===== PAGE 1 ===== VOL 4 | gaustrian E Economics Newsletter 7s vr ns - TT Tes in or y jr A 1 35 od fa, ol ions po | A di a LIER: 4 } shite +H ol ER fg; fe rs The State of Economics in Austria Today: An Interview with Karl Socher Karl Socher is professor of economics at the Uni- versity of Innsbruck, Austria. Q: What is the status of Austrian economics in its home- land today? A: Poor. It is almost forgotten in Vienna itself. There are two or three economists in Vienna, espe- cially Erich Streissler, who value the Austrian contri- bution to economics. Most of the other economists in Vienna call themselves Austro-Keynesians. They are not Keynesians in the traditional sense, but they think government should intervene heavily in the market through monetary and fiscal policy. They also believe in a social-market economy, like Germany's, @ where the social order is linked to the government Karl Socher with a social insurance system and welfare. : Is this view challenged? Q: Is this view challenge Q: What about Austrian economics at the University of A: Not often. The social security system is especially Innsbruck? sacrosanct. Even so, the system can be explained by publicchoice theory: politicians keep the tax bite for the social insurance low and the payments high. This has created a huge deficit that will be impossible te finance. That is why we need serious reform. A: We continue to uphold the Austrian tradition; not all of us, but some. In an article Hayek wrote for an Austrian newspaper, he said that Austrian econom- ics is not taught in Austria anymore. So a few of us in Innsbruck wrote him a letter saying we are still Aus- trian economists in the old sense. We call ourselves : How were you introduced to Austrian economics? . a Q Y Hayekians and Migesians. A well-known economist in A: While I was studying economics at the Univer- Vienna once said the Innsbruck economists de not sity of Vienna in 1950, I attended lectures by Hans belong to Austria anymore because of their views. Mayer, successor to the chair held by Friedrich von Wieser. Only later was I introduced to Keynesian Q: What is your impression of American Austrians? economics. I was told to adopt the new economics and A: Very favorable. I am locking into what American forget the old. Q: Were there other Austrian professors at the university HTT IE SEE EATS? while you were a student? al of G Se EN A: Yes, there was Professor Mahr under whose im guidance I wrote my dissertation on monetary the- Short-Changed in Chile ory. In my studies, I concluded that Wieser was by George Selgin ........cocouvvveeurirvennnnnn. 5 ® wrong about his national income theory for micro- Austrian Economics in Denmark ................. 8 economics. In the writings of Mises I found a more . Book Reviews ........cooocevvevvincvnincccnisisssniinns. 8 correct position. When I broke with Wieser’s posi- tion, Mayer was not happy about it. He was a fierce Notes and Transitions ............ccccevrervivnriveennn 16 supporter of Wieser. ===== PAGE 2 ===== Austrians are saying so we can re-import Austrian is decreed by the government, The actual content of economics to Austria. I was worried that the research the lectures is not supervised, so we can have an here looked backwards and simply re-wrote the old influence. The lecture may be called political econ- theories. On the contrary, I've found Austrian eco- omy, but we can add Austrian economics. If we did nomics here to be fresh and alive. It is being applied that all the time, however, it would be difficult for the C to new developments: to rational expectations, to the students to pass the exams which are prepared by theory of market failure, and to explain the stock non-Austrians. market crash, I am pleased, and hope that my col- leagues and I can learn from this. Q: Are you trying to introduce a course in Austrian economics? Q: What are graduate studies in economics like at the University of Innsbruck? A: Yes, but right now we are teaching it in the “Principles” classes. It gives us a chance to refer to A: We have a University system similar to Mises, Hayek, and the Austrian school. Germany’s. The first grade is the masters; we have the masters in economics and masters in business Q: You once worked at the Austrian Institute for Business administration. After the masters, we have the doc- Cycle Research founded by Ludwig von Mises in 1926 and at tor, which is different from your Ph.D. It takes about which F. A. Hayek had worked. Is the Institute operating today? two years after the masters and you have to write a dissertation. Then we have the habitation, which is publication and research work, something like the Ph.D. Publication is necessary for the right to teach at the University. A: Yes, it is an important and well-known re- search institute. It has been involved in a long and protracted battle over control. Mises set it up to be financed by businessmen or the chamber of com- merce so it would be independent of the govern- Q: How many students are there and what is the cur- ment. That idea is still on the statutes. But after riculum like? the war, the government stepped in and began financing it. A big clash occurred over a speech by the director of the Institute, Dr. Nensuc because it was favorable to free markets, Mises, and Austrian economics. After the speech, the government tried to close the Institute, but there was an outcry. Today A: At Innsbruck we have 4000 business admin- istration students and only 300 students of econom- ics. We offer classes like the theory of economic policy, public choice, and public finance. And we have other fields, for instance sociology and political the Institute is open, independent, and largely free science. Our students are not as well versed in economic from government control. The finance ministers all theory as you are in the United States, but we have a depend on its reports. broad knowledge of political economy. Our students are also technically trained in mathematics and economet- Q: Is there any remnant of Austrian economic influence ~ rics, which is not absolutely necessary for an economist, left? but I think it should be taught. In the doctor’s program, there are seminars, but almost no regular glasses. It's A: There are no Austrian economists there. They mostly the dissertation and the seminar work. are Keynesians and Keynesianism is spread via this institute. The published reports do not advise Q: How is the economics curriculum set? Is it hard to the government directly, but through informal introduce Austrian ideas to the graduate students at the meetings with government officials they advise in- University? terventionist policies. This problem has improved recently and the Institute is more favorable toward free markets, not because of Misesian influence, but to keep up with the climate of opinion in Ger- EE ET Pa many, Britain, and elsewhere. The whole world is Bo a ed TT going in this direction. So the influence of free Co - Cantrilutors to this Issue: RE markets came via Germany, Britain, and the ee a United States back to the institute. A: We cannot change much because the curriculum David Conway is lecturer of philosophy at Middle- Q: Are there any free-market institutes in Austria besides sex Polytechnic University in England. the Carl Menger Institute? Hans-Hermann Hoppe is associate professor of eco- . . ea . nomics at the University of Nevada, Las Vegas. Dares here > an institute attached ely Gerard Radiieky i eb: osapby of small publications. And there is the Institute for : y Higher Studies, which is not so attached to a political Larry Sechrest is instructor of economics at the party. But the Carl Menger Institute is the main University of Texas, Arlington. institute for free markets. 4 George Selgin is visiting assistant professor of eco- nomics at the University of Georgia. Q: Is the current monetary system in Europe an example of Hayek's competing monies? ===== PAGE 3 ===== A: No. When Hayek wrote about free choice in follow a policy that averages the aims of all the currency, he was speaking of individuals choosing the countries. Each central bank would have one vote. currency which they thought was best. In Europe, the Germany would have to follow the dictates of the government chooses it for you. It is similar to European Central Bank, creating a Federal Reserve- Hayek's because the individual governments want type stop-and-go policy. Under the current system, to choose a currency which is stable or, at least, fix with each country pursuing independent monetary pol- their currency to another stable currency. Currency icies, there is more competition and a more stable markets have become more stable and inflation currency system. rates are lower, but only because central banks and governments have learned that it is better to have a stable currency. Q: The Bundesbank is often criticized for slowing growth in Europe with its conservative monetary policy. What's your view? Q: Will Europe soon have a European central bank? A: The criticism is incorrect. The Bundesbank A: I hope not because it is a very bad idea. The simply slowed the rate of inflation. They still have push for it is mainly coming from countries, espe- unemployment, but it is not Keynesian unemploy- cially France, that do not like the stability of the ment where the remedy is high inflation. It is struc- German mark. They want a more inflationary policy tural unemployment which is due to the conditions than the Bundesbank provides. A European central of the labor market. The wage policies of the govern- bank would be more inflationary because it would ment, and the structure of the labor market creates Kluwer Academic Publishers and Austrian Economics In “The Ludwig von ‘Mises Institute is pleased to announce that Kluwer Academic Publishers, the >” publishers of the Review of Austrian Economics, volume 4, hap requested that the Miges Institute increase. the ‘publication of the RAE from the present once a year to a tri-annual. Kluwer said they "have been impressed with the quality of the RAE and its potential for having a large impact on economic. thought not only in the United States but throughout the world. The RAE, » edited by Murray Rothbard and co-edited by Walter Block, i is now in its fourth year. The shift to publishing the RAE to more than once a year will probably occur in 1991, according to Mises Institute president Llewellyn H. Rockwell, Jr. It will appear in a hard-back version for international and library distribution and a low- priced paperback for general distribution. Kluwer has also approached the Mises Institute about expanding its book series, “Studies in Austrian Economics.” Under the general editorship of the Institute, Kluwer. wants to publish a a "minimum of three book-length. manuscripts per year on all aspects 134 - of Austrian thought: The first in the series was Hans-Hermann B Hoppe 8 A Theory of Socialism and Capitalism. "Next in line in the series is Money, Method, and the Market Process, or a collection of essays by Ludwig von Mises, many of which have never | Mon cy, "been published, and The Meaning of Ludwig von Mises, a collection of essays drawn from a Mises Institute conference of the same name, Metho d, - edited by Professor Jeffrey Hitboner of Washington and Jefferson : and the N Other possible forthooming books i in | the Series are several “collections of essays: Murray: Rothbard on Austrian economics; Market Process Roger Garrison on capital theory; and a number of Austrian bank- ~~ ing scholars on the Federal Reserve System with papersdrawn from Eesave b a Mises, Institute conference. The Mises Institute welcomes other Ludwig von ises - FUSBUSCEIpta to be considered. Jor publication as part of the series. : : - their view ‘that froo-market thought will play an 1 important rolein ponds. SO i re-shaping economics inthe: 1990s .and beyond. They think: all Vlad wih sn eirodcton by = : forma’ of statist economics; . whether Marxian or Keynesian, tobe on the decline. Along with Austrian economics, Kluwer is Jecking more. closely at the Chicago and Public C Choice Schools. a ===== PAGE 4 ===== unemployment. Perhaps there are too many academics Maybe the market would slow it down if it gets too and not enough good workers. But a looser monetary high. But if alarge bank isdoing the issuing, it might policy would do nothing to reduce unemployment. do harm to the value of the money by the time it is stopped. A free-banking system would surely be Q: Are strong labor unions a major reason for the unem- more stable than the system in the U.S. But I am ployment? not sure whether it would be more stable than the Swiss or German system has been in the recent A: Yes, especially from 1975 to the beginning of the 1980s. In Austria we have a centralized federal years. If you had a solid monetary constitution, with labor union that is very powerful in making economic rules mandating that’ the central bank maintain a policy. There 1s no competition between the labor stable currency, this would also bring about a stable unions. In Austria we also have structural unemploy- monetary system. ment, but not because wages are too high. Faced with all this unemployment, the union knows it cannot Q: Would you have sanctions to punish the directors of overdraw. the bank? Q: Labor union bosses have said they don’t want to hi A: Yeu 2 unish them if they do not have a policy of -- disturb monetary policy. Does the labor union now realize the igh stability. benefits of a stable monetary system? Q: What would you do? A: Yes. The labor union endorsed fixing the ex- ] , change rate to the Deutschmark. Practically all the th Ac You cou'd shorten 3. lengths mn the duration o f influential politicians in Austria also favored it. They 1¢ GIrectors Lerms based on initiation rate. - ne . . higher the inflation rate the shorter the term. You now know that high wage increases endanger the 1s . exchange rate, so they have opted for stable prices could also fix the nominal income of the directors. If ’ there is inflation, their real income goes down. You and keeping wages down. Labor was told that high wages do damage. The firms would not be able to export and this would create more unemployment in would also need negative double indexation so the directors wouldn’t deflate either. the export sector. If, however, wages increase accord- Q: Are there centers of public choice ideas in Austria? ing to a monetary target, productivity would increase and so would wages. But these increases won't affect A: It is part of the political economy. We think the the general price level. main ideas of public choice are Austrian. They come from Schumpeter, with his book on democracy, and Q: What are the prospects in Europe for privately issued Mises, with his theory of bureaucracy. All this is very money, gold-backed money, and. more freedom in capital popular in Austria. After James Buchanan had lec- markets? tured in Vienna and several other cities, he said the A: Capital controls and exchange controls are set discussion in Innsbruck was the best in a long time. to be lifted this year, and there is a good chance that 'T was very proud of my students and the questions will happen. But as long as money is stakle, there is they asked. | little chance for a gold-backed currency or private money. If the inflation rate reaches 10 percent or Q: Did you ever meet Ludwig von Mises? more, and exchange controls are lifted, banks could A: Only once. It was at a meeting of the Mont promise to pay in the most stable currency, whatever Pelerin Society, in 1967, I think. We were hotly debat- it is at the time. And if one country, say Luxembourg, ing the relative merits of flexible versus fixed ex- opened a bank that began issuing money that was change rates. At the end, Ludwig von Mises stood up accepted in other countries, people would use it. This and said, “stability doesn’t depend on the interna- would be a form of private money. tional monetary system, on whether you have more A or less cooperation among the central banks, or on Q: What about a gold currency? a new system of exchange-rate fixing. It depends on A: It doesn’t have much of a chance, but it is not the monetary policy of each country. Each country impossible if a small country began to issue bank must have a stable currency and a good monetary notes redeemable in gold. At the moment, such a policy.” We all agreed, and that was the end of the currency would be too volatile. As long as the gold conference. price fluctuates because of differing expectations about inflation, I don’t see it succeeding. Q: Was it unusual for everybody to agree? Q: What do you think about free banking? A: Yes, especially at the Mont Pelerin Society. A: I'm still thinking about it. I don’t know if it would be stable. Applying the Austrian theory of Professor Socher was interviewed by Mark entrepreneurship to a free-banking system, it Thornton and Parth Shah while he visited Au- seems that the entrepreneur would look for new burn University to present a paper to the Aus- profit opportunities by issuing too much money. trian Economics Colloquium. ===== PAGE 5 ===== Short-Changed in Chile: The Truth by other banks—had nothing to do with any bank . . runs or crises excepting perhaps the government’s about the Free-Banking Episode own budgetary crisis. It speaks well of the general by George Selgin integrity of the free banks at this date that only one of them (the Banco de Mac-Clure y Cia) in addition to the National Bank took advantage of the government's generous provisions for the issuance of irredeemable paper. Admirers of Professor Rothbard’s trenchant cri- tique of interventionism in the marketplace expect him to hold no punches. Nevertheless, in his recent analysis of Chile’s free-banking episode (AEN, Winter No proponent of free banking, including Courcelle- 1989) Rothbard plays down nefarious government Seneuil, has ever defended a government's right to interventions that reaped havoc with Chile’s mone- undermine that system’s natural checks and contrac- tary and banking system in the 1860s and 1870s. tual obligations by encouraging banks to suspend pay- Uncharacteristically and uncritically he embraces ment. For this reason the events of 1865-66 hardly the mainstream view that Chile’s troubles were due warrant a condemnation of free banking. Indeed the to its overly liberal banking legislation. According to government’s fiscal crisis could just as well have Rothbard, Chile's laissez-faire banking policy encour- served as a pretext for its abandonment of 100-percent aged its bankers to inflate recklessly. reserve banking, had such a system been in force. Would anyone then have been justified in condemn- ing 100-percent reserve banking because it failed to withstand government encroachments aimed at se- curing low-interest loans? It is necessary to stress that Rothbard’s position is against freedom in banking and (implicitly) in favor of increased government intervention, not- withstanding his call for “freedom ... within a firm matrix of 100 percent specie reserves.” Chile's Although the government of Chile was preparing to banking law of 1860 did not exclude the possibility engineer a much vaster expansion of irredeemable cur- of 100-percent reserve banking; the law merely per- rency in 1866, the closing of hostilities with Spain made mitted bankers and their customers to engage vol- this unnecessary and convertibility of all notes was untarily in fractional-reserve banking contracts. Those Chileans who favored hard money could re- frain from holding fractionally-backed bank notes so long as the letter of the law of 1860 was upheld: 0 the proponents of free banking in Chile were no / more opposed to 100-percent banking for those who wished it for themselves than proponents of free speech are opposed to monastic vows of silence. In contrast Rothbard’s attack on the law of 1860, based upon the mainstream view that it promoted inflation, constitutes an implicit defense pf State- imposed restrictions on economic freedom. Moreover, the mainstream interpretation of what happened in Chile does not stand scrutiny. Even a careful reading of Frank A. Fetter—allowing for his a priori conclusions based more upon prejudice against free banking than on any inferences drawn from evidence—indicates clearly that unwarranted government interference rather than the free-banking law of 1860 was responsible for Chile’s monetary troubles.} Chile’s free-banking system was under- mined by (1) its bimetallic legislation of 1851 and (2) its sanctioning of inconvertible currency to ease the government's fiscal burdens in connection with its George Selgin war with Spain and again in 1878. Chile's wartime suspension of specie payment in restored on August 31, 1866. In fact, despite the 1865-66 was due entirely to the government's desire governments irresponsible behavior the entire war for fiscal support and not, as Rothbard asserts (p. episode passed without any serious depreciation of 2), to any general banking crisis stemming from the currency. The period from 1866 to 1874 was ex- overissue of bank notes. Indeed, prior to the out- ceptional in that the government refrained from inter- ® break of the war the banking law of 1860 had led to fering with the free-banking law or with the principle only a minor expansion in note issues. The of convertibility. The consequence was an era of re- government's sanctioning of irredeemable issues— markable growth and prosperity, free of monetary first by the new Banco Nacional de Chile and then crises. ===== PAGE 6 ===== Regrettably that era of unadulterated freedom in export: holders of bank notes rushed to redeem them banking did not last long as unwarranted govern- in the newly undervalued metal. The banks, having ment interference once again began to take its toll. A little silver to offer in place of gold to meet these excep- banking crisis which began in 1874 culminated in the tional demands for redemption, were left with no alter- suspension of specie payments in 1878. Fetter blames native but to watch their specie reserves dwindle while this crisis and subsequent disorders on the free-bank- taking steps to reduce their liabilities as quickly as ing law of 1860, and Rothbard embraces this interpre- possible. tation. Yet the facts do not support Fetter's conclusion. Referring to the outbreak of the crisis Fetter says They suggest, rather, that the events leading to the that the banks, encouraged by “loose banking prac- suspension of specie payments in 1878 were largely a tices” and a desire to minimize their losses, allowed consequence of Chile's bimetallic legislation of 1851 their “margin of safety” to decline in response to the fixing the legal rate of exchange of silver to gold at loss of gold—thus causing the system to suspend in 16.39:1. This legal restriction alone accounts for the 1878.7 Amazingly, though, evidence supplied by Fetter crisis of 1874; to point to the banking law of 1860 is himself (and cited by Rothbard as well) contradicts this unnecessary and unjust. Fetter’s position is to some claim. The average percentage figures for reserves extent understandable as it reflects a preconception to deposits for note issuing banks were 7.6%, 9.1% common to all economists of his era: Fetter set out to and 7.4% respectively for 1876, 1877, and 1878.8 write his book convinced that free banking must lead Notwithstanding the impression conveyed by to disaster; he could not resist interpreting the evi- Rothbard these figures are not terribly low by dence in light of that commen belief. That Rothbard historical fractional-reserve standards (in Scotland should follow Fetter is less easy to understand, how- in the 1830s, for example, rates of around 2% were ever, as Rothbard is well aware of free banking’s rela- typical.) Furthermore (as Rothbard also points out) tively non-inflationary character compared to average figures disguise the fact that many banks centralized banking (a feature of free banking stressed kept much higher reserve ratios: the averages reflect by Rothbard’s teacher, Ludwig von Mises). The theory to a large extent the irresponsible policies of a few of free banking gives no grounds for assuming that bank reserve ratios will be driven below levels required to a — support routine requests for redemption. Rothbard should have realized that something The theory of free banking gives other than excessive freedom in banking had to be no grounds for assuming that behind the events of 1874-78. Part of that something . . ; was bimetallism. Here is what Rothbard himself has bank reserve ratios will be driven to say elsewhere on this subject: below levels required to support routine requests for redemption. Under bimetallism, a nation recognized gold and silver as moneys, but set an arbitrary price, or exchange ratio, between them, When this arbitrary pricerdiffered, ag it was bound to, from the free-market price (and this became ever more likely aa time passed and the free-mar- “bad apples.” Still more significantly, the average ket price changed, while the government's arbitrary figures themselves are not low relative to those from price remzined the same), one money became overvalued . . . and the other endervaloed by ihe goveroment. Thus, the period prior to the appreciation of gold: as Fetter suppose that ... the government set the ratio between himself shows {and Rothbard reiterates) the average [gold and silver] at 16 ounces of silver: ounce of gold. reserve on December 31, 1869 was 8% of the combined control then changes to 16:1, What is the result? Silver value of notes and deposits. (The figure of 5% appear- is now being arbitrarily undervalued by the government ing on p. 3 of Rothbard’s account appears to be a and gold arbitrarily overvalued... The same conse- misprint). As this is the only reserve figure given by quences now follow as from any effective price control... Fetter for the pre-1874 period, it is difficult to accept Gold goes begging for silver in unsold surplus, while his conclusion that banks allowed their “margin of silver becomes acarce and disappears from circulation. Silver disappears to another country ... and gold, in turn, flows into the country. safety” to decline after changing relative prices forced a switch in the de facto standard from gold to silver! On the contrary, the banks appear, overall, to have suc- This description fits the events in Chile after 1874 ceeded admirably in preserving their “margin of safety” almost to a “T” save for the fact that in Chile the market despite exceptional, legislatively-inspired demands to value of silver fell after 1851 relative to that of gold: convert notes and deposits into gold. whereas prior to 1874 the market value of silver was No proponent of free banking has ever defended above the official rate of 16.39:1; it fell early in 1874 to bimetallic legislation. To blame free banking rather 17.623:1.% The official rate, which had previously overval- than bimetallism for Chile’s banking troubles after ued gold, now overvalued silver—almost all of which had 1874 is no better than blaming the housing shortage been melted down and exported in the preceding decades. in Berkeley on “unbridled capitalist exploitation” All of 2 sudden there emerged a vast demand for gold to instead of rent control. Moreover it seems that even ===== PAGE 7 ===== bimetallism was not alone sufficient to undermine the convertibility of bank notes in Chile after 1874. Once again the Chilean government's unquenchable appetite for funds was the ultimate reason for the suspension—a reason which, to repeat, could likewise cause the downfall of any convertible-currency sys- tem, fractional-reserve or not. To tell the complete story of the events leading to the suspension of mid-1878—which Chile's more pru- dent bank managers appear to have been prepared to avoid despite the adverse effects of bimetallism—we must take a closer look at the “bad apples” mentioned above and see just what they were up to during the preceding weeks. In the early 1870s the government ran small budget deficits. But the situation changed dramatically after 1874 when gold began to leave the country, provoking a severe shortage of credit and causing fiscal revenues to plummet. In June 1878 the governmeny once again sought financial support from the banks.? Nine banks in all agreed to purchase over 2.5 million pesos of two-year, 9% Treasury notes in return for their notes (up to four times the value of their individual loans) being declared publically receivable until 1888. Thus a privilege previously limited to the National Bank and the Banco de Agustin Edward y Cia was extended to seven others. In turn the two pre- viously favored banks were given a small annual side payment as a consolation prize. The inequity of these arrangements did not pass without notice. At least one member of the Chamber of Deputies attacked the loan, saying it would pave the way to suspension “because the government would authorize inconvertibility before it would allow the banks to fail.” It was not long before this prophecy was borne out. By early July three of the nine banks which had’ participated in the June loan sgw their reserves fall to exceptionally low levels—in one case to below 3% of liabilities. Rather than contract their obli- gations as other banks had done, the imperiled three continued recklessly to extend credit. The Directors of the National Bank in particular continued to make generous loans to themselves which increased greatly in value in the crucial weeks leading to the suspen- sion.!? Finally a committee of representatives from the troubled banks, led by the representative from the Na- tional Bank, approached the government to request per- mission to suspend payment. To rescue these ill-managed banks (and perhaps to fulfill the implicit terms of the June loan agreement) the government authorized a sus- pension for the nine banks that were a party to the June loan only. (The remaining two banks, which had not increased their loans in the previous weeks, were up to this point in no danger of default.) The notes of the nine banks were declared legal tender in return for their paying to the government 4% annually on their circulations. As Fetter himself relates “the serious condition of two or three banks, in particular the Banco Nacional de Chile, was the immediate occasion for the suspen- sion of p ayments” which these banks themselves re- quested.’ Contrary to what Rothbard implies there is no reason to assume that other banks were in equal danger of succumbing to the “unfavorable balance of trade.” The suspension of '78—which lasted for al- most 50 years (allowing for the brief interlude from 1895-1898) was aimed entirely at bailing out several politically-favored banks. The favored banks had lent generously to the government to rescue it from its own bimetallic legislation, knowing full well that this would lead them to insolvency. They relied upon the govern- ment to support them by sanctioning the suspension of payments, and were not disappointed. Had the government abided by a policy of true free banking these ill-managed banks would have been allowed to fail and suspension would have been avoided; with such a policy in place the banks might never have dared to undertake the excessive lending that caused their reserves to be depleted. Moreover, had it not been for bimetallism the government might never have faced the fiscal crisis that led it to seek the aid of the banks in the first place. To his credit, Courcelle- Seneuil foresaw the danger of government bailouts and expressed himself in favor of a policy of allowing ill-managed banks to fail and be liquidated.’ Free banking did not fail in Chile, Like many other manifestations of economic liberty it was undermined by government intervention before it could prove itself. Friends of economic freedom should not hesitate to laud Courcelle-Seneuil’s noble effort. Notes 1. A source more sympathetic to the free banking experiment but not cited by Rothbard is Augustin Ross Edwards, Chile, 1851-1910: Sizty Years of Monetary and Financial Questions and of Banking Problems (Valparaiso, Chile: Westcott, 1910). 2. Edward H. Strobel, “Cheap Money in Chile.” Sound Currency 3, no. 18 (July 1896): 560. According to Fetter only “a few hundred thousand pesos” of notes were in circulation at the outbreak of the war. Frank A. Fetter, Monetary Inflation in Chile (Princeton: Princeton University Press, 1931), p. 9. 3. Fetter, p. 16. During this era Chile's railroad and telegraph systems were developed, the port of Valparaiso was enlarged and improved, and fiscal revenues increased by one-quarter. See Victor-L. Tapié, Histoire de L'Amérique Latine au XXIXe Siécle (Paris: Aulier, 1945), p. 183. 4. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970), pp. 783-84. 5. Strobel, p. 548. Rothbard is aware of Chile's bimetallic legisla- tion. This important fact is relegated to a footnote, and he makes no mention of the switch from a de facto gold standard to a de facto silver standard in 1874 and its crucial bearing upon events thereafter. 6. Tt is apparent that banks took steps to accumulate silver in anticipation of its overvaluation, thereby avoiding an immediate crisis. 7. Fetter, p. 26. 8. Ibid; see also Strobel, p. 551, for detailed figures for 1878. 9. Fetter, p. 27. 10. Ibid, p. 30; Ross, pp. 37-39. 11. Fetter, p. 29. According to Ross (p. 38), “The debt of the Government served the (Nationall bank as a pretext for bringing pressure to bear on the Congress in order to wring from it the Law of Inconvertibility.” 12. Ross, p. 80. ===== PAGE 8 ===== Austrian Economics in Denmark 4 al , iy TRE TI CORDA Sl SN ol SE Sl . FE A TL A PLA Bo ; CEI AN A ie to LE aE Academic interest in methodological individual- ism, subjectivism, and Austrian economics is invad- ing the long-established fortresses of welfarism, i.e., the Scandinavian “welfare states.” But, while there has Time and Public Polic y been for some years an Austrian following in Sweden and Norway, this is a recent development in Denmark. by T. Alexander Smith University of Tennessee Press, 1989 For the last three years a group of students from economics, political science, philosophy, psychology, . dbvL S ¢ and history, and primarily from the University of Co- Reviewed by Larry J. Sechres penhagen, have been trying to spread interest in Aus- Several interdisciplinary works of interest to eco- trianism among the Danish academic community. nomists have appeared in recent years: F. A. Hayek’s The Fatal Conceit, Robert Higgs Crisis and Leviathan, and Charles Murray's Losing Ground come readily to mind. Perhaps the most intriguing of such efforts is T. Alexander Smith's Time and Public Policy, for it repre- sents a conscious attempt to examine modern political In the fall of 1987 the group organized, for the first time at any Danish university, a course on Aus- trian theory. The course on methodology was offered at the Institute for Economics, a part of the Univer- sity of Copenhagen. A course on “applied Austrian SeNLS 4 d v0 nne theory” will be offered in the spring of 1990. institutions and public policies utilizing the concept of In 1988 these students founded the time preference, a notion usually found only in treatises “Praxeologica Project,” with the help of Libertas— onl economics. oo ] the Danish Society for the Study of Individual Lib- _ Indeed, as Smith is aware, time preference is of erty and Free Market Economics. Their purpose is to little consequence even to mainstream economists; hold one or two interdisciplinary symposia each year, only the Austrian school has treated time and time where students and professors interested in metho- preference as the centrally important concepts they dological individualism and subjectivism can present are. Moreover, Smith—who is a professor of political their Austrian research. From these lectures will be science—is clearly much impressed with the great published a series entitled Praxeologica. body of Austrian theory, not merely with the treat- ment of time preference. The Hayekian approach to ta SY $d Method: The Rae Oe he business cycles, the nature of interest, the heteroge- First Danish Praxeologica Symposium. Among the neity of capital, free banking, the classic gold stan- : 0s ‘ dard and the rejection of the standard model of speakers were & Danish professor, five students, and “perfect competition” are all mentioned favorably. Leonard Liggio from the Institute for Humane Stud- And there are numerous references to the works of ies, who lectured on “Austrian Economics in the specific Austrians; the names of Hayek, Mises, U.S.A.” Most of the lectures from this symposium Rothbard, Lachmann, Shackle, and Kirzner appear were published in 1989 as Praxeologica I. prominently. It must not be supposed, however, that In August, the second Praxeologica Symposium this is a work of an economic dimension only. Smith was held with the theme, “F. A. Hayek: The Austrian borrows and blends ideas from several disciplines School and the Social Sciences”; lectures from this aside from economics and political science: sociology, symposium were published in December of 1989 as psychology, political philosophy, history, legal theory, Praxeologica II. Among the speakers were two profes- etc. This is a very ambitious and largely successful sors, two students, Christian Gandil, former vice effort. president of The Mont Pelerin Society, and Tom The basic theme of the book is the claim that Palmer, Institute for Humane Studies, who lectured stability, freedom, and prosperity are all simulta- on “Competitive Processes as Discovery Processes: neously enhanced in an environment characterized Hayek and Natural Law. by (1) low time preference, (2) free markets and, (3) “Public Choice Theory, Austrian Economics and the “rule of law” (as that term has been used by Modern Theories of the State,” the third Praxeologica theorists such as Hayek and Oakeshott). In contrast, Symposium was held in November and the lectures Smith points out that most contemporary Western from this symposium will be published in 1990 as democracies—especially the United States and the Praxeologica III. United Kingdom—suffer from a pervasive cultural, The Praxeologica group, which is headed by stu- political, and economic decay that has led to very dents Otto Brons-Petersen, Nicolai Juul Foss and Peter high time preference, widespread intervention into Kurrild-Klitgaard may be contacted at: Praxeologica, economic life, and highly partisan “promissory poli- c/o Peter Kurrild-Klitgaard, Matthausgade 16, II t.h., tics.” DK-1666 Copenhagen V. Denmark. As Smith argues, long time horizons (i.e., low time ===== PAGE 9 ===== ® preference) imply frugality, hard work, and a trust in the future; they are literally the “sociological glue” that holds things together. Free markets complement this by providing (1) “the best means for coping with the diversity of producer and consumer tastes and knowl- edge” and (2) the “necessary condition for political free- dom.” The rule of law (common law) has the desirable effect of slowing the tempo of social change and reduc- ing the uncertainty that is the result of rapid alter- ations in the legal environment. Thus, these three factors interact to bring about a society that protects individual rights and fosters long-term growth. The cultural facet of the decay which Smith so deplores is exemplified by the widespread rejection of what he terms the “Bourgeois Ethic.” This bourgeoi- sie, or “older middle class,” was characterized by (1) being both owner and manager of their firms, (2) possessing an “inner-directedness” that led them to defy customs and their peers on occasion, (3) lengthy time horizons, (4) a commitment to the ideal of balance and moderation, and (5) a reluctance to be seduced by envy (a result of their strong Christian faith). Above all, this bourgeois class exuded a powerful confidence in the future; they accepted as a tenet of faith that thrift, hard work, and honesty would bring rewards— as indeed they usually did during the last century. Today, as Smith sees it, the Bourgeois Ethic is gener- ally seen as “reactionary” and “atavistic.” The focus is on the superficial self and its immediate sensory gratification instead of on family and the future. The results are all around us: drugs, violence, teenage sex, crime, divorce, etc. What specifically, one may ask, has brought about this dramatic change? Smith offers several answers to this, but he seems to focus on three in particular: “the decline of the Judeo-Christian faith,” the rise of a new middle class, and the Keynesian denigration of ® saving and exhortation to spend. Smith's argument on religion is the usual one that the erosion of religious belief has led to loneliness and alienation (and higher time preference) for many individuals; regardless of the nature of one’s religious belief (or non-belief), it is difficult to deny the accu- racy of that observation. The new middle class, as he points out, differs radically from the old bourgeoisie in that they are technocrats and managers rather than entrepreneurs and merchants. They believe that monetary rewards should be based on “merit,” on some sort of “objective” standards—such as degrees earned or job seniority, rather than upon the “subjec- tive” valuations of the market. This difference leads the new middle class to resist market forces on the one hand (e.g., to refuse to take wage rate cuts in times of recession) and, on the other hand, to embrace certain short-run political “solutions” (e.g., affirma- tive action and comparable worth). Smith's attack upon Keynesian theory will warm the hearts of all free-market advocates, especially Austrians. He ar- gues that Keynes and his followers have contributed mightily to the dissolution of the bourgeoisie. Instead of depending on true saving and capital accumulation to sustain growth, modern nations have opted for the Keynesian prescription of discretionary fiscal and monetary policies, an approach that leads inexorably to inflation and capital consumption. Smith is partic- ularly critical of the duplicitous “tradeoff” of the infa- mous Phillips curve. The central role of the Phillips relation within so much of public policy is truly “a dagger aimed at the heart of saving.” Political decay in our age may be understood by contrasting the status of political man with that of economic man. As Smith puts it, homo economicus is widely believed to exhibit raw greed and cultural insensitivity while homo politicus is supposed to be generous and “public-spirited.” Moreover—and criti- cal to Smith’s thesis—it is often assumed that eco- nomic man displays short-time horizons while political man takes the long-term view. Yet Smith contends that “contrary to what is usually supposed, time horizons are more likely to be short when we occupy political instead of economic roles.” This, he argues, follows inevitably from (1) the nature of majoritarian democracies and (2) the rise of the wel- fare state ideology. As political parties compete ever more intensely for votes they offer patronage and privilege to more and more special interest groups. Coupled with the commonly-held belief that the state can and should alter the social and economic status of certain groups via redistributionist schemes (what is known as “so- cial reform”), this of course produces a climate of opinion in which the “quick political fix” is deemed appropriate, even necessary. In other words, time preferences rise significantly. In this context Smith makes an observation which, while not original, is nevertheless rather provocative: that many modern conservatives (e.g., George Will and Irving Kristol) are not enthusiastic defenders of free markets, despite a media-managed image to the con- trary. Thus they, like modern liberals, believe that the state performs a valid function by managing time ===== PAGE 10 ===== preferences in the “public interest.” The contrast of both status rather than religion. Also, when Smith dis- groups with libertarians is clear. cusses the courting of the “moderate center” by the The final manifestation of the decay which concerns major political parties in the United States he seems Smith is that of economic theory: the supplanting of at a loss to explain why that “center” has become Say’s supply-oriented Law of Markets by Keynes's increasingly collectivist and statist in its beliefs. A 3 “effective aggregate demand management.” Readers focus upon the perversion of the concept of freedom of this newsletter will be very familiar with the basic from its classical liberal (“negative”) interpretation issues involved here so only a few points of interest into the modern liberal (“positive”) interpretation will be touched on. might be of benefit here. Finally, Smith’s contention that the “rule of law” can be applied successfully even in the realms of government “social welfare” and educational policies seems highly problematic. The negative income tax, to take one of his proposals, would indeed remove the stigma from income trans- fers by making them automatic and anonymous. However, by doing so, it would also greatly encourage individuals to seek such welfare in the first place. How is that going to decrease either the scope of government or the burden on taxpayers? Despite these few problems, this is a book that should prove eminently satisfying to anyone with a After quite ably summarizing each of the above two approaches, Smith arrives at three conclusions. First, he points out the fundamental contradiction of Keynes: since to supply is to “create value” and to consume is to “exterminate value,” then one can only demand to the extent that one can continue to supply. In other words, “inadequate demand” is, in truth, a withholding of supply (cf. W. H. Hutt’s excellent book, The Keynesian Episode). Second, he sees Keynes as concerned with distribution of a fixed “economic pie” and thus conducive to pessimism and high time preference; while Say was concerned xa pr an with production of an ever-growing “pie” and so con- predilection for free markets and limited govern- ducive to optimism and low time preference. Finally, ment. And it should be required reading for all Smith concludes that the debate also possesses a pow- political science majors as well as all public office erful moral dimension since the controversy centers holders. upon the relative values one places upon saving ver- sus consumption. As he puts it: “Say’s Law and the Bourgeois Ethic are symmetrical ... [the Keynesian Social Con tract, Free Ride: approach] is to rationalize present gratification and . selfishness at the expense of the future. AS tudy of the Public Goods The foregoing is the core of Smith's thesis, How- Problem ever, two items of tangential importance must be by Anthony de Jasay mentioned in passing. First, what the of so-called Oxford University Press, 1989 “Post-Industrial Society?” Such a world, according to ny writers like Daniel Bell and Alvin Toffler, will exhibit ) | | Reviewed by Gerard Radnitzky material superabundance, high technology, much lei- sure and “self-actualization” and values that will be The schoolbook reason why even selfish men, decidedly anti-bourgeois. Smith understands well lacking any feeling for nation and community, are that such a scenario is a contradiction in terms. supposed willingly to obey the political authority is Without bourgeois values, there will exist little sav- their imperative need for public goods like civil order, ing, little capital accumulation, little wealth and lit- defense, a clean environment, social security, and the tle leisure. Second, are there any bright stars in the other underpinnings of civilized society. If each were constellation of Western democracies, or do all such not forced by the state to contribute to the cost of such nations suffer from the malaise Smith has identified? goods, each would prefer to let others carry the bur- The one exception seems to be Switzerland, a land of den while he enjoys a free ride. strong bourgeois beliefs, mostly local (cantonal) polit- Social Contract, Free Ride: A Study of the Public ical decision-making, low crime rates, low inflation Goods Problem, by Anthony de Jasay is an unusual rates and a renowned banking system. In short, “Po- book. Starting from the nature of contracts and litical Man has been kept more 1n abeyance in Swit- games, it provides a radically new understanding zerland than in other nations. of social coexistence and a novel account of the public Time and Public Policy is a lucidly written and goods dilemma and it dismantles the conventional thought-provoking book that deserves a very wide theory. The author, who was a Fellow of Nuffield readership. Nevertheless, it is not without several College, Oxford, where he taught economics up to minor flaws. For example, Smith argues that low time 1962, later established himself as an investment preference is bolstered hy the Christian proscription banker and eventually became a political philoso- | of envy. Yet, if that is true, why do so many Hispanics pher. Without relying on any assumption about 3 and blacks (two passionately religious groups) exhibit “man’s better nature,” he deduces that the pursuit such high time preference? Surely the critical factor of maximum utility is sufficient to induce groups of is ethnic group or cultural norms or socio-economic rational individuals spontaneously to allocate 10 ===== PAGE 11 ===== amongthemselves, however “unfairly,” the cost of the use of the word “liberal” it should be pointed out that public goods they value highly enough. Jasay used it in the sense of classical liberalism, i.e., The standard approach to public goods problems to refer to a broad presumption in favor of deciding &' is that they are typically “prisoners’ dilemmas,” individually any matter whose structure lends itself ¢ where uncoerced contribution to the public good is to both individual and collective choice. irrational. Jasay shows that this is but a special case Both books are examples of the successful appli- among other possible incentive structures or cation of the economic approach and of game-theory “games.” If the “productivity” of public provision is arguments in political science and political philoso- sufficiently superior to private-good substitutes, phy. Jasay’s arguments bring a breath of fresh air to other incentive structures arise whose normal so- both fields. lution is that some people contribute and others free-ride on the public good thus created. Social roles are then either self-selecied—some are “suckers,” others are free eee involves A Theory of “unfairness,” or, alternatively, they can be im- Socialism and Capitalism posed by “social contract”: everybody must contrib- by Hans-Hermann Hoppe ute (typically by taxation). This, however, Kluwer Academic Publishers, 1989 reintroduces free riding by the back door, via over- consumption of certain public goods and redistribu- tion of the incidence of taxation. Reviewed by David Conway Up to chapter 7 a utility-maximizing approach is H:ns-Hermann Hoppe's A Theory of Socialism used: all the results are deduced from strict utility and Capitalism in essence is given over to establish- maximization. Then further possibilities are admit- ing two theses concerning the comparative merits of ted (chapter 8) that have in addition various moral capitalism and socialism. The first—which shall be motivations. referred to below as the economic thesis—is that cap- The true role of the state is not, as we had been italism is economically superior to any form of social- taught, forcibly to channel resources into the produc- ism, in the sense that, given the economic resources tion of public goods we would not otherwise get. It is, of any society, the average standard of living per instead, to ensure that the distribution of public bur- member of that society will be higher if its economic ¢ dens and benefits is decided by collective political structure is capitalist than it would be if its struc- deliberation rather than by the free interactions of ture were socialist in any form, to any degree. The . second thesis—which shall be termed in what fol- Be lows as the moral thesis—is that capitalism is mor- ally superior to any form of socialism, in the sense ~ Jasay ... shows how and why [the] that capitalism” respects, , whereas every form of naive quest for “fair” distribution is socialism violates, property rights belonging to bound to fail some members of society. The two theses themselves are by no means novel, nor are the arguments which Hoppe offers in support of the economic thesis. So far as the theses autonomous individuals. Jasay, with impeccable themselves are concerned, they are the stock-in- logic, shows how and why this naive quest for “fair” trade of that species of libertarianism propounded distribution is bound to fail, bringing about chronic by Murray Rothbard to whom the author signals overconsumption of public goods and stimulating the the greatest intellectual debt in his acknowledg- free riding it was meant to interdict. ments and to whose writings numerous references are made in the text itself, Likewise the arguments In an earlier book—Anthony de Jasay, The State ! ! (Blackwell, Oxford 1985), which is now starting to advanced on behalf of the economic thesis can, by exert an influence—the author presented a theory of and large, be found in the economic writings of how the natural conflict between state and society Rothbard and, earlier still, of Ludwig von Mises, transforms both state and society in a process from who, next to Rothbard, is the author to whose works which only historical luck lets us escape. The emer- most references are made in Hoppe's text. What is gence of a relatively free society, “The Rise of the novel about Hoppe’s book is, first, the great care | West,” is the result of happy accidents in history, and with which the author distinguishes between the it is an endangered species. In his book Social Con- different possible forms of socialism and then ex- [ tract, Free Ride, Jasay forces us to face the prospect plains with respect to each why it is economically that even our constitutionalist-liberal doctrines are inferior to capitalism, and, second, his argument not liberal enough to protect us from the unintended for the moral thesis. and automatic crowding out of individual choice by At the base of his conception of both capitalism and collective will. After the grotesque mid-Atlantic mis- socialism in all its various forms, and, in addition, 11 ===== PAGE 12 ===== underlying the moral thesis, is a certain account of France and Italy are less affluent than West Ger- property rights which Hoppe calls the natural theory many, and so on. Hoppe’s book is well worth reading of property. The essence of the natural theory is that for the light which it sheds on these hard facts of whoever first uses a scarce resource acquires (natu- economic reality alone. ral) ownership of it. This entails that each person owns his (or her) own body (being the first to use it), and also owns in addition whatever other scarce re- sources he (or she) either is the first to make use of or else is given—either in some contractual exchange or as a free gift—by some previous (natural) owner of that resource. First-use forms, for Hoppe, “an objec- tive, intersubjective ascertainable link” between an individual and some scarce resource which can be transferred to another individual through gift or ex- change. Pure capitalism, for Hoppe, is simply that social systems are based on the natural theory of property. By contrast, socialism is any social system “that assigns rights of exclusive control over scarce means ... to persons or groups of persons that can point neither to an act of previous usership of the things concerned, nor to a contractual relation with some previous user-owner” (p. 18). Matters are otherwise, however, when it comes |, e to Hoppe’s moral thesis and to his argument for it. This thesis—viz. that pure capitalism is morally superior to all forms of socialism—depends cru- cially upon his natural theory of property offering a morally correct account of property rights. In other words, the truth of Hoppe’s moral thesis de- pends upon its being true that whoever first uses a scarce resource acquires rights to exclusive use and controt of it. Capitalism would not violate property rights, whereas all forms of socialism would violate property rights, if the natural the- ory were morally sound. Hoppe attempts to dem- onstrate the moral soundness of the natural theory of property in chapter 7. His argument is somewhat complex and not altogether easy to fol- low. A convenient summary is offered in the first paragraph of chapter 8. He writes “[Socialism] can- Armed with this general conception of socialism, not be defended as a fair or just social order from a Hoppe is able to distinguish no less than four differ- moral point of view because to argue so ... necessar- ent specific forms of it. These are: (1} Socialism Rus- ily presupposes the validity of the first-use-first- sian-style, exemplified by the communist countries of own rule of the natural theory of property and the Eastern bloc; (2) Social-democratic Socialism, capitalism, as otherwise no one could survive and favored by socialist and social-democratic parties of then say, or possibly agree on, anything as an inde- Western Europe as well as by so-called “liberals” in pendent physical unit” (p. 145). the U. S. A.; (3) The Socialism of Conservatism most ) notably by France and Italy, but still more graphically } Put more fully, the argument Seems £0 be this: exemplified by fascist Italy and Nazi Germany; (4) in order to be able to engage in argument, it 15 and The Socialism of Social Engineering, currently necessary for a person first to have control over his favored in the U. S. A. body. Therefore, whoever wishes to be able to justify Ce : anything by means of argument must subscribe to Hoppe has little difficulty in showing witlirespect ~~ the following principle (which Hoppe calls the prin- to each of these forms of socialism that‘it is less ciple of non-aggression): nobody has the right to efficient at producing and conserving wealth than uninvitedly aggress against the body of any other capitalism. Thus, for example, with respect to Social- person and thus delimit or restrict anyone’s control ism Russian-style, we are told that, among its other over his own body. Now, if no one had the right to economic shortcomings, by disallowing private acquire anything except his own body, no one would ownership of means of production, this form of so- be able to live. Therefore, anyone who engages in cialism prevents the formation of market prices in any argument must accept that people have a right means of production which in turn prevents man- to acquire property rights in scarce goods besides agers of economic resources from being able to cal- their own bodies. Since everyone who engages in culate the monetary costs of production and thereby argument must subscribe to the principle of non-ag- from being able to determine the optimum way to gression, it follows that everyone who acknowl- utilize the means of production. In consequence, edges that people have a right to acquire scarce misallocation of resources is almost inevitable. goods besides their own bodies must also accept This, and many of the other arguments advanced that, in order to be valid, the norm which specifies by Hoppe for the economic thesis, should be famil- how a person may acquire a scarce good besides his iar to those acquainted with Austrian economics. own body must be consistent with the principle of On the whole, the arguments which Hoppe presents non-aggression. The only norm which specifies how for the economic thesis are sound and clearly formu- someone may acquire some scarce good besides his lated. Moreover, Hoppe goes on to show how, in the own body that is compatible with the principle of light of these arguments, we can make sense of a non-aggression is the first-use-first-own principle whole host of otherwise disconnected empirical facts: of the natural theory. Therefore, it has to be ac- such as why the Eastern bloc is less affluent than the cepted by whoever wishes to engage in any argu- West; why, within the West, the U.S. A. is more affluent ment that whoever first works on an unused than Western Europe; why, within Western Europe, nature-given thing becomes its owner. 12 ===== PAGE 13 ===== The crucial premise of this argument is the last: is significantly less arbitrary than Hoppe’s natural namely, that the only norm that specifies how some- theory for the following reason. A world which ap- one may acquire scarce goods besides his own body plied Hoppe’s favored theory of property to scarce | that is compatible with the principle of non-aggression goods besides people’s own bodies would be a @ is the norm which assigns first ownership of a hith- world which permitted only 2 minority of the peo- erto unused nature-given thing to whoever first uses ple existing within it to appropriate through first that thing. What Hoppe wants to contend here is use the entire stock of scarce natural resources, that individuals are owners of their own physical and to deny access to means of subsistence to the bodies. According to Hoppe, all other norms speci- remainder of the world’s population who lacked fying how individuals may acquire scarce goods any scarce resources of their own besides their involve assigning scarce goods to individuals sim- own bodies. A rule which permits such a state of ply by verbal means, i. e., by decree. However, affairs would clearly permit some people to be de- being able to acquire ownership of something sim- nied the necessary preconditions for their being ply by decree is inconsistent with everyone’s owning able to engage in argument. Consequently, no one their own body. For everyone else in addition to any who wishes to argue for their views should be will- given person is equally well able as that given ing to accept such a rule. Consequently, the first- person to decree that they own that persen’s body. use-first-own rule is not truly a precondition of So, if one accepts that the only person who owns a argument and cannot be allowed to stand in an person’s body is that person himself, then one must unqualified form by all who would be governed by reject all norms which state how persons may acquire reasoned argument in their moral views. scarce goods besides their body other than the first-use- At the outset of the book, Hoppe introduces the first-own principle. idea that property rights are claims to exclusive own- Ingenious though the argument is, it is flawed. ership of scarce resources the purpose of which is to This is because it is false that wherever ownership prevent conflicts between persons over the use of ~ of some unused nature-given thing is assigned by scarce resources. Such conflicts are surely not pre- we ,.means other than reference to first use of that vented by rules which permit some people to die of * thing, ownership is being assigned merely by verbal starvation through lack of opportunity to acquire " means. In order to live, individuals need means of means of subsistence. Consequently, any morally valid theory of property has to consist of rules which acknowledge people’s rights to acquire their ( means of subsistence. A person who is destitute through no fault of his or her own in a society which contains enough resources to maintain that desti- tute person without taking away from anyone any resources that are necessary for the survival of some- ‘one else, has a right, against all those who own more than they need in order to survive, to be provided with the opportunity to acquire goods at least sufficient to live on. This does not imply that those with more than they need to survive are obliged to maintain the destitute in idleness. The granting of means of sub- sistence to the destitute can be made conditional on the destitute engaging in work for these means of subsistence. by Kluwer Academic Publishers as the first in a joint versus socialism? What it means is that whoever series with the Mises Institute called “Studies in first uses a scarce resource can at most acquire Austrian Economics.” The book is presently being ownership of it subject to the qualification that this translated into Portuguese, Korean, and Spanish. owner, or whoever that owner passes on that re- source to, if he has more than he needs for subsis- subsistence. This fact establishes arelation between tence, must be willing to provide those lacking an individual and some scarce goods every bit as means of subsistence of their own, through no fault objective as that which mixing one’s labor with those of their own, the opportunity to acquire means of goods does. Thus, a norm that states thatindividuals subsistence. This means that, in a world in which all have a right to what they need in order to live (i. e., natural resources have become privately owned, LJ) to means of subsistence) is at least as non-arbitrary property owners must ensure either opportunities for as the first-use-first-own principle as applied to gainful employment or welfare for those who are scarce goods besideshuman bodies. More tothe point, without means of subsistence of their own. The rights the norm specifying a right to means of subsistence of the destitute are consequently being denied by L 13 ===== PAGE 14 ===== property owners in such a world if the latter deny the justified, it becomes impossible to justify any restric- former both job opportunities and welfare. tions in the homesteading process—except for a self- imposed, voluntary one—without thereby running into contradictions. For if the proponent of such a restriction were consistent, he could have justified control only over some, however limited, scarce re- sources which he would not be allowed to employ for additional homesteading. Yet, he could not then inter- fere with another’s extended homesteading, simply because of his own lack of means to do anything about this. And if he did interfere, he would thereby incon- sistently extend his ownership claims beyond his own justly homesteaded resources. Hoppe has presented a powerful economic case for making us prefer capitalism to socialism. However, society's enjoying the highest possible average stan- dard of living per member is little consolation to a member who through no fault of his or her own neither has anything nor can acquire anything. Surely, no form of society which tolerates such states or unameliorated property within its midst can be morally superior to a form of society in which owners have an enforceable obligation to non-owners to pro- vide them with enumerated work or welfare. Full- blooded socialism may not be required by justice, but Moreover, in order to justify his interference he some small departure from pure capitalism may well would have to invoke a principle of property acquisi- be. tion incompatible with the homesteading principle: he would have to claim, inconsistently, that a person who extends his homesteading, and who does s0 in IT accordance with a principle that no one can argue to On the Indefensibility be generally invalid, is, or at least can be, an aggres- of Welfare Rights: sor (even though in doing se this person could not A Comment on C onway possibly be said to have taken anything away from anyone, because he would have merely appropriated previously unowned resources.) Furthermore, a per- by Hans-Hermann Hoppe son who interferes with such an action, and who does Davia Conway claims that my argument intend- so in accordance with a principle that no one could ing to show the unrestricted validity of the home- possibly argue to be generally valid, is, or at least can steading principle, i.e., the first-use-first-own rule be, acting legitimately (even though he would always regarding unowned, nature-given resources, is take something away from someone whose appropri- flawed, and that he can demonstrate the defensibility ations had occurred at no one’s expense). of welfare rights. I remain unconvinced and contend The central error in Conway's rejection of this that it is his counter-argument which is faulty. argument is his refusal to acknowledge the logical While I have no quarrel with his presentation of incompatibility of his idea of welfare rights on the one my argument, I will first briefly restate my proof. hand—the notion that one can have enforceable Second, I will point out the central errors in his reply. claims against homesteaders—and of the homestead- And third, offer an explanation for Conway's rejection ing principle on the other. Either the first idea is right of my argument as resulting from a rather common or the second. Yet the first cannot be said to be right, misconception regarding the logic of ethical reason- because in order for anyone to say so, the second one ing. ) must be presupposed as valid. There can be no such thing as a right to life, then, in Conway’s sense of a right to having one’s life sustained by others. There can only be each person’s right to own his physical body, everything that is homesteaded with its help, and to engage in mutually beneficial exchanges with Whether or not one has any rights, and, if any, which ones, can only be decided in the course of an argumentation. It is impossible to deny the truth of this without falling into a contradiction. Arguing re- quires a person’s exclusive control (ownership) over scarce resources (one’s brain, vocal cords, ete.) Trying others. to deny this would again merely prove the point. And Suppose, for instance, that I am terminally ill and a person must have acquired this ownership simply the only way for me to survive is to have my brain by virtue of the fact that he began using these re- short-circuited with Conway’s. Does he have the right sources before anyone else had done so, otherwise he to refuse? I think so, and I am sure that he thinks so, could never say or argue anything to begin with. too. But he cannot have this right on welfare grounds Thus, anyone denying the validity of the homestead- (assuming that his life would not be threatened by ing principle at least with respect to some resources such an operation), but only on the basis of the home- would contradict the content of his propesition stead principle as the precondition of one’s existence through his very act of proposition making. as an independently reasoning and arguing physical So far, it appears, Conway would agree. But he being. wants to impose limitations on the range of objects Further, his claim that welfare rights “are every that may legitimately be homesteaded. Unfortu- bit as objective” as those implied by mixing one’s labor nately, however, (for Conway's case) once exclusive with scarce resources (contrary to my thesis that the control over some homesteaded means is admitted as former are subjective, arbitrary, verbal, derived out 14 ===== PAGE 15 ===== of thin air) is fallacious. Through homesteading an homesteading rule as an indisputably valid, axio- objective link between a particular person and partic- matic principle. ular resource is created. But how can one say that my The explanation for Conway’s refusal to accept 2 need can give rise to a claim regarding any specific the homesteading ethic lies in a misconception re- @ resource or resource owner x, rather than y, or z, if I garding the nature of ethical theory. Instead of recogniz- had not homesteaded or produced either one? Not ing ethics as a logical theory, deductively derived from only is neediness incapable of objective identification incontestable axioms (akin to praxeclogy), Conway or measurement: who determines who is or is not implicitly shares a popular, empiricist-intuitionist (or needy? Everyone for himself? And what if I happened gut-feeling) approach toward ethics. Accordingly, an to disagree with someone’s self-assessment? ethical theory is tested against moral experience, People have died from love-sickness—do they such that if the theory yields conclusions at variance have a right to a lover-conscript? People have sur- with one’s moral intuitions it should be regarded as vived by eating grass, bark, rats, roaches, or other’s falsified. However, this view is entirely mistaken and, garbage—are there no needy people then so long as there is enough grass or garbage to eat? If not, why not? For how long would the support for the needy have to last? Forever? And what about the rights of the supporters who would thereby become permanently enslaved to the needy? Or what if my support for the needy caused me to become needy myself, or somehow increased my own future needs? Would I still have to continue to support them? And how much work can I expect the destitute to perform in return for my sup- port—given the fact that one is not dealing here with a mutually beneficial employment relation or voluntary charity to begin with? As much as, the needy feel is appropriate? oC Moreover, even if all these difficulties were over- come, more are lying in the wings because need does not connect the needy with any resource or resource owner in particular, and yet it must invariably be particular resources that provide relief. The needy may be needy without any fault of their own; but the non-needy may be non-needy without any fault of theirs, too. So how can the needy claim support from me, rather than you? Surely that would be utterly Hans-Hermann Hoppe unfair toward me in particular. In fact, either the much like in economics, the role of theory and expe- needy can have a claim against no one in particular, rience in ethics is almost precisely the opposite: it is which is to say they have no claim whatsoever; or else the very function of ethical theory to provide a ratio- their claim would have to be directed equally against nal justification for our moral intuitions, or to show each one of the world’s non-needy. why they have no such basis and make us reconsider How can the needy possibly enforce such a claim? and revise our intuitive reactions. This is not to say After all, they lack resources. For this to be possible, that intuitions can never play a role in the building an all-resourceful, world-wide operating agency of ethical theory. In fact, counterintuitive theoretical would be required. The owners of such an agency conclusions may well indicate a theoretical error. But obviously would have to be classified as among the if after one’s theoretical reexamination, errors are non-needy, and could hence have no direct claim neither found in one’s axioms nor in one’s deductions, against anyone. Supposedly, only need creates such then it is one’s intuitions that must go, not one’s claims, In fact, this agency would have to be consid- theory. ered one of the foremost debtors to the needy; and In fact, what strikes Conway as a counterintuitive it could only legitimately act against other non- implication of the homesteading ethic, and then leads needy then, if it had previously paid its share of him to reject it, can easily be interpreted quite differ- welfare debts and the needy had contractually en- ently. It is true, as Conway says, that this ethic would trusted it with such an enforcement task. And allow for the possibility of the entire world’s being ® hence the welfare problem would have to wait for a homesteaded. What about newcomers in this situa- solution until this institution arrived. So far it has tion, who own nothing but their physical bodies? not arrived, and there is nothing to indicate that it Cannot the homesteaders restrict access to their will arrive in the near future. And even if it did, property from these newcomers and would this not be welfare rights would still be incompatible with the intolerable? (Empirically, of course, the problem does Se — 15 ===== PAGE 16 ===== not exist: if it were not for governments’ restricting access to unowned land, there would still be Review of Austrian Economics plenty of empty land around.) These Volume IV newcomers come into existence Co ( somewhere—normally one would Articles think as children born to parents Eugen Richter and Late German Manchester Liberalism: A who are owners or renters of land (if Reevaluation, by Ralph Raico they came from Mars, and no one wanted them here, so what; they * Ludwig von Mises as Social Rationalist, by Joseph T. Salerno assumed a risk in coming, and if } Banking, Nation States and International Politics: A Socio- they now have to return, tough | logical Reconstruction of the Present Economic Order, by luck). If the parents do not provide Hans-Hermann Hoppe for the newcomers, they are free to Nationa! Goods versus Public Goods: Defense, Disarmament, search the world over for employ- | and Free Riders, by Jeffrey Rogers Hummel ers, sellers, or charitable contribu- tors—and a society ruled by the ‘Karl Marx, Communist as Religious Eschatologist, by Murray homesteading ethic would be, as N. Rothbard Conway admits, the most prosper- The Subjectivist Roots of James Buchanan's Economics, by ous one possible. If they still could Thomas J. DiLorenze not find anyone willing to employ, Notes and Comments LC support, or trade with them, why them?” instead of Conway's feeling - Misconceptions about Austrian Business Cycle Theory: A sorry for them? Apparently they Comment, by James Clark and James Keeler must be intolerably unpleasant fel- | lows and had better shape up, or Book Reviews they deserve no other treatment. Understanding: A Phenomenological- Pragmatic Analysis, by Such, in fact, would be my own intu- Gary B. Madison; A Conflict of Visions, hy Thomas Sowell; A itive reaction. Farewell to Marx, by David Conway; The International Political Economy of Coffee, by Richard L. Lucier; and Man, Economy, and Liberty, edited by W. Block and L. Rockwell, Jr. Notes and Transitions Karen Vaughn has stepped down as chair of the Department of Economics at George Mason University. She returns to the Center for the Study of Market Process. Rich- Joseph T. Salerno, professor of economics at Pace University, has been granted tenure at the Lub- lin Busi School of P iversity in New York ard Wagner of the Center for the Study of Public in Business School of Pace University in New Yor Choice is the new chairman at George Mason Univer- City. | | sity. The Center for the Study of Public Choice has launched a new journal, Constitutional Political Economy. It will be edited by Viktor Vanberg and Richard Wagner. Nobel laureate James Buchanan will serve as advisory editor. The interdisciplinary George Selgin, formerly of Hong Kong Univer- sity, is now visiting assistant professor of economics at the University of Georgia. Don Boudreaux, former editor of the AEN, is on journal will be published three times a year as “a leave from George Mason University and the Center forum for papers in the broad area of constitutional for the Study of Market Process to attend the Univer- analysis.” sity of Virginia Law School. The first issue of Cafallaxy was published in John McCallie, former assistant editor of the October 1989. It is a four-page newsletter reporting AEN, is now visiting assistant professor of economics on the activities of the East-West Outreach Program, at the University of Alabama at Birmingham. a joint venture of the Carl Menger Institute (Austria) Mark Thornton, editor of the AEN, has been and the Institute for Humane Studies (USA). Contact named O. P. Alford assistant professor of Austrian either the Institute for Humane Studies or the Carl economics at Auburn University. Menger Institute for more information. 18