Friday, July 2, 2010

July Fourth Celebrates America's and the West's Core Values

Reason, Rights, and Science Are What Made America Great


Why should we celebrate the Fourth of July? Because America -- as the greatest product of Western civilization -- is the greatest country in the world. But it cannot remain great unless we understand the causes of its greatness.

In this age of diversity-worship, it is considered axiomatic that all cultures and countries are equal. Western culture, it is declared, is in no way superior to that of any other, not even to tribes of cannibals. To deny the equality of all cultures, claim the intellectuals, is to be guilty of the most heinous of intellectual sins: "ethnocentrism." It is to flout the "sacred" (and false) principle of cultural relativism. I disagree with the relativists -- absolutely.

There are three fundamental respects in which Western culture is objectively the best. The core values and achievements of Western civilization -- the values that made America great -- are:

1. Reason. The Greeks were the first to identify philosophically that knowledge is gained through reason and logic as opposed to mysticism (faith, tradition, revelation, dogma). It would take two millennia, including a Dark Ages and a Renaissance, before the full implications of Greek thought would be realized. The rule of reason reached its zenith in the West in the 18th century -- the Age of Enlightenment. "For the first time in modern history," writes one philosopher, "an authentic respect for reason became the mark of an entire culture." America is the epitome of Enlightenment thought.

2. Individual Rights. An indispensable achievement leading to the Enlightenment was the recognition of the concept of individual rights. John Locke demonstrated that individuals do not exist to serve governments, but rather that governments exist to protect individuals. The individual, said Locke, has an inalienable right to life, liberty, and the pursuit of his own happiness. This was the founding philosophy of America. (America made a disastrous error by tolerating slavery, which originated elsewhere, but it was too incongruent with America's core principles of reason and rights to endure and was corrected in the name of those principles.)

3. Science and Technology. The triumph of reason and rights made possible the full development and application of science and technology and ultimately modern industrial society. Once man's mind was freed from the tyranny of religious dogma, and man's productive capacity was freed from the tyranny of state control, scientific and technological progress followed in several interdependent steps. Men began to understand the laws of nature. They invented machinery. They engaged in large-scale production, that is, the creation of wealth. This wealth, in turn, financed and motivated further invention and production. As a result, horse-and-buggies were replaced by automobiles, wagon tracks by steel rails, and candles by electricity. At last, after millennia of struggle, man became the master of his environment.

The result of these core achievements was an increase in freedom, wealth, health, comfort, and life expectancy unprecedented in the history of the world. These Western achievements were greatest in the country where the principles of reason and rights were implemented most consistently -- the United States of America. In contrast, it was precisely in those (third-world) countries which did not embrace reason, rights, and technology where people suffered (and still suffer) most from both natural and man-made disasters (famine, poverty, illness, dictatorship) and where life-expectancy was (and is) lowest. It is said that primitives live "in harmony with nature," but in reality they are simply victims of the vicissitudes of nature -- if some dictator does not kill them first.

The greatness of America is not an "ethnocentric" prejudice; it is an objective fact. This assessment is based on the only proper standard for judging a culture or a society: the degree to which its core values are pro- or anti-life. Pro-life cultures acknowledge and respect man's nature as a rational being who must discover and create the conditions which his survival and happiness require -- which means that they advocate reason, rights (freedom), and technological progress.

Despite its undeniable triumphs, America is by no means secure. Its core principles are under attack from every direction -- by religious zealots who want to undermine the separation of church and state, and by its own intellectuals, who are denouncing reason in the name of skepticism, rights in the name of special entitlements, and progress in the name of environmentalism. We are heading rapidly toward the destruction of our core values and the dead end of nihilism. The core values and achievements of the West and of America must be asserted proudly and defended to the death. Our lives depend on them.

A Peace Plan for The Middle East

A Peace Plan for The Middle East

Israel defeats its enemies.

My peace plan is simple: Israel defeats its enemies.

Victory uniquely creates circumstances conducive to peace. Wars end, the historical record confirms, when one side concedes defeat and the other wins. This makes intuitive sense, for so long as both sides aspire to achieve their ambitions, fighting continues or it potentially can resume.

The goal of victory is not exactly something novel. Sun Tzu, the ancient Chinese strategist, advised that in war, "Let your great object be victory." Raimondo Montecuccoli, a seventeenth-century Austrian, said that "The objective in war is victory." Carl von Clausewitz, a nineteenth-century Prussian, added that "War is an act of violence to compel the enemy to fulfill our will." Winston Churchill told the British people: "You ask: what is our aim? I can answer in one word: Victory - victory - at all costs, victory, in spite of all terror, victory, however long and hard the road may be." Dwight D. Eisenhower observed that "In war, there is no substitute for victory." These insights from prior eras still hold, for however much weaponry changes, human nature remains the same.

Victory means imposing one's will on the enemy, compelling him to abandon his war goals. Germans, forced to surrender in World War I, retained the goal of dominating Europe and a few years later looked to Hitler to achieve this goal. Signed pieces of paper matter only if one side has cried "Uncle": The Vietnam War ostensibly concluded through diplomacy in 1973 but both sides continued to seek their war aims until the North won ultimate victory in 1975.

Willpower is the key: shooting down planes, destroying tanks, exhausting munitions, making soldiers flee, and seizing land are not decisive in themselves but must be accompanied by a psychological collapse. North Korea's loss in 1953, Saddam Hussein's in 1991, and the Iraqi Sunni loss in 2003 did not translate into despair. Conversely, the French gave up in Algeria in 1962, despite out-manning and out-gunning their foes, as did the Americans in Vietnam in 1975 and the Soviets in Afghanistan in 1989. The Cold War ended without a fatality. In all these cases, the losers maintained large arsenals, armies, and functioning economies. But they ran out of will.

Likewise, the Arab-Israeli conflict will be resolved only when one side gives up.

Until now, through round after round of war, both sides have retained their goals. Israel fights to win acceptance by its enemies, while those enemies fight to eliminate Israel. Those goals are raw, unchanging, and mutually contradictory. Israel's acceptance or elimination are the only states of peace. Each observer must opt for one solution or the other. A civilized person will want Israel to win, for its goal is defensive, to protect an existing and flourishing country. Its enemies' goal of destruction amounts to pure barbarism.

For nearly 60 years, Arab rejectionists, now joined by Iranian and leftist counterparts, have tried to eliminate Israel through multiple strategies: they work to undermine its legitimacy intellectually, overwhelm it demographically, isolate it economically, restrain its defenses diplomatically, fight it conventionally, demoralize it with terror, and threaten to destroy it with WMDs. While the enemies of Israel have pursued their goals with energy and will, they have met few successes.

Ironically, Israelis over time responded to the incessant assault on their country by losing sight of the need to win. The right developed schemes to finesse victory, the center experimented with appeasement and unilateralism, and the left wallowed in guilt and self-recrimination. Exceedingly few Israelis understand the unfinished business of victory, of crushing the enemy's will and getting him to accept the permanence of the Jewish state.

Fortunately for Israel, it need only defeat the Palestinians, and not the entire Arab or Muslim population, which eventually will follow the Palestinian lead in accepting Israel. Fortunately too, although the Palestinians have built an awesome reputation for endurance, they can be beaten. If the Germans and Japanese could be forced to give up in 1945 and the Americans in 1975, how can Palestinians be exempt from defeat?

Of course, Israel faces obstacles in achieving victory. The country is hemmed in generally by international expectations (from the United Nations Security Council, for example) and specifically by the policies of its main ally, the U.S. government. Therefore, if Jerusalem is to win, that starts with a change in policy in the United States and in other Western countries. Those governments should urge Israel to seek victory by convincing the Palestinians that they have lost.

This means undoing the perceptions of Israel's weakness that grew during the Oslo process (1993-2000) and then the twin withdrawals from Lebanon and Gaza (2000-05). Jerusalem appeared back on track during Ariel Sharon's first three years as prime minister, 2001-03 and his tough stance then marked real progress in Israel's war effort. Only when it became clear in late 2004 that Sharon really did plan to withdraw unilaterally from Gaza did the Palestinian mood revive and Israel stopped winning. Ehud Olmert's debilitating prime ministry has been only partially remedied by Binyamin Netanyahu over the past year.

Ironically, an Israeli victory would bring yet greater benefits to the Palestinians than to Israel. Israelis would benefit by being rid of an atavistic war, to be sure, but their country is a functioning, modern society. For Palestinians, in contrast, abandoning the fetid irredentist dream of eliminating their neighbor would finally offer them a chance to tend their own misbegotten garden, to develop their deeply deficient polity, economy, society, and culture.

Thus does my peace plan both end the war and bring unique benefits to all directly involved.

It Depends on What the Definition of ‘Austerity’ Is

It Depends on What the Definition of ‘Austerity’ Is

Paul Krugman says we are in a 'new era of austerity.' When will government spending be enough?

In a recent column, economist Paul Krugman explained how the United States has entered a new era of austerity as evidenced by the Senate’s failure to pass a bill that would have sent more money to the states to fill their budget gaps: "Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, myself included, regard this turn to austerity as a huge mistake."

Austerity, as Krugman defines here, equals Congress’s onetime refusal to spend even more money above the $4 trillion that the federal government is already spending this year (as the nation runs a $1.4 trillion deficit, with $7.5 trillion in debt held by the public and $50 trillion in unfunded entitlement spending).

When will government spending be enough? Using Bureau of Labor Statistics data, the chart below compares recent changes in government expenditures—or federal, state, and local government purchases of labor, goods, and services—and private domestic investment.

deRugy 6.30.10

As we see, changes in the size of government and in the private sector have generally moved together over the last decade. However, with the exception of 2004 and 2005, government consumption and investment has grown more quickly than private expenditures and investment every year this decade. In the last ten years, the private sector has, on average, grown 1.2 percent annually, while the government has, on average, grown 3.5 percent annually.

What’s more, while the private sector contracted in three of the past ten years, the government has continued to grow throughout the period. The government grows, regardless of changes in the economy.

In other words, if there is austerity, it’s not in government.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

Tax to the Max?

Tax to the Max?

Should we lift the payroll-tax ceiling to fix Social Security?

Over at ThinkProgress, Matt Yglesias argues that a sensible solution to Social Security’s long-term funding shortfalls would be to eliminate the so-called “tax max,” the $106,800 maximum earnings on which Social Security’s 12.4 percent tax is levied and upon which benefits are calculated. In other words, individuals would pay taxes and earn benefits based on their total earnings, no matter how high. According to the Social Security Administration’s (SSA’s) Office of the Actuary, this step—if implemented immediately—would eliminate around 95 percent of the long-term “actuarial deficit.” Yglesias calls eliminating the tax max “a very reasonable response to the fact that over the past thirty years the share of national income accruing to very high income individuals has gone up dramatically.”

Here are two thoughts, dealing with the effects of eliminating the payroll tax ceiling on Social Security’s financing and on marginal tax rates.

First, while eliminating the payroll tax ceiling would solve most of the 75-year actuarial deficit, bear in mind that this is a trust fund-based measure. Most economists and government analysts view government trust funds as accounting mechanisms, but not a vehicle that truly saves and transfers resources over time. For instance, the Congressional Budget Office’s Long-Term Budget Outlook, released Wednesday, states with reference to the Medicare trust fund that

Although the HI trust fund has important legal meaning, in that its balances are a measure of the amounts that government has the legal authority to spend under current law, it has little economic significance.

The economic consensus appears to be that Social Security surpluses effectively subsidize current consumption in the rest of the budget, not to improve the overall budget balance or raise national saving. That’s a really important point in this context, since eliminating the payroll-tax ceiling would produce large short-term payroll-tax surpluses, which would be credited to the trust fund and then “drawn down” to pay benefits in the future.

This chart, from SSA data, shows the program’s net cash flows (taxes minus benefits) under current law and for a no tax-max scenario. Eliminating the tax cap does improve Social Security’s long-term cash flows, reducing annual deficits by around half. But the big improvement to the system’s actuarial balance hinges on a large trust fund buildup in the short term, as higher taxes produce a bubble of payroll tax surpluses. If these surpluses aren’t truly saved—and there’s very good reason to believe they won’t be—then Social Security’s financing will be improved more on paper than in reality. It would cut annual deficits in half—which is great, but a far cry from eliminating them.

Biggs 7.1.10

Second, raising or eliminating the payroll-tax ceiling would constitute a significant increase in marginal taxes for many people with middle-class standards of living. Consider a person earning $107,000 annually, which is just above the current tax ceiling. That person pays a marginal federal income tax rate of 28 percent, a combined Medicare tax rate of 2.9 percent, and a state income tax rate that averages around 5 percent. In total, that person pays the government almost 36 cents of each additional dollar he or she earns.

If the payroll tax ceiling were eliminated, that same person would pay an additional tax of 12.4 percent (nominally split between employer and employee, but almost universally believed to be fully borne by the worker through reduced wages). The worker would receive additional benefits in exchange for higher Social Security taxes, but these are tiny at the margin due the progressivity of the benefit formula. I believe his net tax rate (the payroll tax rate minus benefits earned) would approach 11 percent. This would put this worker’s marginal tax rate at around 47 percent of his or her income.

And note that a) in many urban areas around the country $107,000 is a middle-class income, so these aren’t the super-rich; and b) these would be the marginal tax rates paid before we’d fixed even a penny of Medicare and Medicaid’s multi-trillion-dollar deficits, which—as the Left likes to remind us—are so much bigger than Social Security’s.

It’s pretty much accepted, even among policy folks well to the left-of-center, that the trust fund isn’t real savings and that marginal tax rates do matter. Given this, I don’t think a straight-elimination of the payroll tax ceiling really passes muster as a practical solution to Social Security’s funding problems. Philosophically and emotionally, a lot of liberals want to do it, but I suspect many of them know that eliminating the payroll-tax ceiling also presents some significant practical problems.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008 to 2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.

The Spirit of Independence

The Spirit of Independence: The Social Psychology of Freedom

Intellectuals routinely give undue weight to people’s ideas. They tend to believe that ideas cause attitudes, though it is far more often the other way around. Consider the natural libertarians.

Several years ago, while attending a street festival in the small town of Tucker, Georgia, I came across a booth sponsored by the local libertarian society. At the time, I did not realize that my encounter would generate my next book. I only remember being struck by the question asked of everyone who visited the booth that day: “So who owns you?”

Like any good carnival barker, the young libertarian who asked this knew from experience that it was an effective opener. It catches you off-guard. It forces you to stop and think. The correct answer, as I soon discovered, was that we own ourselves. We are not owned by the state, the church, or even by God. We are our own property, to dispose of as we wish, in any way we want. We can throw ourselves off a cliff. We can move to Nepal. We can stand at street corners and beg. It is all up to us, because we all own ourselves.

The “correct” answer did not sit well with me. I told the young libertarian that, as a human being, I was not the kind of thing that anyone could own, including myself. Tables and chairs could be owned. Chevrolets and BMWs could be owned. But not human beings. After all, if I owned myself, then I had the right to sell myself, the right to deprive myself of my rights. But if liberty was my inalienable right, as the great libertarian Thomas Jefferson had asserted in the Declaration of Independence, then how could I alienate it by selling myself into slavery?

I only remember being struck by the question asked of everyone who visited the booth that day: ‘So who owns you?’

Perhaps my objection was overly subtle, because I noticed that my reservations did not bother anyone else who wandered into the libertarian booth that day. To most of them, the question “So who owns you?” seemed to come with the force of a revelation, and they responded with a decided and often emphatic, “Nobody owns me.” Which is to say, someone may own other people, but certainly does not own me.

In retrospect, their answers were more profound than mine. My answer came from the head; theirs from the heart. Many of those who responded from the heart probably knew very little about the philosophy behind libertarianism. Perhaps some had read John Locke or John Stuart Mill back in college, but most of them might best be considered natural libertarians. They knew they couldn’t stand the idea of someone else owning them, someone else telling them what to do or how to think, of someone else bossing them around. They all felt competent to manage their own lives and deeply resented any attempt by other people, including the government, to manage their lives for them. Rightly or wrongly, natural libertarians are firmly convinced that no one else can know their best interests more than they do. They insist on remaining in charge of their own destinies and bristle whenever other people seem intent on taking charge of their lives. Because natural libertarians respect their own independence, they respect the independence of others. They do not aspire to control other people’s lives, but when other people aspire to control theirs, they will resist tooth and nail. The natural libertarian will behave this way not because of an ideology, but because of his or her distinctive attitude towards life.

The High Cost of Not Rebelling

Intellectuals routinely give undue weight to people’s ideas. They tend to believe that ideas cause attitudes, though it is far more often the other way around. The discipline known as social psychology recognizes attitude’s primacy. Furthermore, as its name implies, social psychology focuses on attitudes that groups of individuals share: the group can be small, like an office, or quite large, like an entire culture. The work of two American social psychologists, Julian Rotter and Martin Seligman, offers perhaps the best introduction to unraveling the social psychology of the natural libertarian.

Because natural libertarians respect their own independence, they respect the independence of others. They do not aspire to control other people’s lives, but when other people aspire to control theirs, they will resist tooth and nail.

In 1966, American psychologist Julian Rotter published a paper that introduced the concept known as locus of control. Human beings, according to Rotter, could be divided into two basic groups: those who believed their locus of control was within themselves, and those who see themselves as under the control of forces located outside themselves, such as luck, or fate, or other people whose will cannot be resisted. The first group, called internals, believe that they are the masters of their own destiny; they tend to be high-achievers, optimistic about their ability to improve their lot, and to discard bad habits. They believe in willpower and positive thinking. They are determined to control their own lives, for better or worse. Members of the second group are called externals. They look on themselves as victims of circumstances, the playthings of fate. If they go to bed drunk, light up a cigarette, and burn their house down, they explain the disaster as another instance of their bad luck, and not their poor judgment, much less their bad habits. On the other hand, if a drunk driver hits an internal, the internal will scold himself that he should have been more alert at the wheel, he should have seen the drunk coming and swerved in time to avoid him.

Rotter discovered that certain groups tended to be dense with internals, while others tend to display the social psychology of the external. Jews, for example, tend to be internals. Rotter himself came from a family of Jewish immigrants, and was a classic high-achiever who believed that by hard work and study he could improve his lot and rise in the world. He was a classic self-made man. But, then, Rotter’s success story was certainly not unique among Jewish immigrants to America—or indeed, other immigrants to America. Immigrants, after all, demonstrates the belief that they are in charge of their own destiny by electing to leave their homeland, in search of a new home that will permit them to exercise greater control over their own life. On the other hand, experiments have shown that the Japanese are more external than Americans. These cultural differences suggest that locus of control may be passed on as part of a culture’s tradition, both consciously and unconsciously.

In order to encourage a population rich in internals—i.e., natural libertarians—a society needs cultural traditions that emphasize the value of independence and ethical agency. It must teach the young that they are responsible for their own actions, and to never regard themselves as victims of circumstance. Anthropologists who have studied the huge variety of human cultures have encountered quite primitive societies, such as the Nuer of the Sudan, which raise children to be feisty and independent. They are taught from an early age to resist being bullied by others and to fight back at the first attempt at dominating them. But wherever it may be found, at the heart of the tradition of independence lives a set of imperatives. Be self-reliant. Don’t take other people’s word for something; think for yourself. Never become anyone’s follower. Bow down before no one. Stand up for your rights. Don’t let bullies intimidate you. Don’t permit yourself to become the slave of an addiction and thereby forfeit your all-important self-control. And do whatever you can to make sure that other members of your community uphold and cherish the same tradition of independence.

In order to encourage a population rich in internals—i.e., natural libertarians—a society needs cultural traditions that emphasize the value of independence and ethical agency.

Of no less importance to the tradition of independence is the seemingly paranoid fear that power will fall into the wrong hands. The great nineteenth-century champion of liberty, Lord Acton, coined the famous maxim: “All power corrupts, and absolute power corrupts absolutely.” This obsessive fear of power is key to understanding why natural libertarians will automatically rebel when some overbearing elite threatens to rob them of their cherished tradition of independence. They rebel because they instinctively understand the high cost of not rebelling.

According to the American psychologist Martin Seligman, the cost of not rebelling is a pathological condition that he called “learned helplessness.” Seligman developed this concept after performing a set of experiments in which he exposed various lab animals, such as dogs, to painful stimuli. Some of the dogs could escape the pain by pressing against a button; other dogs, when they pressed their button, failed to receive any relief from the pain. The dogs with the opportunity of acting to control the painful stimuli suffered no adverse long-term effects. The dogs with no control over the painful stimuli simply gave up trying to control their situation, and afterward suffered from clinical depression. Worse, in other tests, those dogs that had learned that they were helpless in one environment behaved equally helpless in a second environment, even when the second environment was one in which they could have escaped the painful stimulus by jumping over a low barrier into safety. Convinced that nothing they did could change their wretched situation, the dogs simply lay down and cried. They had learned to be helpless.

Trained Helplessness

But Seligman’s conclusion can be put in another way: the dogs had been trained to be helpless. The tradition of independence trains us to struggle against adversity, in the belief that we are ultimately in charge of our own destinies. But a multitude of traditions instill the opposite lesson. These traditions invariably preach the same message: You must submit to the inevitable. You are the victim of fate, so that any resistance is pointless and frequently counterproductive. It is folly to rebel against those with power, since they will inevitably use their superior power to crush you beneath their heels. Resign yourself to what lowly lot has been assigned you. Accept your utter helplessness, for that is the way of wisdom.

Natural libertarians rebel because they instinctively understand the high cost of not rebelling.

Under systems of slavery and servitude, those intended to become human chattel will be raised by a tradition that will encourage learned helplessness. Their young will likely listen to stories like Aesop’s fable of the oak and the reeds—it is better to submit to force majeure than to try to stand up defiantly against it. If you are a reed, bend and survive. If you are an oak, refuse to bow and be broken. Yet, miraculously, there have always been some shining examples of men and women who, despite their servile status, have broken free of mental servitude.

In nineteenth-century America, Frederick Douglass escaped from slavery, and was determined to not only to remain free from chains, but to achieve the genuine independence that can only come from self-reliance and self-mastery. He succeeded, and instead of moaning that he was the victim of an unjust social system, Douglass set out, with immense courage and strength of will, to topple the unjust system under which he had suffered but never surrendered. Similarly, Seligman in his experiment on lab dogs found that not all the dogs reacted to the uncontrollable pain stimulus by learning to be helpless. Roughly one-third of the dogs did not respond this way, and kept attempting to escape the pain by whatever means they could. They continued to rebel against their harsh condition, despite the fact that they could not change it. To an outside observer, their rebellion might seem utterly pointless, yet it kept the irrationally rebellious dogs from a fate much worse than mere physical pain—namely, the fate of the majority of dogs who simply gave up, thereby resigning themselves forever to the misery of their hopeless situation.

Insidious Benevolence

The condition of learned helplessness can be induced by pain, but many kinder, gentler ways can achieve the same insidious results. When today’s natural libertarians express their alarm at the inroads of “the nanny state,” they are recognizing this fact. A good nanny’s duty is to protect from harm the children she watches. But it is all too easy for the nanny, despite her best intentions, to overprotect her wards. If they act independently of her wishes, they might hurt themselves. To prevent this, a nanny might require her wards to ask permission before they do anything. Her message is: “Come to nanny first. Let her decide what is best for you.” If the kids obey, they will imperceptibly become dependent on nanny to make decisions for them—indeed, they may become alarmed at the very idea of having to make decisions for themselves. By this point, the children have entered a state of learned helplessness, but one brought about by the most benevolent intentions.

The road from serfdom is far less frequently traveled than the road to serfdom.

In this example, we are assuming that the nanny means well, and that she is not deliberately aiming to crush her ward’s independence. But some with a taste for power recognize there exists no better way of acquiring it than by making other people codependent on them. The nineteenth-century German politician Otto von Bismarck was hardly anyone’s idea of a nanny, but he constructed the world’s first nanny state for the sole purpose of making German citizens so codependent on the German Reich that they would never think of rebelling against it. By offering Germans a prototype of the modern welfare state, Bismarck’s goal was not improving the common man’s lot—it was his way of inducing the common man, when faced with personal difficulties, to expect the state to look after him, instead of relying on himself to deal with his own problems.

Ironically, Bismarck launched the first welfare state because he feared the influence of Karl Marx on the German working class. Marx opposed the welfare state precisely because he recognized that it would create a population codependent on the ruling elite in charge of the German Reich. It would tend to make them more docile and helpless, less self-reliant and rebellious. Today’s European socialists, along with America’s welfare statists, are not the descendants of Marx; they are the great-grandchildren of Bismarck.

A Kinder, Gentler Serfdom

Yet there is something even worse than creating codependency on either nanny or the welfare state. This occurs whenever a deliberate campaign encourages people to think of themselves as victims. Victims are not in charge of their own lives and destinies. They show the same attitude toward the world that Rotter’s externals display. Our condition is not our fault, and we can do nothing about it ourselves. We must depend on others, since we obviously cannot depend on ourselves. We are helpless to help ourselves; therefore, others must help us.

Today in the United States, far too many in the political class willingly help the victims of social injustice, but only so long as they agree to play the victim role and to keep playing it so long as politicians need their votes. It is terrible to have been a victim of social injustice, but to condemn victims to remain perpetual victims simply to keep them voting a party line is the most heartless kind of political opportunism of all.

Human beings, according to Rotter, could be divided into two basic groups: those who believed their locus of control was within themselves, and those who see themselves as under the control of forces located outside themselves, such as luck, or fate, or other people whose will cannot be resisted.

Yet this same opportunism has guided the leadership of the various liberation movements that emerged during the ’60s. In order to keep their positions of influence and command, this leadership has done everything in its power to make their followers think of themselves as victims, and indeed to find new and unexpected modes of victimization. This is not liberation; it is training people into the attitude of Rotter’s externals, who do not see themselves as masters of their own destinies, but as the tragic victims of circumstances beyond their control.

In the radio interviews I did after the publication of my new book, its alarming title, The Next American Civil War, received much attention. Some interviewers thought it was simply wacko. Others were more sympathetic, but argued that I really meant a war of ideas. But this is not what I really meant. I was referring to the clash between two radically incompatible attitudes towards life—a far more serious clash than mere intellectual debate. Ideas can be changed much more easily than our fundamental attitude. In fact, few things are more difficult to change.

On one side of the clash are the people like those who visited the libertarian booth in Tucker, Georgia, and whose attitude was: “Hell, no, nobody owns me.” Perhaps some of these people have joined the Tea Party movement, but I suspect most have not. Yet they still remain natural libertarians, who instinctively place their locus of control within themselves. Like Rotter’s internals, they resist any effort by others to manage and control their lives.

On the other side of the clash are those who stand to benefit from encouraging others to rely on them instead of relying on themselves. Those who seek to exercise power and influence over others will naturally be hostile to the independent attitude of the natural libertarian, simply because this attitude is ultimately the one thing that stands in the way of achieving their own ambitions to rule, manage, and govern others. Today, far too many people in governmental circles, in our universities, and among the custodians of mass culture all share the goal of encouraging ordinary men and women to stop being self-reliant, cease to think for themselves, embrace their status as victims of circumstances, and to blame others for their own misfortunes instead of rousing themselves to overcome difficulties, as Frederick Douglass did.

Ideas can be changed much more easily than our fundamental attitude. In fact, few things are more difficult to change.

The stakes in this clash are enormous. Natural libertarians find themselves in a desperate struggle to keep alive the traditions of independence that have shaped and molded their attitudes. They see themselves battling forces that seek to create a state of helpless codependency among their fellow citizens. Often, like the natural libertarians of the past—for example, our own revolutionary ancestors and the seventeenth-century English parliamentarians who resisted Charles the First—today’s natural libertarians display a paranoid tendency to imagine that wicked men are conspiring to rob them of their liberty. Now, as in the past, the rhetoric of the natural libertarian will sound overwrought. But this must not confuse us. For the natural libertarian is always correct in his or her assumption that those with a hunger for power and influence will seek to crush, for their own interest, the spirit of rebellious independence that is the fundamental habit of the heart shared by all natural libertarians of every epoch and culture. Even under the worst of circumstances, when it would be easy to accept victim status, natural libertarians continue to struggle heroically against impossible odds, just as a third of the dogs in Seligman’s experiments continued to try to escape their inescapable bondage. Was this folly or the noblest form of heroism, namely heroism for a cause you know is already lost?

The Roadblock to Serfdom

If the cause of the natural libertarian is lost, then the cause of liberty is also lost. Those with power prefer their subjects to behave like the majority of dogs in Seligman’s experiment—to lay down and give up, to hand over the control of their fate to those who possess the power. In the aftermath of World War II, when Joseph Stalin needed money to spend on armaments and pursuing nuclear weaponry, he knew exactly whom to tax: the Russian peasants. True, they were already on the verge of starvation, but Stalin knew that the peasants had been so beat down over centuries that they had completely lost the will to resist even the most outrageous demands upon their slender means. They paid and did not even moan—at least, not very loudly.

If the cause of the natural libertarian is lost, then the cause of liberty is also lost.

The road from serfdom is far less frequently traveled than the road to serfdom. Forget the ideology by which human beings have been reduced to serfs through the ages, including our own. The ideology only creates a pretext for acquiring and retaining power. It attempts to legitimate the monopoly of power that is the ultimate objective of every ruling class throughout history. The powers that be always seek to convince, first themselves and then others, that they are the powers that should be. Their rule is providential, right, and necessary. They want to make the serfs think to themselves: How lucky we are to be the serfs of such excellent masters!

Today’s natural libertarians are the greatest roadblock on the road back to serfdom—a kinder and gentler serfdom, it is true, just as there are kinder, gentler ways of inducing a state of learned helplessness than the methods Seligman employed. The techniques by which human beings are induced into a sense of dependent helplessness may vary considerably, from the most coarse and brutal to the most ingeniously seductive, sophisticated, and subliminal. But they all equally accomplish their intended goal: to crush out, once and for all, the spirit of independence natural libertarians champion. As Seligman’s experiment demonstrates, once you induce a state of learned helplessness, it does not seem possible to unlearn it. The dogs who have given up in the initial experiment, from which they could not escape, immediately gave up in the second experiment, from which they could easily have escaped. The spark of independence had been extinguished in them forever, as it had been extinguished in the Russian peasants whom Stalin bled dry. They became the passive victims of a cruel and uncaring universe.

Ironically, Otto von Bismarck launched the first welfare state because he feared the influence of Karl Marx on the German working class.

The ease in which so much of humanity has been reduced to serfdom is at the root of the natural libertarian’s zealous passion to preserve his or her own independence. Because they have the attitude of Rotter’s internals, they fear those externals who willingly hand over control of their own lives to other people. A society composed mainly of externals will too quickly relinquish their claim to decide their own affairs, thereby permitting the power-hungry to boss and bully them at will. Under such circumstances, internals will inevitably find themselves fighting a losing battle, although they may still refuse to lay down and die. This explains why internals must always stay on their guard. It explains why they abhor any ideology that seeks to convince people they are helpless victims of fate. It explains why they resist, at its first appearance, any effort to seize control not only over their own lives, but over the lives of the other members of his community. It explains why they insist on keeping alive and passing down from generation to generation the maxims at the heart of the spirit of independence, teaching their children to take responsibility for their own actions and to accept blame for misbehavior. Lastly, it explains why they will stick to those religious and cultural traditions that have cultivated their own exceptional attitude. The remarkable survival and success of the Jewish people, and of the Hebrew religion, must surely relate to the fact that their ancestors instilled the same message in generation and generation: Thou shalt keep alive the attitude of the internal. Never let others manage your affairs, and when they try to interfere, resist and rebel against them.

We are in the midst not of a war of ideas, or even a cultural war, taken in its usual superficial sense. We are fighting an old battle all over again. On the one side stand the natural libertarians, Rotter’s internals, furiously insistent on defending their integrity as ethical agents. On the other side stand those in power who naturally find such people troublesome nuisances, and who would prefer to rule a society made up of individuals who have been properly educated to know they were really incompetent to manage their own affairs, and to regard themselves as the victims of circumstances.

To natural libertarians, there can be no more existential conflict than the one they face today. Are they destined to perish from the earth along with their cherished cultural and religious traditions, pushed aside by those who claim to champion progress but who in fact promote learned helplessness in the general population, however benevolent their intentions? Will the natural libertarians’ roadblock to serfdom simply be brushed aside without a fight? Or will these roadblocks turn into barricades, to be manned by those who are willing to make the last sacrifice to preserve their spirit of independence? These questions only time can answer.

Lee Harris is the author of The Next American Civil War, as well as Civilization and Its Enemies and The Suicide of Reason.

A Plague of Vagueness

AM Report: U.S. Jobs Figures Decline

Can Bank Reform Pass Senate?

Obama's Immigration Speech

The Kagan Hearings

Alleged Russian Agent Claimed.......

Alleged Russian Agent Claimed Official Was His Firm's Adviser

[fuerth0702] Constance Flavell Pratt/Associated Press

In this courtroom sketch, Tracey Lee Ann Foley, left, and her husband, Donald Heathfield, third from left, are depicted with Mr. Heathfield's attorney Peter Krupp, second from left, at a bail hearing in federal court in Boston, Thursday.

The alleged Russian secret agent who posed as a Canadian entrepreneur named Donald Heathfield claimed a former Clinton administration national-security official was an adviser to his company.

A federal criminal complaint by the U.S. attorney's office in Manhattan filed Monday charged 11 people, including Mr. Heathfield, with being Russian secret agents sent to the U.S. to infiltrate policy-making circles and to help the Russian spy agency SVR cultivate intelligence targets.

A 2008 version of the website for Mr. Heathfield's company, Future Map, lists Leon Fuerth, former Vice President Al Gore's top national-security aide, as an adviser.

Mr. Fuerth, in an email to The Wall Street Journal, denied he was ever an adviser to Future Map. Mr. Fuerth said he met Mr. Heathfield after delivering a speech and that Mr. Heathfield once proposed a partnership on a research grant.

"Heathfield introduced himself to me after a speech I gave, and described himself as having similar interests in the subject of long-range foresight as a means for making better decisions," Mr. Fuerth said. "I was (still am) teaching the subject, and he represented that he was dealing with it as a business subject. Eventually, he proposed that we look for a way to partner on a research grant—but the idea didn't appeal to me. Once he understood that I was not interested, he stopped communicating."

Mr. Fuerth, on vacation in Asia, said he plans to provide details of his contact with Mr. Heathfield to U.S. authorities as soon as possible. "I have never been an advisor to his business," he said.

In a 2005 message to his alleged spymaster handlers in Moscow, Mr. Heathfield reported that he had "established contact" with a "former high-ranking U.S. national security official," prosecutors said in their complaint. The official is unnamed in the complaint.

The complaint doesn't allege that the former national-security adviser was aware of efforts by SVR to connect with him.

The criminal complaint against Mr. Heathfield notes that SVR handlers told him to keep his cover cautiously, suggesting the official was an unwitting target.

Officials familiar with the matter said that most of the people targeted were similarly unaware they were being used as sources for Russian intelligence.

The Justice Department in Washington declined to comment.

Mr. Heathfield and the woman the FBI alleges was posing as his wife, Tracey Lee Ann Foley, who worked as a real-estate agent, lived in Cambridge, Mass., blocks from the Harvard University campus.

Russia's 11?

Read more about the spy suspects and allegations against them in the complaints.

Mr. Heathfield listed himself as chief executive of the four-year old company Future Map on his Linked-in professional-networking page. He described the company as developing software to help predict the future.

The current Future Map website has password-protected links that prevent viewing details about the company. Older versions of the company's website, including the one from August 2008 that lists Mr. Fuerth, are available via the Internet archive site known as the Wayback Machine.

Mr. Fuerth's university biography, which is replicated on the Future Map 2008 site, lists his time as Mr. Gore's national-security adviser during both Clinton terms. He was the senior administration official responsible for the operation of binational commissions with Russia, Ukraine, Kazakhstan, Egypt and South Africa.

According to U.S. prosecutors in the complaint, Mr. Heathfield worked for more than a decade as an undercover Russian agent tasked with infiltrating U.S. policy-making circles, allegedly focusing on Harvard's Kennedy School of Government. Mr. Heathfield graduated in 2000 from the Kennedy school, where he would have had access to multiple major figures in U.S. policy. The school is a top choice for students who plan to pursue careers in Washington, including many who join the Central Intelligence Agency and other national-security agencies. His graduating class included Mexican President Felipe Calderón.

The couple moved to the U.S. in 1999, according to the complaint, and part of their mission was to gather information on U.S. assessment of Russian foreign policy, U.S. policy on Central Asia and U.S. data on use of the Internet by terrorists.

Federal Bureau of Investigation agents in July 2006 secretly searched the Cambridge townhouse where Mr. Heathfield and Ms. Foley lived at the time and copied computer disks, according to prosecutors. FBI investigators recovered electronic data that prosecutors said were drafts of messages the couple sent to Moscow. The couple allegedly used Steganography software, which embeds messages in images placed on publicly available websites. FBI investigators were able to decode the messages, prosecutors allege.

Mr. Heathfield reported to Moscow in December 2004, according to prosecutors, that he had attended a seminar and made contact with a U.S. government official who worked on nuclear-weapons development at a government research facility. They discussed U.S. "bunker-buster" warheads, he told Moscow handlers, according to the complaint from U.S. prosecutors.

In a separate September 2005 message, he reported contact with a high-level former national-security official, drawing interest from Moscow handlers who encouraged Mr. Heathfield to continue the relationship, according to prosecutors, citing Mr. Heathfield's messages.

Another listed Future Map adviser, William Halal, also a George Washington University professor, like Mr. Fuerth, said he and Mr. Heathfield "had business relationships over the past decade. We met in my office at George Washington University at least 2-3 times. I allowed him to use our TechCast forecasts on his company's site, Future Map, and he was listed as one of our partners at"

Mr. Halal said was shocked by the arrest but, in retrospect, the government's allegations against Mr. Heathfield explain questions that always nagged him.

"I never suspected he was a Russian spy," Mr. Halal said. "I did wonder how he supported a family in Boston on what did not seem to be prosperous business. In retrospect, I marvel at how well he and [his] Russian associates infiltrated the normal activities of life in Washington policy circles. I would bump into him at meetings of Federal agencies, think tanks, and the World Future Society.

"I have no information that's of any security value," Mr. Halal said. "Everything I gave Don was published widely and readily available on the Internet."

Oil dips after U.S. employment data

Oil dips after U.S. employment data

A taxi driver re-fuels his taxi at a Shell petrol station in   London March 16, 2010. REUTERS/Luke MacGregor

A taxi driver re-fuels his taxi at a Shell petrol station in London March 16, 2010.


LONDON (Reuters) - Crude oil futures dipped on Friday, reversing gains made after the market interpreted U.S. employment data as slightly more positive for economic growth than expected.

The U.S. Labor Department said non-farm payrolls dropped 125,000, the largest decline since October. But the unemployment rate in the world's top economy and energy consumer fell to 9.5 percent, the lowest level since July.

By 1402 GMT, U.S. crude oil futures was down 32 cents to $72.63 a barrel. Prices briefly turned positive immediately after the jobs data, then slipped by more than $1 to $71.70.

ICE Brent crude oil futures were 26 cents down at $72.04.

Financial markets had expected employment to fall 110,000 last month, with the jobless rate edging up to 9.8 percent from 9.7 percent in May. "The jobs numbers were pretty much factored in," Olivier Jakob with PetromatrixJakob said. "But that is not enough to turn the market around."

Prompt U.S. crude had fallen every day this week and is on course for a slide of more than 7 percent on the week, its biggest weekly drop in percentage terms since early May, when the European debt crisis hit markets and prompted a 13 percent drop.

The dollar fell against the euro on concerns about the U.S. economy, but Wall Street opened slightly higher in a mixed reaction to the employment data.

Wall Street flat

Wall Street flat after 4-day slide and payrolls data

Related Video

A trader works on the floor of the New York Stock Exchange in New   York, June 30, 2010. REUTERS/Shannon Stapleton

NEW YORK | Fri Jul 2, 2010 10:24am EDT

NEW YORK (Reuters) - Wall Street indexes were trading around the break-even point on Friday after government data showed employment in the United States fell in June for the first time this year but not as much as some had expected.

Non-farm payrolls dropped by 125,000, the largest decline since October, largely because temporary government jobs for the census decreased by 225,000, the Labor Department said.

With fears of a double-dip recession mounting after a flurry of weak data recently, the report was closely watched to assess the strength of the economic recovery. Some analysts said that while the numbers were grim, they were not as weak as the most pessimistic forecasts.

"There were probably fears in the back of some people's minds that the private payrolls could even be worse," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

"Clearly this is telling us we've lost momentum and growth is slowing. (But) Has it slowed so much to drive us into a double dip? I think probably not."

Also, the unemployment rate fell to 9.5 percent, the lowest level since July, though this was because people left the labor force.

The Dow Jones industrial average .DJI was up 5.64 points, or 0.06 percent, at 9,738.17. The Standard & Poor's 500 Index .SPX was up 1.30 points, or 0.13 percent, at 1,028.67. The Nasdaq Composite Index .IXIC was up 2.81 points, or 0.13 percent, at 2,104.17.

Another drag on the market was data showing U.S. factory orders dropped more than expected in May, falling 1.4 percent versus a gain of 1.2 percent in the previous month. Analysts in a Reuters survey expected a drop of 0.5 percent.

In Europe, stocks had received a lift from news that Australia ended a damaging dispute with global miners by dumping its "super profits" tax for a lower resources rent tax backed by big miners. Mining shares such as Rio Tinto (RIO.L) and Xstrata (XTA.L) were one of the top gainers.

Biotech shares will be in the spotlight. French drugmaker Sanofi-Aventis SA (SASY.PA) is preparing an acquisition in the United States that may be worth $20 billion or more, Bloomberg reported on Thursday, citing people familiar with the matter. A Sanofi-Aventis spokesman declined to comment.

British power supply systems maker Chloride (CHLD.L) has recommended a $1.5 billion takeover by U.S. conglomerate Emerson Electric (EMR.N), bringing to an end a long-running bid battle. Emerson Electric shares rose 0.4 percent to $43.85.

Shares of Wilshire Bancorp (WIBC.O) fell 9 percent to $7.75 after the company on Thursday forecast a second-quarter loss.

Major indexes closed lower for a fourth straight day on Thursday after suffering their worst quarter since late 2008.

Inflation or Deflation, why settle for just one?

Inflation or Deflation, why settle for just one?

If you are trying to decide whether to fret about inflation or deflation, don’t bother: you may just get both.

Yes, in the spirit of these austere times, it is a two for one offer; deflation comes first, followed by an almighty inflation after central banks press the “go nuclear” button on the quantitative easing machine.

It seems clear that, at least in the near term, the stars are aligned for deflation. Rather than lancing a massive debt bubble, policy-makers have added to it and the intense pressure to clean balance sheets has spread from corporations and households to nations.

As in 1937 in the U.S. or 1997 in Japan, a move to budget austerity has taken hold in large swaths of the global economy, adding to the intense downward pressure already being generated by very large unused economic capacity.

If neither banks nor governments are willing and able to stoke demand then prices will fall, and as we have seen, absent an outside shock this is a cycle which feeds on itself.

Consumers and businesses will pay down debts that are becoming heavier as money becomes more valuable and they will delay purchases as prices fall.

Of course in a system in which the government can create money at will, deflation should theoretically be an easy problem to solve; central banks can, in Chairman Bernanke’s famous image, simply drop money from helicopters.

That, of course, is a bit like saying that anyone can rid their house of termites, as long as they have enough gasoline and matches; it will work but there may be considerable collateral damage.

This difficulty of achieving a controlled burn, or printing just enough extra money to stop deflation but without unleashing very high inflation, is perhaps one of the reasons quantitative easing has such a chequered history. Unless you are in extremis, it is hard to commit to it wholeheartedly.

The U.S. rowed back from its efforts, at least in part because the Federal Reserve faced predictable political pressure from a policy of directing credit to the housing market, a move that usurped Congress’ check signing role and led to increased and unwelcome oversight of the central bank from the Fed’s viewpoint.


Adam Posen, a member of the Bank of England Monetary Policy Committee and an expert on Japan’s deflation experience, more or less nodded to the deflation first, then inflation theory in a speech on Wednesday, though he was quite confident in the banks’ ability to control the inflation genie once released.

Noting that inflation has remained above target in Britain and that inflationary expectations have risen, he concluded that this was in part the result of having had a very loose and very extreme monetary policy the face of quite dire threats.

Posen described Britain as being poised between “a recovery, which we are now in, albeit perhaps an initially weak one … and the renewal of a severe recession if not outright deflation”.

The creep of inflation expectations was then the “unsurprising result of having set monetary policy to prevent a terrible downside risk, and finding policy appears too loose if that risk thankfully does not come to pass.”
In short, the very real threat of deflation calls for policy that will, if successful, unhinge inflation expectations.

Of course, Britain is not the U.S., nor is it Japan, but even though the small island without a true reserve currency is being forced to take austerity steps that may call for extreme monetary measures, something similar could happen in the U.S. for slightly different reasons.

If political pressure for no new spending in the U.S. mounts, more quantitative easing by the Fed may be an achievable quick way to support the system.

The last time we had QE it was amid supportive fiscal policy and with a Europe that was not in a crisis of identity and form.

If European banks begin to fall, beyond the inevitable rescue it would be easy to foresee a coordinated and quite large programme of QE to fend off a generalized sovereign crisis.

This gets us back to inflation, but the question is where does it stop?

This is how we reconcile a world with U.S. 10-year bond yields below 3.0 percent and gold at $1244 per ounce. Many sensible people believe very much in the threat of deflation and a substantial minority think that contains within it the seeds of an inflation to come.

The Fallacies of Nonmonetary Explanations

The Fallacies of Nonmonetary Explanations of the Trade Cycle

Mises Daily: by

[This article is excerpted from chapter 20 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.]

In dealing with the futile attempts to explain the cyclical fluctuations of business by a nonmonetary doctrine, one point must first of all be stressed which has hitherto been unduly neglected.

There were schools of thought for whom interest was merely a price paid for obtaining the disposition of a quantity of money or money substitutes. From this belief they quite logically drew the inference that abolishing the scarcity of money and money-substitutes would abolish interest altogether and result in the gratuitousness of credit. If, however, one does not endorse this view and comprehends the nature of originary interest, a problem presents itself the treatment of which one must not evade. An additional supply of credit, brought about by an increase in the quantity of money or fiduciary media, has certainly the power to lower the gross market rate of interest. If interest is not merely a monetary phenomenon and consequently cannot be lastingly lowered or brushed away by any increase, however large, in the supply of money and fiduciary media, it devolves upon economics to show how the height of the rate of interest conforming to the state of the market's nonmonetary data reestablishes itself. It must explain what kind of process removes the cash-induced deviation of the market rate from that state which is consonant with the ratio in people's valuation of present and future goods. If economics were at a loss to achieve this, it would implicitly admit that interest is a monetary phenomenon and could even disappear completely in the course of changes in the money relation.

For the nonmonetary explanations of the trade cycle, the experience that there are recurrent depressions is the primary thing. Their champions first do not see in their scheme of the sequence of economic events any clue which could suggest a satisfactory interpretation of these enigmatic disorders. They desperately search for a makeshift in order to patch it onto their teachings as an alleged cycle theory.

The case is different with the monetary or circulation-credit theory. Modern monetary theory has finally cleared away all notions of an alleged neutrality of money. It has proved irrefutably that there are in the market economy factors operating about which a doctrine ignorant of the driving force of money has nothing to say. The catallactic system that involves the knowledge of money's non-neutrality and driving force presses the questions of how changes in the money relation affect the rate of interest first in the short run and later in the long run. The system would be defective if it could not answer these questions. It would be contradictory if it were to provide an answer which would not simultaneously explain the cyclical fluctuations of trade. Even if there had never been such things as fiduciary media and circulation credit, modern catallactics would have been forced to raise the problem concerning the relations between changes in the money relation and the rate of interest.

It has been mentioned already that every nonmonetary explanation of the cycle is bound to admit that an increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. It is obvious that a general tendency of prices to rise which is not caused by a general drop in production and in the supply of commodities offered for sale, cannot appear if the supply of money (in the broader sense) has not increased. Now we can see that those fighting the monetary explanation are also forced to resort to the theory they slander for a second reason. For this theory alone answers the question of how an inflow of additional money and fiduciary media affects the loan market and the market rate of interest. Only those for whom interest is merely the outgrowth of an institutionally conditioned scarcity of money can dispense with an implicit acknowledgment of the circulation-credit theory of the cycle. This explains why no critic has ever advanced any tenable objection against this theory.

"The assumption that all entrepreneurs regularly fall prey to certain errors tacitly implies that all practical men lack intelligence."

The fanaticism with which the supporters of all these nonmonetary doctrines refuse to acknowledge their errors is, of course, a display of political bias. The Marxians have inaugurated the usage of interpreting the commercial crisis as an inherent evil of capitalism, as the necessary outgrowth of its "anarchy" of production.[1] The non-Marxian socialists and the interventionists are no less anxious to demonstrate that the market economy cannot avoid the return of depressions. They are the more eager to assail the monetary theory, as currency and credit manipulation is today the main instrument by means of which the anticapitalist governments are intent upon establishing government omnipotence.[2]

The attempts to connect business depressions with cosmic influences, the most remarkable of which was William Stanley Jevons's sunspot theory, failed utterly. The market economy has succeeded in a fairly satisfactory way in adjusting production and marketing to all the natural conditions of human life and its environment. It is quite arbitrary to assume that there is just one natural fact — namely, allegedly rhythmic harvest variations — with which the market economy does not know how to cope. Why do entrepreneurs fail to recognize the fact of crop fluctuations and to adjust business activities in such a way as to discount their disastrous effects upon their plans?

Guided by the Marxian slogan "anarchy of production," the present-day nonmonetary cycle doctrines explain the cyclical fluctuations of trade in terms of a tendency, allegedly inherent in the capitalist economy, to develop disproportionality in the size of investments made in various branches of industry. Yet even these disproportionality doctrines do not contest the fact that every businessman is eager to avoid such mistakes, which must bring him serious financial losses. The essence of the activities of entrepreneurs and capitalists is precisely not to embark upon projects which they consider unprofitable. If one assumes that there prevails a tendency for businessmen to fail in these endeavors, one implies that all businessmen are short-sighted. They are too dull to avoid certain pitfalls, and thus blunder again and again in their conduct of affairs. The whole of society has to foot the bill for the shortcomings of the thick-headed speculators, promoters, and entrepreneurs.

Now, it is obvious that men are fallible, and businessmen are certainly not free from this human weakness. But one should not forget that on the market a process of selection is in continual operation. There prevails an unceasing tendency to weed out the less-efficient entrepreneurs, that is, those who fail in their endeavors to anticipate correctly the future demands of the consumers. If one group of entrepreneurs produces commodities in excess of the demand of the consumers and consequently cannot sell these goods at remunerative prices and suffers losses, other groups who produce those things for which the public scrambles make all the greater profits. Some sectors of business are distressed while others thrive. No general depression of trade can emerge.

But the proponents of the doctrines we have to deal with argue differently. They assume that not only the whole entrepreneurial class but all of the people are struck with blindness. As the entrepreneurial class is not a closed social order to which access is denied to outsiders, as every enterprising man is virtually in a position to challenge those who already belong to the class of entrepreneurs, as the history of capitalism provides innumerable examples of penniless newcomers who brilliantly succeeded in embarking upon the production of those goods which according to their own judgment were fitted to satisfy the most urgent needs of consumers, the assumption that all entrepreneurs regularly fall prey to certain errors tacitly implies that all practical men lack intelligence. It implies that nobody who is engaged in business (and nobody who considers engaging in business if some opportunity is offered to him by the shortcomings of those already engaged in it) is shrewd enough to understand the real state of the market.

But on the other hand the theorists, who are not themselves active in the conduct of affairs and merely philosophize about other people's actions, consider themselves smart enough to discover the fallacies leading astray those doing business. These omniscient professors are never deluded by the errors which cloud the judgment of everyone else. They know precisely what is wrong with private enterprise. Their claims to be invested with dictatorial powers to control business are therefore fully justified.

The most amazing thing about these doctrines is that they furthermore imply that businessmen, in their littleness of mind, obstinately cling to their erroneous procedures in spite of the fact that the scholars have long since unmasked their faults. Although every textbook explodes them, the businessmen cannot help repeating them. There is manifestly no means to prevent the recurrence of economic depression other than to entrust — in accordance with Plato's utopian ideas — supreme power to the philosophers.

Murphy's Guide to Mises

Let us examine briefly the two most popular varieties of these disproportionality doctrines.

There is first the durable-goods doctrine. These goods retain their serviceableness for some time. As long as their life period lasts, the buyer who has acquired a piece abstains from replacing it by the purchase of a new one. Thus, once all people have made their purchases, the demand for new products dwindles. Business becomes bad. A revival is possible only when, after the lapse of some time, the old houses, cars, refrigerators, and the like are worn out, and their owners must buy new ones.

However, businessmen are as a rule more provident than this doctrine assumes. They are intent upon adjusting the size of their production to the anticipated size of consumers' demand. The bakers take account of the fact that every day a housewife needs a new loaf of bread, and the manufacturers of coffins take into account the fact that the total annual sale of coffins cannot exceed the number of people deceased during this period. The machine industry reckons with the average "life" of its products no less than do the tailors, the shoemakers, the manufacturers of motorcars, radio sets, and refrigerators, and the construction firms. There are, to be sure, always promoters who in a mood of deceptive optimism are prone to overexpand their enterprises. In the pursuit of such projects they snatch away factors of production from other plants of the same industry and from other branches of industry. Thus their overexpansion results in a relative restriction of output in other fields. One branch goes on expanding while others shrink until the unprofitability of the former and the profitability of the latter rearranges conditions. Both the preceding boom and the following slump concern only a part of business.

The second variety of these disproportionality doctrines is known as the acceleration principle. A temporary rise in the demand for a certain commodity results in increased production of the commodity concerned. If, then, demand later drops again, the investments made for this expansion of production appear as malinvestments. This becomes especially pernicious in the field of durable producers' goods.

If the demand for the consumers' good a increases by 10 percent, business increases the equipment p required for its production by 10 percent. The resulting rise in the demand for p is the more momentous in proportion to the previous demand for p, the longer the duration of serviceableness of a piece of p is and the smaller consequently the previous demand for the replacement of worn-out pieces of p was. If the life of a piece of p is 10 years, the annual demand for p for replacement was 10 percent of the stock of p previously employed by the industry. The rise of 10 percent in the demand for a doubles therefore the demand for p and results in a 100 percent expansion in the equipment r needed for the production of p. If then the demand for a stops increasing, 50 percent of the production capacity of r remains idle. If the annual increase in the demand for a drops from 10 percent to 5 percent, 25 percent of the production capacity of r cannot be used.

The fundamental error of this doctrine is that it considers entrepreneurial activities as a blindly automatic response to the momentary state of demand. Whenever demand increases and renders a branch of business more profitable, production facilities are supposed instantly to expand in proportion. This view is untenable. Entrepreneurs often err. They pay heavily for their errors. But whoever acted in the way the acceleration principle describes would not be an entrepreneur but a soulless automaton. Yet the real entrepreneur is a speculator,[3] a man eager to utilize his opinion about the future structure of the market for business operations promising profits. This specific anticipative understanding of the conditions of the uncertain future defies any rules and systematization. It can be neither taught nor learned. If it were different, everybody could embark upon entrepreneurship with the same prospect of success.

"What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is but arranges his affairs on the ground of his opinion about the future."

What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way. In his actions he is directed by an opinion about the future which deviates from those held by the crowd. The impulse of his actions is that he appraises the factors of production and the future prices of the commodities which can be produced out of them in a different way from other people.

If the present structure of prices renders very profitable the business of those who are today selling the articles concerned, their production will expand only to the extent that entrepreneurs believe that the favorable market constellation will last long enough to make new investments pay. If entrepreneurs do not expect this, even very high profits of the enterprises already operating will not bring about an expansion. It is exactly this reluctance of the capitalists and entrepreneurs to invest in lines which they consider unprofitable that is violently criticized by people who do not comprehend the operation of the market economy. Technocratically minded engineers complain that the supremacy of the profit motive prevents consumers from being amply supplied with all those goods with which technological knowledge could provide them. Demagogues cry out against the greed of capitalists intent upon preserving scarcity.

A satisfactory explanation of business fluctuations must not be built upon the fact that individual firms or groups of firms misjudge the future state of the market and therefore make bad investments. The objective of the trade-cycle theory is the general upswing of business activities, the propensity to expand production in all branches of industry, and the following general depression. These phenomena cannot be brought about by the fact that increased profits in some branches of business result in their expansion and a corresponding overproportional investment in the industries manufacturing the equipment needed for such an expansion.

It is a very well-known fact that the more the boom progresses, the harder it becomes to buy machines and other equipment. The plants producing these things are overloaded with orders. Their customers must wait a long time until the machines ordered are delivered. This clearly shows that the producers-goods industries are not so quick in the expansion of their own production facilities as the acceleration principle assumes.

But even if, for the sake of argument, we were ready to admit that capitalists and entrepreneurs behave in the way the disproportionality doctrines describe, it remains inexplicable how they could go on in the absence of credit expansion. The striving after such additional investments raises the prices of the complementary factors of production and the rate of interest on the loan market. These effects would curb the expansionist tendencies very soon if there were no credit expansion.

The supporters of the disproportionality doctrines refer to certain occurrences in the field of farming as a confirmation of their assertion concerning the inherent lack of provision on the part of private business. However, it is impermissible to demonstrate characteristic features of free competitive enterprise as operating in the market economy by pointing to conditions in the sphere of medium-size and small farming. In many countries, this sphere is institutionally removed from the supremacy of the market and the consumers. Government interference is eager to protect the farmer against the vicissitudes of the market. These farmers do not operate in a free market; they are privileged and pampered by various devices. The orbit of their production activities is a reservation, as it were, in which technological backwardness, narrow-minded obstinacy, and entrepreneurial inefficiency are artificially preserved at the expense of the nonagricultural strata of the people. If they blunder in their conduct of affairs, the government forces the consumers, the taxpayers, and the mortgagees to foot the bill.

Audiobook read by Jeff Riggenbach

It is true that there is such a thing as the corn-hog cycle and analogous happenings in the production of other farm products. But the recurrence of such cycles is due to the fact that the penalties which the market applies against inefficient and clumsy entrepreneurs do not affect a great part of the farmers. These farmers are not answerable for their actions because they are the pet children of governments and politicians. If it were not so, they would long since have gone bankrupt and their former farms would be operated by more intelligent people.

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