Monday, March 29, 2010

The Dehumanizing Pretentions and Inanities of Earth Hour

Environmentalists, in a gesture to spur governments to enact ever more restrictive environmental laws, called on the world to turn off all lights and electrical appliances at 8:30 p.m. local time on Saturday, March 27th. The environmentalists claim that the reduced demand for electricity would cause a significant reduction in greenhouse gases and, thusly, benefit Mother Earth. Many government buildings around the world, from the Mother of all Parliaments in London to the State University in Moscow, went dark, as did offices of major corporations such as Coca Cola on this side of the Pond.

In the 1960’s the term “radical chic” was applied to well-to-do socialites who became enamored with the Black Power movement. These tough-guy and tough-gal wannabes held cocktail parties in upper class New York apartments in order to rub shoulders with thugs advocating the overthrow of legally constituted government. Their dabbling in anti-Americanism was very much like children taking their first roller coaster ride—they got a nice thrill without much concern that there was really any risk involved. The same can be said of those who accede to the demands of the Earth Hour advocates. One can be “earth chic” by turning off the lights for an hour without much concern that the lights will come back on at the flick of a switch later in the evening.

As masters of public relations Earth Hour promoters were careful not to go too far in their demands. For example, they did not advise that governments turn off traffic lights or that hospitals shut off life supporting medical equipment. Nice of them, wouldn’t you say? But what about other uses of electricity? Just where do the Earth Hour advocates draw the line and what is their criterion for doing so?

From a practical point of view, it is hard to believe that electricity generating companies would be able to reduce their output knowing that the lowered demand would last for only one hour. A more likely scenario is that tasks that can be performed at just about any time, such as running the electric clothes dryer, will be bunched into the time frames before or after Earth Hour, causing spikes in peak power demand that would require more not less electric power production.

But let’s play along and say that demand for the one hour of electricity is lost forever along with demand for electricity. We turn out the lights, sit in the dark, and, in effect, lose one hour of our collective lives. What exactly has been accomplished? OK, that may be a little too hard to comprehend, so let’s lengthen the Earth Hour to an entire Earth Day, whereby we turn off all non-essential power usage (however that is defined) for an entire twenty-four hours. Shops close. Restaurants close. Sporting events are cancelled. Cultural centers, museums, grocery stores, laundromats, factories…all close. Surely, electric power production may be reduced by some significant amount, along with a concomitant reduction in greenhouse gases. But this perhaps significant reduction in greenhouse gases has come at the cost of loss of production. And it is production that generates the purchasing power to command consumption. Without sufficient production the lights just may not come on again at the flick of the switch.

Why Man is Different

The philosophical assumption behind Earth Hour is that energy use harms Mother Earth. If this is so, why are traffic lights and life supporting medical devices exempt? If man is harming Mother Earth, he must be stopped! But man is different from other species in his rationality, his free will, and his inherent recognition that by cooperating with other men he can improve his lot above mere existence in a rude, cold, and terrifying state of nature. It is man’s nature to cooperate under the division of labor that has given him all the comforts of modern life that the Earth Hour advocates decry as harmful. They are not. When combined with protection of private property and economic calculation under a money-price system, man reorders nature’s physical properties to produce goods on a sustainable basis.

It is a gross misunderstanding of Nature to claim that it contains only so much quantity of resources and that once employed these resources are lost forever. Nature’s resources are limitless. The physical properties of nature may change, but, as Einstein proved, matter and energy cannot be destroyed. Man’s ability to exploit nature is limited only by his level of technological development and degree of social cooperation.

It is man’s ingenuity that allows him to exploit the hidden utility in what everyone once believed to be useless natural objects. Most of what we today call resources were useless and even hindrances until man processed them in some manner. Oil, uranium, trees, even water are useless until man alters them in some way to make them useful. We have no use for oil that seeps from the ground, uranium that is embedded in rock, standing trees (aside from the few that provide shade over man’s abodes), or water that flows in rivers or stands in lakes. But we do have use for petroleum products of all kinds, uranium to power nuclear reactors, a multitude of wood products, and hydroelectric power and potable tap water. But all of these resources require productive enterprise to make them useful, and that is what the Earth Hour advocates claim is harmful.

The consequence of Earth Hour or a more expansive Earth Day would be to reduce men to the status of the animals, consuming nothing because we produce nothing. But without the ability to engage in capitalistic productive enterprise not even traffic lights and life saving medical devices would be available and not one man in a million currently alive would survive. Neither vote seeking governments nor pandering corporations seeking protection from environmental extremists should succumb to its inhumane pretentions and inanities. So, turn on the lights and enjoy what man has accomplished. Your Mother Earth would be proud of you.

Friday, March 26, 2010

My Latest Letter to the NY Times

From: Patrick Barron
To: NY Times
Sent: Friday, March 26, 2010 1:55 PM
Subject: Don't Dismiss Health Care Bill's Opponents

Re: "The Fight Is Over, the Myths Remain", by Brendan Nyhan

and "Brave New Health Care World", by Gail Collins

Dear Sirs:
In their defense of the health care law, Mr. Nyhan and Ms. Collins just will not recognize that there are any principled objections to this new government intervention into our lives or that there are any substantive concerns about its adverse consequences. Mr. Nyhan dismisses as "myth" the objection that the law is socialistic; he treats all such concerns as mere public relations problems. Ms. Collins portrays the Republicans' last ditch procedural efforts to delay the law's passage as "insane" and "loopy". (Maybe these are pre-existing conditions that Ms. Collins says will be "the coolest spring accessory"). But neither writer is willing to face the many legitimate patient concerns honestly and forthrightly. For example, it is a serious issue if someone besides my doctor or myself is making decisions about my care, which may mean whether I live or die. There is too much empirical evidence to suggest that citizens in countries with decades' experience with national health care do, in fact, have higher death rates from treatable illnesses as a result of rationed care. These questions deserve more adult response than the shallow answers by Mr. Nyhan and Ms. Collins.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa
Iowa City, Iowa

Thursday, March 25, 2010

Use Logic to Understand Economics

The citizenry of the world are being misled by the faulty economic doctrine of Keynesianism, which places consumption as the most important factor in producing prosperity. Business is slow? Then boost spending! Already in debt up to your eyeballs? Then borrow even more! Can’t borrow more? Then lobby the federal government to spend! It is not limited in its spending; it can print all the money that it needs. This is what passes for economic reasoning at the pinnacles of government power throughout the world.

The challenge of understanding economics is that observation of economic activity sheds little light on the “why” of things. If business is slow, observation does little to inform us why business is slow. People aren’t buying; goods are accumulating on shelves; they can be sold only by dropping prices, probably below cost. Our observation and experience tell us that selling below cost is the route to bankruptcy. So, it is easy for government to convince us that deflation—i.e., falling prices—is an evil that must be avoided. Therefore, only the government has the power to boost total spending, clearing the market of unsold goods, and at a profit, too!

Unfortunately, this doesn’t work. Our observation of conditions may be accurate, but a higher level of thinking is required to understand how we came to those conditions and how to correct the problem. This is the role of logic, the foundation of Austrian school economics.

Keynesian economics would place itself solidly within the discipline of the natural sciences, which have gained such a well-deserved reputation since the beginning of the industrial revolution. The natural sciences call upon research based upon observation and empirical testing to arrive at the truth or at least the truth until new observations and new testing arrives at a greater truth. In the natural sciences there is no such thing as irrefutable truth. We may be absolutely certain about physics, medicine, and even mathematics, until some new observation comes along to give us a new truth. An example is that of Einstein supplanting Newtonian physics. So all truth in the natural sciences is conditional and subject to refutation, even though we may believe that there are some things that will never be supplanted. But this just is not the case. It is this wing of science into which the Keynesians have attempted to place all of economics.

Contrary to placing economics in the natural science, observational and testing discipline, the Austrians claim that economics is a social science subject to deductive reasoning. Deductive reasoning requires NO observation and NO testing. If one postulates an irrefutable maxim and deduces other maxims from it in a logical manner, then these other maxims are irrefutable, too. Thusly, we arrive at the truth, and this truth requires no observation.

Here is the primary maxim in Austrian economics, as postulated by Ludwig von Mises—Man Acts. This is an irrefutable maxim, because if one attempts to refute the maxim he has only confirmed it: to refute the maxim that Man Acts is to “act”! The maxim is irrefutable! Furthermore, from this maxim much truth can be implied. For example, we must conclude that man acts purposefully; that is, he is rational and his actions are not merely physiological reflect actions; he acts in the context of time, performing one act ahead of another; he acts out of an understanding of cause and effect, for he believes that prior actions will bring about later desired results; he performs the more important actions ahead of the less important ones; he expects the result of his actions to improve his position in some way; etc., etc..

Let us now turn to how an Austrian would analyze the previously mentioned condition that business is slow. Austrians know that supply and demand constantly move toward equilibrium; this is known as Say’s Law. Therefore, Austrians would ask what external forces intervened to cause a general overabundance of unsold goods. Austrians would examine subsidies that encourage production of more goods of one type at the expense of other goods more desired by the market. This is the case with many agricultural gluts, which have their origin in government subsidy programs. Austrians would examine why costs are so high in relation to what consumers are willing and able to pay. Labor, environmental, safety, and licensing rules would draw their attention.

In other words, Austrian economists would look for the logical causes of undesirable circumstances, which most often reside well in the past. Therefore, the Austrian prescription of what to do differs radically from those of the Keynesians. Austrians would recommend the removal of all obstacles to the smooth interplay of supply and demand in a free market; whereas, the Keynesians would recommend more interventions, such as greater subsidies to more businesses in order to prevent their failure.

There is no doubt that the Keynesian prescription of vigorous, direct action is more appealing, at least in the short run, than the Austrian one of removing the shackles on the smooth running of the market. The Keynesian points to recipients of government bailout money and proclaims that businesses and jobs were saved; the Austrian advises that what is unseen is the price the rest of society pays through monetary debasement. The Keynesian prescription is further boosted by the shameless claim that what we have is a failure of the free market. But no country in the world today has a free market. All are managed, guided, restricted, and encouraged in some form by government. Some markets may be more free than others, and some are freer by some measures and less free by others; for example, some countries may have lower taxes but more stringent labor laws. This merely reflects the internal power politics of given countries.

The challenge to those of us who believe that we understand “real economics” is to recognize the appeal of the Keynesians and counter that appeal with a more powerful one of our own—the appeal to freedom. Keynesianism represents more government intervention and more loss of freedom; Austrian economics represents less government intervention and more freedom. America was founded on the principle that man is born free and that it is the proper role of government to protect his freedom not stifle it. The greatest attack upon our freedom has not come from foreign enemies bearing bombs and guns but from false economic doctrines bearing the poisonous idea that by giving up our economic freedom we will get the greater freedom of economic security. Not only is this a false statement—those countries with the least economic freedom have the least economic security--but freedom itself is indivisible. Economic freedom cannot be separated from political freedom--just try not paying your new healthcare taxes and see what happens!

Wednesday, March 24, 2010

My Letter to the NY Times re: Stifling Free Trade

From: Patrick Barron
To: NY Times
Sent: Wednesday, March 24, 2010 10:02 AM
Subject: A Brilliant Call for Autarky and War

Re: Stifling the Economy, One Argument at a Time, by Robert E. Lighthizer, March 22, 2010

Dear Sirs:
The irony of the title to Mr. Lighthizer's article--Stifling the Economy, One Argument at a Time--is that it applies to HIS arguments and not to those who advocate free trade. Like the front page, above-the-fold report by Mr. Bradsher on March 15, Mr. Lighthizer believes that China is harming others by holding its currency cheap. No, it is harming its own citizens by importing inflation; it is subsidizing its trading partners' lifestyles. It is laughable that Mr. Lighthizer writes that "many economists" believe that China contributed to our housing bubble. Would those be Curly, Moe, and Larry? And what is Mr. Lighthizer's brilliant answer to his upside down view of the world?--Make the rest of the world raise taxes to America's level and make the rest of the world adopt our punishing labor and environmental regulations. Since the rest of the world is unlikely to follow America as we jump off this bridge, Mr. Lighthizer would have us adopt trade barriers, ala Messrs Smoot and Hawley. Americans' view of free trade indeed has been poisoned, as Mr. Lighthizer says, but not by China's trade gap. It has been poisoned by the likes of Mr. Lighthizer himself, whose policies will lead to the same conclusion as did those of Herbert Hoover and FDR--autarky and war.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa

Tuesday, March 23, 2010

My Letter to the NY Times re: China's Currency Manipulation

Re: China Uses Rules on Global Trade to Its Advantage, by Keith Bradsher--March 15, 2010

Dear Sirs:
Mr. Bradsher gets the consequences of state currency manipulation exactly backwards. No country can inflict damage upon another by manipulating its own currency; all harm accrues to the citizens of that country alone. By holding its currency weak, China subsidizes exports at the expense of its own citizens. The citizens of China's trading partners enjoy cheaper and/or better quality goods, while the Chinese experience higher prices due to trading more renmindi for foreign currencies than the unhampered market would allow. In economic terms this is called "importing inflation". Mr. Bradsher makes another crucial error when he makes the claim that "unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China." No, the process is the same, whether within one country or among several countries; that is, that governments cannot increase total demand. Mr. Bradsher describes perfectly the "fallacy of composition", whereby it is assumed that, since a government can shower benefits on one economic entity, it can shower benefits on all economic entities. On the contrary, government spending rewards some at the expense of others. Neither currency manipulation nor government spending will increase resources, but, instead, will transfer them--at a cost, of course--from some segments of the economy to others. The so-called stimulus spending in the United States does not increase total demand within our country any more than China's currency manipulation increases worldwide total demand.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa
Iowa City, Iowa

Friday, March 19, 2010

Fed Chief Wants to Eliminate Bank Reserves

The link below is a transcript of Federal Reserve Chairman Ben Bernanke's Feb 10, 2010 testimony to Congress. The last line of the final note at the end of the letter has the pertinent statement that the Fed may eliminate reserves completely.

Here is my analysis:

With over a trillion dollars in excess reserves right now, the banking system is not limited by reserves. Since its founding in 1913 the Fed has steadily destroyed the public's understanding of real money. Therefore, eliminating reserves fits into the scheme of things as just another move away from any semblance of sound money.

Without reserve requirements, the banking system would have no limits to its manufacture of money; therefore, I see this as a step toward government allocation of credit--the government's ultimate goal. Because the banks would be in a position to expand credit without limit, the government could claim that only it has the foresight and the power to prevent another crisis. This is the banking system as it was practiced during the communist reign in Eastern Europe. I taught many East European bankers at the University of Wisconsin in the late '90's. They related that the role of bankers during the communist era was simply to implement orders from the government; that is, allocate so much credit to the steel industry, so much to agriculture, etc.

If sound money is eliminated and the banks are not required to hold any reserves, there hardly is any other way to conduct banking.

Wednesday, March 10, 2010

My Letter to the Wall Street Journal re: Regulating CDS's

Wednesday, 10Mar10

Dear Sirs:
I see that the government has succeeded in its efforts to focus attention away from itself as the real cause of the financial crisis and onto "evil speculators". The Fed's feckless attempts to create wealth out of paper money was doomed from the start. A false boom ignited by fiat money credit expansion cannot be distinguished from a real economic expansion financed by savings and capital accumulation. Now the government is trying to make everyone believe that a free, capitalist economic system is inherently unstable and an easy victim of unscrupulous villains, when the truth is exactly the opposite.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa, Iowa City, Iowa

Monday, March 1, 2010


The velocity of money is the one of the factors that determines GDP. The well-known formula is GDP = M x V; that is, Gross Domestic Product equals the quantity of Money times its Velocity. Velocity refers to how many times a given quantity of money is spent during the period under consideration, usually one year. Less understood is how changes to money’s velocity come about. The formula makes clear that a decrease in velocity can adversely affect GDP and vice versa. But, that just begs the question, what causes changes in monetary velocity?

The primary determinant of how often a given quantity of money is spent is the desire of the public to hold money; that is, the public’s demand for money. When demand for money is high, meaning that the public wishes to hold more money in the form of cash balances, the velocity of money decreases. Likewise, when the public’s demand for money is low, velocity accelerates. Therefore, we have entered the realm of perception, which is not an exact science in the sense that one can establish a formula of the magnitude and time frame for changes in perception. Nevertheless, it is possible to establish the factors that eventually will change perception and, therefore, will cause the demand for money to increase or decrease.

The demand for money is influenced primarily by the quantity of money. This simple statement reveals something very important—that if the quantity of money changes very little, then the demand for money will change very little and the economy will experience stable conditions. Commodity money—that is, gold and silver—experiences very small changes in its quantity; therefore, one would expect that commodity money velocity would change very little. But even in the days of the gold standard, the demand for money varied. The reason was that the money supply was not backed one hundred percent by gold but, rather, only a fraction of the money supply was backed by gold. The rest of the money supply was anchored in bank loans instead. As banks increased lending during temporary boom times, the quantity of the fiduciary media, as Ludwig von Mises called this money not backed by gold, increased, which caused the demand for money to decrease and money’s velocity to rise. This is the very definition of a boom. However, eventually this increase in the money supply causes prices to rise, among other evils, revealing that the boom is unsustainable. There does not exist any new, real capital to fund it.

When bank loans become uncollectable, the quantity of fiduciary media decreases. Now the demand for money increases dramatically, as the public scrambles to convert their fiduciary media—bank checking accounts now of questionable value—into currency. This increase in the demand for money causes a decrease in money’s velocity, exacerbating the bust. The only way out of this predicament is for prices to fall, so that the remaining, smaller supply of money will be sufficient to allow the market of goods and services to clear.

All this can take quite some time. In today’s fiat money, central bank monetary system the bust phase can be papered over for quite some time with increases in fiduciary media. But the demand for money detects subtle changes, thusly precipitating changes in money’s velocity. For instance, rising prices are a signal to money holders to reduce their demand for money. A reduction in money demand causes its velocity to increase, putting further upward pressure on prices. If there exist other assets in which the public can easily invest, then one would expect to see upward price movements. Stock market and commodity price increases are symptoms of such movements out of money, reflecting reduced demand for money, furthering an increase in money’s velocity.

It is typical of such boom periods that credit is readily available. Businesses, then, are more prone to reduce cash holdings in the certainty that bank loans can be used as a substitute for ready cash to meet business needs. This drop in business demand for holding money is a further spur to an increase in money’s velocity. Furthermore, since central bank manipulation of the interest rate in a downward direction was the precipitous cause of the temporary boom, business has even less incentive to moderate its borrowing in lieu of holding cash. Better to invest in inventories that may rise in value than hold cash, especially when loans not only are easy to obtain but are cheap, too.

Therefore, what economists see as an increase in money’s velocity is actually a rational decision by market participants to reduce their demand for money following central bank intervention to lower the interest rate and ignite a temporary boom. But, when the boom turns to bust, the reverse happens. Now the market demands more cash at a time when fiduciary media is being wiped out by bank loan losses. Prices fall, making it wise to hold cash in the expectation of even further price reductions. Businesses begin to hoard cash when bank lending dries up in the face of falling bank capital ratios due to loan losses. And they stop investing in inventories that become less valuable each day. Finally, the public bails out of a falling stock and commodity market in favor of the comfort of cash holdings. Money velocity drops even more.

In a free market, capitalist economy marked by little government intervention and the existence of sound—that is, commodity—money, the demand for money and its inverse, the velocity of money, are of little interest to economists let alone the public. The demand for money reflects real choices based upon market forces rather than opportunistic or defensive choices based upon wild, temporary swings in economic fortunes based upon government and central bank intervention. Prices change very slowly. Banks are institutions of probity and practice good asset-liability management; that is, they match loan maturities to deposit maturities. This may sound dull to some, but it beats the wild boom/bust cycles that create millionaires one day and paupers the next.