightening is that the whole intellectual world, including the press and the media in general, the professors of economics, law, political philosophy, history, and all other fields directly or indirectly bearing on politics, all are overwhelmingly characterized by the same level of ignorance and thus unable to identify it in the candidates. We now apparently live in a society and culture that has become comparable in its level of economic knowledge to a pool table, on which mindless billiard balls randomly careen and collide and no knowledge or understanding of any kind is present.

*Copyright © 2008, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is and his blog is A pdf replica of his complete book can be downloaded to the reader’s hard drive simply by clicking on the book’s title Capitalism: A Treatise on Economics and then saving the file when it appears on the screen.