PC Is About Control, Not Etiquette

[This appears appears in the November–December 2015 issue of The Austrian.]

I’d like to speak today about what political correctness is, at least in its modern version, what it is not, and what we might do to fight against it.

To begin, we need to understand that political correctness is not about being nice. It’s not simply a social issue, or a subset of the culture wars.

It’s not about politeness, or inclusiveness, or good manners. It’s not about being respectful toward your fellow humans, and it’s not about being sensitive or caring or avoiding hurt feelings and unpleasant slurs.

But you’ve heard this argument, I’m sure. PC is about simple respect and inclusiveness, they tell us. As though we need progressives, the cultural enforcers, to help us understand that we shouldn’t call someone retarded, or use the “N” word, make hurtful comments about someone’s appearance, or tolerate bullies.

If PC truly was about kindness and respect, it wouldn’t need to be imposed on us. After all, we already have a mechanism for the social cohesion PC is said to represent: it’s called manners. And we already have specific individuals charged with insuring that good manners are instilled and upheld: they’re called parents.

Political Correctness Defined

But what exactly is PC? Let me take a stab at defining it: Political correctness is the conscious, designed manipulation of language intended to change the way people speak, write, think, feel, and act, in furtherance of an agenda.

PC is best understood as propaganda, which is how I suggest we approach it. But unlike propaganda, which historically has been used by governments to win favor for a particular campaign or effort, PC is all-encompassing. It seeks nothing less than to mold us into modern versions of Marx’s un-alienated society man, freed of all his bourgeois pretensions and humdrum social conventions.

Like all propaganda, PC fundamentally is a lie. It is about refusing to deal with the underlying nature of reality, in fact attempting to alter that reality by legislative and social fiat. A is no longer A.

To quote Hans-Hermann Hoppe:

[T]he masters … stipulate that aggression, invasion, murder and war are actually self-defense, whereas self-defense is aggression, invasion, murder and war. Freedom is coercion, and coercion is freedom. … Taxes are voluntary payments, and voluntarily paid prices are exploitative taxes. In a PC world, metaphysics is diverted and rerouted. Truth becomes malleable, to serve a bigger purpose determined by our superiors.

But where did all this come from? Surely PC, in all its various forms, is nothing new under the sun. I think we can safely assume that feudal chiefs, kings, emperors, and politicians have ever and always attempted to control the language, thoughts, and thus the actions of their subjects. Thought police have always existed.

To understand the origins of political correctness, we might look to the aforementioned Marx, and later the Frankfurt school. We might consider the work of Leo Strauss for its impact on the war-hungry think tank world. We might study the deceptive sloganeering of Saul Alinsky. We might mention the French philosopher Foucault, who used the term “political correctness” in the 1960s as a criticism of unscientific dogma.

But if you really want to understand the black art of PC propaganda, let me suggest reading one of its foremost practitioners, Edward Bernays.

Bernays was a remarkable man, someone who literally wrote the book on propaganda and its softer guise of public relations. He is little discussed in the West today, despite being the godfather of modern spin.

He was the nephew of Sigmund Freud, and like Mises was born in Austria in the late nineteenth century. Unlike Mises, however, he fortuitously came to New York City as an infant and then proceeded to live an astonishing 103 years.

One of his first jobs was as a press agent for President Woodrow Wilson’s Committee on Public Information, an agency designed to gin up popular support for US entry into WW1 (German Americans and Irish Americans especially were opposed). It was Bernays who coined the infamous phrase “Make the World Safe for Democracy” used by the committee.

After the war, he asked himself whether one could “apply a similar technique to the problems of peace.” And by “problems,” Bernays meant selling stuff. He directed very successful campaigns promoting Ivory Soap, for bacon and eggs as a healthy breakfast, and ballet. He directed several very successful advertising campaigns, most notably for Lucky Strike in its efforts to make smoking socially acceptable for women.

The Role of “Herd Psychology”

Bernays was quite open and even proud of engaging in the “manufacturing of consent,” a term used by British surgeon and psychologist Wilfred Trotter in his seminal Instincts of the Herd in Peace and War published in 1919.

Bernays took the concept of herd psychology to heart. The herd instinct entails the deep seated psychological need to win approval of one’s social group. The herd overwhelms any other influence; as social humans, our need to fit in is paramount.

But however ingrained, in Bernays’s view the herd instinct cannot be trusted. The herd is irrational and dangerous, and must be steered by wiser men in a thousand imperceptible ways — and this is key. They must not know they are being steered.

The techniques Bernays employed are still very much being used to shape political correctness today.

First, he understood how all-powerful the herd mind and herd instinct really is. We are not the special snowflakes we imagine, according to Bernays. Instead we are timorous and malleable creatures who desperately want to fit in and win acceptance of the group.

Second, he understood the critical importance of using third party authorities to promote causes or products. Celebrities, athletes, models, politicians, and wealthy elites are the people from whom the herd takes its cues, whether they’re endorsing transgender awareness or selling luxury cars. So when George Clooney or Kim Kardashian endorses Hillary Clinton, it resonates with the herd.

Third, he understood the role that emotions play in our tastes and preferences. It’s not a particular candidate or cigarette or a watch or a handbag we really want, it’s the emotional component of the ad that affects us, however subconsciously.

What We Can Do About It

So the question we might ask ourselves is this: how do we fight back against PC? What can we do, as individuals with finite amounts of time and resources, with serious obligations to our families, loved ones, and careers, to reverse the growing tide of darkness?

First, we must understand that we’re in a fight. PC represents a war for our very hearts, minds, and souls. The other side understands this, and so should you. The fight is taking place on multiple fronts: the state-linguistic complex operates not only within government, but also academia, media, the business world, churches and synagogues, nonprofits, and NGOs. So understand the forces aligned against you.

Understand that the PC enforcers are not asking you, they’re not debating you, and they don’t care about your vote. They don’t care whether they can win at the ballot box, or whether they use extralegal means. There are millions of progressives in the US who absolutely would criminalize speech that does not comport with their sense of social justice.

One poll suggests 51 percent of Democrats and 1/3 of all Americans would do just that.

The other side is fighting deliberately and tactically. So realize you’re in a fight, and fight back. Culturally, this really is a matter of life and death.

We Still Have Freedom to Act

As bad as PC contamination may be at this point, we are not like Mises, fleeing a few days ahead of the Nazis. We have tremendous resources at our disposal in a digital age. We can still communicate globally and create communities of outspoken, anti-PC voices. We can still read and share anti-state books and articles. We can still read real history and the great un-PC literary classics. We can still homeschool our kids. We can still hold events like this one today.

This is not to say that bucking PC can’t hurt you: the possible loss of one’s job, reputation, friends, and even family is very serious. But defeatism is never called for, and it makes us unworthy of our ancestors.

Use humor to ridicule PC. PC is absurd, and most people sense it. And its practitioners suffer from a comical lack of self-awareness and irony. Use every tool at your disposal to mock, ridicule, and expose PC for what it is.

Never forget that society can change very rapidly in the wake of certain precipitating events. We certainly all hope that no great calamity strikes America, in the form of an economic collapse, a currency collapse, an inability to provide entitlements and welfare, energy shortages, food and water shortages, natural disasters, or civil unrest. But we can’t discount the possibility of these things happening.

And if they do, I suggest that PC language and PC thinking will be the first ornament of the state to go. Only rich, modern, societies can afford the luxury of a mindset that does not comport with reality, and that mindset will be swiftly swept aside as the “rich” part of America frays.

Men and women might start to rediscover that they need and complement each other if the welfare state breaks down. Endless hours spent on social media might give way to rebuilding social connections that really matter when the chips are down.

More traditional family structures might suddenly seem less oppressive in the face of great economic uncertainty. Schools and universities might rediscover the value of teaching practical skills, instead of whitewashed history and grievance studies. One’s sexual preferences might not loom as large in the scheme of things, certainly not as a source of rights. The rule of law might become something more than an abstraction to be discarded in order to further social justice and deny privilege.

Play the Long Game

I’m afraid it might not be popular to say so, but we have to be prepared for a long and hard campaign. Let’s leave the empty promises of quick fixes to the politicians. Progressives play the long game masterfully. They’ve taken 100 years to ransack our institutions inch by inch. I’m not suggesting incrementalism to reclaim those foregone institutions, which are by all account too far gone — but to create our own.

PC enforcers seek to divide and atomize us, by class, race, sex, and sexuality. So let’s take them up on it. Let’s bypass the institutions controlled by them in favor of our own. Who says we can’t create our own schools, our own churches, our own media, our own literature, and our own civic and social organizations? Starting from scratch certainly is less daunting than fighting PC on its own turf.


PC is a virus that puts us — liberty loving people — on our heels. When we allow progressives to frame the debate and control the narrative, we lose power over our lives. If we don’t address what the state and its agents are doing to control us, we might honestly wonder how much longer organizations like the Mises Institute are going to be free to hold events like this one today.

Is it really that unimaginable that you might wake up one day and find sites with anti-state and anti-egalitarian content blocked — sites like mises.org and lewrockwell.com?

Or that social media outlets like Facebook might simply eliminate opinions not deemed acceptable in the new America?

In fact, head Facebook creep Mark Zuckerberg recently was overheard at a UN summit telling Angela Merkel that he would get to work on suppressing Facebook comments by Germans who have the audacity to object to the government’s handling of migrants.

Here’s the Facebook statement:

We are committed to working closely with the German government on this important issue. We think the best solutions to dealing with people who make racist and xenophobic comments can be found when service providers, government, and civil society all work together to address this common challenge.

Chilling, isn’t it? And coming soon to a server near you, unless we all get busy.

There’s No Such Thing As a Neutral Government

[This article appears in the November–December 2015 issue of The Austrian.]

Peter Simpson is a distinguished classicist and philosopher, known especially for his work on Aristotle’s ethics and politics. (He is also, by the way, a mordant critic of Leo Strauss and his followers.) In Political Illiberalism, he poses a fundamental challenge to philosophical justifications of modern liberalism, culminating in the vastly influential Political Liberalism (1993) of John Rawls. Though Simpson cannot be classed as a libertarian, his bold arguments will be of great use to all of us who, like Lew Rockwell, are Against the State.

According to a familiar tale, states before the inception of liberalism in the seventeenth and eighteenth centuries were fatally flawed. They sought to impose on their subject populations a political and religious orthodoxy. The Protestant Reformation brought some progress, but all too often, control by the monarch replaced dominance by the Catholic Church. Premodern illiberal states “taught and imposed on society a distinctive view of the good life. … Those who disagreed with this view of religion imposed by the state had to be resisted or expelled or incarcerated or killed.”

What was the distinctive contribution of liberalism? According to this view, the state must not rule on the basis of what Rawls calls a “conception of the good.” By this he means a comprehensive view of the good life for human beings. Religions are prime examples of conceptions of the good, but not the only ones. The all-embracing theory of life taught in Soviet Russia in the glory days of Lenin and Stalin would be a secular example of what liberalism deplores and seeks to eradicate.

Instead, liberals maintain, the state must remain neutral in the battle between such competing conceptions of the good. People must be allowed to work out their own salvation, religious or secular, as their own consciences dictate.

The recent Rawlsian account of liberalism rests itself on a notion of a neutral core of morality … which all such visions [of the good] are supposed to be able to accept and live by. … The core morality sets down conditions of respect and tolerance that, while permitting each person to pursue their vision as they wish, forbids them so to pursue it so they forcibly prevent others from pursuing other visions.

What is wrong with that? Is it not simple common sense? Who can reject freedom of conscience?  Simpson exposes a crucial weakness in this seemingly impregnable argument for liberalism. The supposedly neutral state does not ensure freedom of conscience. It itself imposes its own ideology, namely liberalism, on everyone.  The state is not an impartial umpire, standing above competing conceptions of the good: it is a powerful and malevolent force.

The paradox is that while liberalism claims to free people from the oppression of states that impose on everyone the one true doctrine espoused by the state, liberalism itself imposes on everyone such a doctrine: namely liberalism itself. … All those in professedly liberal states who, for whatever reason, do not accept the liberal doctrine, or are suspected of not doing so, become enemies of the state. … The liberal state has proved itself as ruthless against its opponents as any illiberal state is supposed to have done.

Even if Simpson’s argument is right, though, is there not an obvious objection he must confront? Is it not better to have a “neutral” state, which at least professes the ideal of freedom of conscience, than an avowedly ideological state that openly demands conformity?

Simpson has a brilliant response to this objection. The state is not necessary at all. To the contrary, he says, the state is an invention of the modern world. In what sense is this true? Simpson has in mind Max Weber’s famous definition of the state as an organization that claims a monopoly on the legitimate use of force.

Note, too, the novelty of this idea, for what Weber brings to our attention … is the difference between what existed before and what exists now. Before the modern emergence of the state, no institutional structure had a monopoly of coercive enforcement.

In past times, people to a large measure protected their persons and property by their own efforts.

One sign of the accuracy of Weber’s definition [of the modern state] is the absence of organized police forces in the pre-modern world. … The functions we now depute exclusively to the police were performed previously by the citizens, who relied on themselves and their relatives and friends for the enforcement of rights and for defense and protection.

In the face of the tyrannical contemporary state, Simpson places special emphasis on the private ownership of guns.

Weapons of self-defense … and nowadays primarily guns, belong naturally to the family. … By the situation of present times, the first defense is against the state. … Weapons, therefore, naturally belong in the hands of the people, and it is intrinsically unjust for any higher authority to confiscate or forbid them.

The monopoly state, supposedly needed to protect us, harms rather than benefits us. The record of the state is no better in foreign affairs. The modern liberal state has brought death and destruction, far more than it has protected us from foreign invaders.

One cannot even say that it was the totalitarian and not the liberal version of the state that caused total war. In the world wars of the twentieth century that were fought between liberal and totalitarian states, the liberal states caused at least as much death and destruction as the totalitarian ones, and these liberal states also pursued war when the totalitarian ones would have preferred peace. … So how, then, is liberalism better as regards war, since all systems will fight when they think they must? The only difference seems to be that liberalism will fight total wars, while most of these other systems will not be able to,  which is an argument against liberalism and the state, not for them.

In his account of the rise of the state and the ideology that purports to justify it, Simpson brings to the fore the philosophy of Hegel, who remarked that the state “is the march of God in the world.” I would add to Simpson’s fine discussion that Hegel, incredibly, regarded the decline of the “divided conscience,” when the Church was an independent source of authority apart from the monarch, as a part of the growth of freedom. Now people were “free” to obey the state, without the distraction of a competing authority.

Simpson applies his anti-state perspective to American history. He does not view the Constitution with favor. Its adoption was a coup for centralizers and a blow against the dispersal of power.

The Constitution, therefore, makes two different changes [from the Articles of Confederation] at the same time: from a league to a national government and from a congress of delegates to a congress  of individuals whose collective power, because it is the coercive power of the state and because in extremis it is unlimited, amounts to autocracy or despotism.

Simpson highlights to great effect the warnings of the Anti-Federalists against the potential for tyranny inherent in the Constitution.

The Anti-Federalists knew far more about political realities than the Federalists did, or at least that the Federalists admitted (for one may suspect that the actual results that the Ant-Federalists foresaw and feared were foreseen and perhaps in part welcomed by the Federalists).

As mentioned earlier, Simpson is no libertarian; and Austrians and libertarians will differ with some of his remarks about the economy. It is all the more remarkable, then, that Simpson’s views on the state converge so substantially with views that we at the Mises Institute have long defended. In our efforts to do so, we now have the help of the arguments of this original thinker and distinguished scholar.

Poland, Free Markets, and the Eurozone

Mateusz Machaj is a former Mises Fellow, the founder of Mises Institute Poland, and is assistant professor at the Institute of Economic Sciences at the University of Wroclaw in Wroclaw, Poland.

He spoke with us recently about his work at the Mises Institute and the state of free-market thinking in Poland. An excerpt of this interview appeared in July/August issue of The Austrian.

The Austrian: Why did you decide to apply for a Mises Institute fellowship?

Mateusz Machaj: The summer fellowship program is the best place on Earth to take the first steps in developing your career and learning how to do scientific research. The fellowship program and Mises University are of incredible value for young scholars, and it is impossible to overstate their importance. The online resources, books, and articles of the Mises Institute are definitely the building blocks of our knowledge, yet I found personal interaction with the Mises faculty to really be key in advancing my knowledge. Once we learn anything it is necessary to share our thoughts, insights, and discuss them with our teachers, mentors, and other students. The publications at the Institute are the bricks, but the summer programs are the necessary mortar.

TA: Why did you decide to obtain a PhD? What role, if any did the Mises Institute play in the direction of your academic studies?

MM: I decided to take the academic route, because I am passionate about economics as a discipline. The Mises Institute was the main factor in sparking that passion, first as a supplier of the online library, and then as a sponsor of my attendance at the summer programs. When I first came to Mises University I already knew almost all of the lectures (because I had watched them online in the previous years), but it was my personal interactions with students and scholars at the Institute that were a key stimulus for further studies. Then, I was fortunate enough to work as a summer fellow under the supportive guidance of Professor Salerno. Most of the work on my PhD thesis was done within the walls of the Mises Institute. The Institute is truly the “indispensable framework,” to borrow a phrase from Rothbard.

TA: What research topics are you working on right now?

MM: Currently I am working on monetary policy, which has become even more important to the global economy thanks to the rise of “special” monetary policy. Once upon a time, the debate was dominated by “conventional” monetary policy, which, according to the mainstream, should be performed in “normal” times, and applied according to certain guidelines such as the Taylor Rule. More and more, however, monetary policy consists of “special” monetary tools — which we might call “Bernanke Bazookas” — that are nearly turning the central banks into financial pawnshops ready to supply additional liquidity in exchange for almost anything.

The tools are special because with their usage, central banks are beginning to flirt with zero interest rate ideas and other monetary-crank proposals. In the light of recent rage against the money printing machines, both topics deserve a careful scrutiny. Especially because there is lots of demagoguery and amateurish criticism of monetary policy out there.

TA: What is the state of free-market thinking in Poland?

MM: Younger people are very interested in the pro-market ideas. We have two very unique programs at the Polish Mises Institute, for example. The first one is composed of the Austrian Economics Clubs which are at the main Polish universities that focus on economics, and they attract young and intelligent people.

We also prepare lesson plans and curricula for teaching economics at high schools. Currently, we are attempting to create a free-of-charge online elementary book for this subject, as well. Both of the programs are very successful, and younger people who are genuinely interested in economics are usually seduced by the Austrian approach. This can be seen in the demand for our Austrian books. We already publish a dozen of them, and we thank the Mises Institute for most of the content.

TA: Why did you decide to start Poland’s Mises Institute?

MM: Austrian economics is the best way to learn good economics. Moreover, I believe that even if one dislikes the ideologies of Mises, Rothbard, and Hayek, the works of those thinkers are the best place to start to learn economics.

This is especially true of Rothbard. Man, Economy, and State is the best introduction to pricing theory, bargaining theory, production theory, competition theory, monetary theory, etc. I think even the opponents of free markets would do well to start with reading Rothbard, because he is the Mozart of economics.

You may prefer to play Wagner, but Eine Kleine Nachtmusik is where you should start. Similarly the Austrians are the best way to study economics, even when one disagrees with some of their premises. They are so much better in explaining the basics of economics than the mainstream textbooks, and no one comes near the writing and lecturing skills of many Austrians.

TA: Some eastern European countries, such as Estonia and Slovakia, have a reputation for continuing to liberalize their economies long after the fall of communism. Does Poland have a similar reputation?

MM: In the case of Poland, the glass is one-third full and two-thirds empty. There are two ways of comparing transformation economies. You can compare Poland to Russia, Belarus, and Ukraine. In those comparisons, Poland’s transformation is a huge success. On the other hand, you can compare Poland to developed Western economies, and then we see huge deficiencies and unfinished reforms. And let us remember that Germany, the United Kingdom, and the United States are very far from any free market paradise.

In terms of broadly defined economic freedom, Poland is behind the Western countries. In comparison, what is particularly burdensome is higher regime uncertainty due to a less predictable (and relatively more oppressive) legal system.

TA: With all the news about the eurozone lately, I have to ask if Poland will be adopting the euro soon. Is there a lot of local support for this?

MM: There’s not really much local support for the euro right now. The recent economic crisis has effectively killed any quest for quick adoption of the euro in Poland. Even the supporters of the euro currency are saying that the eurozone first needs to fix itself, before Poland joins the zone. Let us all hope the euro fixes itself permanently and fully — to gold of course.

How Chicago “Works”: Tax and Graft; Who Benefits?

On October 28, the Chicago City Council passed the largest property-tax hike in modern city history by a vote of 36-14, approving Mayor Rahm Emanuel’s 2016 budget proposal.

Taxpayers will have to fork over another $588 million property-tax hike to be phased in over the next four years.

Some businesses and taxpayers will simply flee, joining what now is best viewed as the “Great Illinois Exodus”.

Taxpayers Lose, Who Wins?

Someone always benefits from these tax-and-spend schemes. Who is it?

The Illinois Policy Institute has the answer in Meet the politicians who stand to get rich off of Chicago’s massive property-tax hike.

The Players

As the tax hikes hit Chicago families and businesses, a who’s who of the state’s political machine will continue to line their pockets off of a property-tax game in which their connections are priced at a premium.

Illinois House Speaker Mike Madigan and Chicago Alderman Ed Burke both run law firms specializing in the lucrative field of Cook County property-tax appeals, one of the most inefficient, corrupt systems in urban politics. Illinois Senate President John Cullerton is a member of a large law firm that handles a range of issues, including property-tax law. The three have held political office in Illinois for a combined 126 years.

The Game

The property-tax-assessment process in Cook County is convoluted by design. But here’s how it works in simple terms:

First, the Cook County Assessor’s Office assesses the value of every property in the county. The value of any given property is reassessed once every three years. This “assessed value” is then used to calculate the property taxes owed by each property owner.

Property owners can then appeal that assessed value in a number of ways. They can file a request with the assessor asking for a reduction, appeal the valuation to the Cook County Board of Review, file a lawsuit in which a judge will decide the value, or the property owner and the Cook County State’s Attorney will enter into a settlement agreement over the value.

Flawed property valuations and the process required to fix them are a cash cow for law firms, including those of Madigan, Burke and Cullerton, which know what strings to pull. These law firms handle the ways in which the assessed value of a property is appealed: the request with the assessor, the appeal to the Cook County Board of Review, and lawsuits.

The Cook County Board of Review – which exists solely to field appeals for assessments by the Cook County Assessor’s Office – processed appeals for more than 400,000 properties in 2013.

What doesn’t add up is nearly two-thirds of those appeals were successful: an astonishing number that reveals a faulty assessment process ripe for savvy attorneys.

Choose not to appeal your assessment and the government pockets the extra money. Choose to hire a politically connected law firm and that law firm typically pockets anywhere from 25 to 50 percent of the “winnings.” And each reduction for a politically connected business means an increase in property taxes for those lacking the right political connections.

Investigative reporting from the Illinois News Network revealed Madigan’s six-person firm, Madigan & Getzendanner, earned close to $10 million in tax refunds for its clients from April 2013 through April 2014. Madigan’s spokesperson Steve Brown has said that the House speakers’ law firm, which services mainly commercial clients, charges a flat fee for its services. The Chicago Sun-Times’ Tim Novak broke the story in 2014 that Madigan’s firm had saved Mesirow Financial Services $1.7 million dollars by slashing the valuation of its River North headquarters by 60 percent. Mesirow manages $300 million in state pension funds and employs Madigan’s son, Andrew.

Every year from 2010 to 2014, Cook County Assessor and Democratic Party Chairman Joseph Berrios declared the building that housed Mesirow was worth at least $330 million. In each of those years, Madigan’s law firm successfully contested that valuation to the tune of $5 million in tax breaks annually, according to Novak’s research.

That’s the game in a nutshell.

Other Winners

In addition to politically connected law firms specializing in tax appeals, the public unions benefit, and corrupt politicians who support tax hikes to buy votes from public unions also win.

The losers are the businesses and taxpayers in Illinois.

Great Illinois Exodus

In increasing numbers, residents and businesses have voted with their feet as noted in Get Me the Hell Out of Here.

For further discussion, please see …


Mike “Mish” Shedlock

Why Capitalists Are Repeatedly “Fooled” By Business Cycles

According to the Austrian business cycle theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that — prior to the lowering of interest rates —weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

As a rule, businessmen discover their error once the central bank — which was instrumental in the artificial lowering of interest rates — reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust.

From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest rate stance.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates.

Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates.

Correct expectations will undo or neutralize the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates.

Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena. According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.

Even Mises himself had conceded that it is possible that some time in the future businessmen will stop responding to loose monetary policy thereby preventing the setting in motion of the boom-bust cycle. In his reply to Lachmann (Economica, August 1943) Mises wrote,

It may be that businessmen will in the future react to credit expansion in another manner than they did in the past. It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom. Some signs forebode such a change. But it is too early to make a positive statement.

Do Expectations Matter?

According to the critics then, if businessmen were to anticipate that the artificial lowering of interest rates is likely to be followed some time in the future by a tighter interest rate stance, their conduct in response to this anticipation will neutralize the occurrence of the boom-bust cycle phenomenon. But is it true that businessmen are likely to act on correct expectations as critics are suggesting?

Furthermore, the key to business cycles is not just businessmen’s conduct but also the conduct of consumers in response to the artificial lowering of interest rates — after all, businessmen adjust their activities in accordance with expected consumer demand. So on this ground one could generalize and suggest that correct expectations by people in an economy should prevent the boom-bust cycle phenomenon. But would it?

For instance, if an individual John, as a result of a loose central bank stance, could lower his interest rate payment on his mortgage why would he refuse to do that even if he knows that a lower interest rate leads to boom-bust cycles?

As an individual the only concern John has is his own well being. By paying less interest on his existent debt John’s means have now expanded. He can now afford various ends that previously he couldn’t undertake.

As a result of the central bank’s easy stance the demand for John’s goods and services and other mortgage holders has risen. (Again it must be realized that all this couldn’t have taken place without the support from the central bank, which accommodates the lower interest rate stance.)

Now, the job of a businessman is to cater to consumers’ future requirements. So whenever he observes a lowering in interest rates he knows that this most likely will provide a boost to the demand for various goods and services in the months ahead.

Hence if he wants to make a profit he would have to make the necessary arrangements to meet the future demand.

For instance, if a builder refuses to act on the likely increase in the demand for houses because he believes that this is on account of the loose monetary policy of the central bank and cannot be sustainable, then he will be out of business very quickly.

To be in the building business means that he must be in tune with the demand for housing. Likewise any other businessman in a given field will have to respond to the likely changes in demand in the area of his involvement if he wants to stay in business.

A businessman has only two options — either to be in a particular business or not to be there at all. Once he has decided to be in a given business this means that the businessman is likely to cater for changes in the demand for goods and services in this particular business irrespective of the underlying causes behind changes in demand.

Failing to do so will put him out of business very quickly. Now, regardless of expectations once the central bank tightens its stance most businessmen will “get caught.” A tighter stance will undermine demand for goods and services and this will put pressure on various business activities that sprang up while the interest rate stance was loose. An economic bust emerges.

We can conclude that correct expectations cannot prevent boom-bust cycles once the central bank has eased its interest rate stance. The only way to stop the menace of boom-bust cycles is for the central bank to stop the tampering with financial markets. As a rule however, central banks respond to the bust by again loosening their stance and thereby starting the new boom-bust cycle phase.

Get More Bang for Your Buck

If you missed it, Forbes recently reported that a college ranking organization has named the Mises Institute as the #9 most influential think tank in the United States — out of nearly 2,000 organizations!

All of the other top 10 organizations — among them the neocon American Enterprise Institute, the Fed-loving Brookings Institution, the Heritage Foundation, and the Cato Institute — have budgets and staffs vastly larger than ours. Yet our web traffic, name ID, reputation, and influence rival the biggest Beltway outfits.

Here’s what Forbes had to say:

In addition to the superb collection of scholarly books and studies in the Austrian tradition, especially by Ludwig von Mises, Murray Rothbard, and their disciples, Mises Institute sometimes releases provocative articles, defying political correctness and attracting wide readership. This increases its social media impact, but who is to say that think tanks were only created to influence the academic and policy elites?

As blogger Ryan Griggs puts it:

the Mises Institute is the “top pound for pound — or influence per dollar of revenue — educational and research institution in the country. … Simply put, Mises does more with less than all the rest.”

Of course the Mises Institute is not really a think tank at all. We’re not interested in “public policy,” we don’t provide intellectual cover for dubious legislation, we don’t court one faction or another in Congress, and we surely don’t support parties or candidates.

But if you’re reading this, you’re likely already familiar with the Mises Institute and what we do. That’s why we’re asking for your help. We need you to join us as a member, to consider donating, and to ask as many liberty-minded friends and family to do the same.

With an election year looming, our mission of winning hearts and minds is increasingly urgent. The 2016 presidential race is already a horror show, filled with statist platitudes, divisive rhetoric, warmongering, and mind-numbing repetitions of economic fallacies.

You know there’s a better way. America doesn’t need a central state, it doesn’t need a central bank, it doesn’t need a political class, and in fact it doesn’t need politics at all. It certainly doesn’t need an endless election season. What it needs is the peaceful and cooperative power of an unleashed market economy, coupled with a commitment to nonintervention in the affairs of other nations.

Will you help the Mises Institute stand as an intellectual counter to the political rhetoric and the false Left/Right dichotomy? Is there a single organization better suited to use the 2016 election as a platform to call for the rejection of politics as the means of organizing society?

That’s why we’re asking you to join us as a member if you haven’t already, and to help us enlist as many new members as possible in the coming year. It’s only $60 a year — ($5 a month!) and the benefits are tangible:

Join a Community. Join us and become part of the Austro-libertarian intellectual revolution taking hold around the world. Your membership puts you at the forefront as a radical and uncompromising advocate for Austrian economics and liberty: pro-market, pro-peace, anti-state, anti-Fed, anti-PC. And many of our members make professional contacts and lifelong friends through the Institute.Amplify Your Voice. Our website, live events, and academic conferences reach more than 4 million people every year. By engaging with the Mises Institute, the diffuse voices of libertarians around the world are concentrated, focused, and amplified.Arm Yourself Intellectually. Our daily articles, blog, social media feeds, and videos provide you with a steady source of Austrian and libertarian content to demolish progressive myths and interventionist disinformation. Our online library of foundational books — by giants like Mises, Rothbard, and Hoppe — is the biggest and best source for Austrian and libertarian literature in the world. Mises.org provides millions of people with a lifetime of free learning at their fingertips.Defy the State. More than anything, the state seeks to dumb us down and force young people into schools that are hostile to liberty and market economics. Mises University, Mises Academy, and our high school seminars teach thousands of students from around the world real economics, real history, and real philosophy. Those students tell us their lives changed forever by attending Mises Institute events, and they’re now deployed in business, academia, Wall Street, and the tech world. There’s nothing like our week-long Mises University available anywhere else, and it’s our most important program.

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When Medical Doctors Are Entrepreneurs

In this article, I wish to introduce the reader to the theory of entrepreneurship advanced by Frank Knight (1885–1972), and show that the common, everyday work of the physician could be considered a form of entrepreneurial activity in the Knightian sense.

Knight was an influential American economist. He is best known for his book Risk, Uncertainty, and Profit in which he proposed to distinguish risk and uncertainty as follows: Risk pertains to situations where outcomes occur with a frequency that is quantifiable according to probability distributions.

Risk may be mathematical and a priori knowable, meaning that the probability function that governs the outcome is known with certainty, as in the case of a coin toss (assuming the coin to be well balanced).

Risk may also be statistical, where the outcome can be estimated according to an empirically discoverable probability function. This is the case in situations where we know the set of possible outcomes and can make observations under controlled conditions to determine the probability of occurrence of each outcome.

Uncertainty, on the other hand, pertains to situations where the probability of an outcome cannot be quantified in any meaningful way. The situation is such that we don’t even know the set of all possible outcomes, let alone what numerical probabilities to assign to those outcomes. Knight believed that most situations involving human beings fall under the category of uncertainty.

Knight’s great insight was to recognize that the economic role of the entrepreneur is to shoulder uncertainty. He does so not by calculating risk, but by exercising judgment. And, as Professor Peter Klein has noted, the entrepreneurial judgment is not “contractable,” because the entrepreneur cannot articulate his belief about uncertainty in a way that can be communicated and become subject to market exchange. Instead, the economic entrepreneur must directly invest in material resources and modify them for productive use.

It is in this direct involvement with resources that the entrepreneur shoulders the uncertainty and communicates his or her judgment. Of course, some risk calculation may take place and be taken into account if the entrepreneur has some knowledge of the probability of certain outcomes, but the entrepreneurial action is ultimately in the entrepreneur’s direct investment in the resources at hand. A correct exercise of judgment returns an entrepreneurial profit, while an error in judgment incurs a loss.

Medical Uncertainty and the Physician

Are medical situations good examples of Knightian uncertainty? On the one hand, we may all agree that each human being is unique, unpredictable, and unrepeatable. On the other hand, much of medical practice is now guided by predictive analytics, by the examination of risk factors, and by the calculation of probability for certain outcomes, determined through ever more sophisticated epidemiological studies and clinical trials. And the use of predictive analytics is now sanctioned by “pay-for-performance” schemes to entice doctors to treat according to statistically-based algorithms.

Has modern outcomes research conquered Knightian uncertainty and provided clinicians with reliable statistical models with which medical treatment can be determined?

I don’t believe it has. How could it?

George is in my office and I ponder whether he should take a statin drug to manage his cholesterol and future risk of a heart attack. The studies that I should rely upon to make my decision have not enrolled George, of course. At best, they have enrolled someone “like” George: same age, gender, baseline blood cholesterol level, blood pressure, and perhaps a few other traits.

In other words, the claim of “likeness” that should convince me to apply statistical probabilities to George requires me to turn George into a stick figure of risk factors, a “profile,” an abstraction that overlooks everything else about him that makes him George and not someone else.

Perhaps George will respond well to the drug, or perhaps he will not. As far as his personal outcome is concerned, the statistics are meaningless.

And this is not news to statisticians. Richard von Mises (Ludwig von Mises’s younger brother), a renowned mid-twentieth century Harvard statistician, put it in no uncertain terms:

We can say nothing about the probability of death of an individual even if we know his condition of life and health in detail. The phrase “probability of death,” when it refers to a single person, has no meaning at all for us.

Is there no meaning and value, then, in the clinical trials and large epidemiological studies? Of course, there is. Those studies do provide useful information about the frequency at which certain outcomes occur — good or bad. Those outcomes are the ones that the study designers have chosen to record and tally.

But when applied to the patient, such epidemiological information is limited and cannot determine the course of action to take. There is much inherent residual uncertainty.

Are doctors then paralyzed or impotent in the face of the unknowable future? Of course not, and that’s where Knight’s insights may be so valuable. For by analogy with the economic entrepreneur, we may conceive of the physician as a health entrepreneur, shouldering on behalf of the patient the inherent uncertainty associated with an illness.

Like the economic entrepreneur, doctors take into account not only quantifiable knowledge, but also locally obtained, tacit knowledge. This is a concept that we associate with F.A. Hayek, but a similar idea has been validated recently by psychologist Gary Klein in his studies on how experts — including doctors — make decisions. The totality of available knowledge is used, explicit and implicit. And we could push the analogy of the physician as health entrepreneur further if we recognize that, in a praxeological sense, the patient gives up ownership, or cedes control, of his or her body to the doctor.

Like the economic entrepreneur, the physician is now directly invested in the outcome for that body. It is through that investment that the physician communicates his or her clinical judgment, a judgment that, as Knight would think, cannot be properly articulated.

Entrepreneurship and the Healthcare System

Is this understanding of the entrepreneurial nature of medical care an academic exercise? Not if we consider the extent to which the healthcare systems runs counter to it.

For doctors are precisely asked to communicate, for the benefit of third parties, and through endless documentation and arcane coding, an exercise in judgment which is inherently unsuited for linguistic or numerical articulation.

And this demand to articulate the inarticulable is not only a distraction and a drain on the doctor’s time, but also a misleading influence on her thinking, forcing her to translate the uncertainty of medicine into a false representation that soon becomes reality: physicians, patients, and payers all get lured into mistaking the illness experience for its coded description.

We should also be mindful that third-party payers do not bear ultimate responsibility for divorcing medical care from its reality. In fact, third-party payment systems arose precisely because the medical community, in a certain sense, has made the claim that the medical enterprise could be articulated. Third-party payment systems would not have emerged if the medical community did not agree that medical care is “contractable” (a concept that finds its ultimate legal foundation in licensing laws).

A Need for More Research

The idea that medical care has an entrepreneurial nature may seem novel, but that is mostly because our understanding of the entrepreneur is still embryonic. Economic science has neglected Knight’s theory of the entrepreneur for decades, focusing instead on the development of predictive models and econometric tools. Likewise, medical science has strongly favored predictive analysis, and it is no surprise, though still uncanny, that economic systems and healthcare systems share similar dysfunctions.

It is only in recent years that work by Peter Klein and others have rekindled interest in a proper understanding of the entrepreneur and of the entrepreneurial role of the business firm. I hope similar work can also shed light on a proper understanding of the doctor, the doctor-patient relationship, and the entrepreneurial work involved in the restoration of health.

That would really be a disruptive innovation.

A Will To Peace

[This is an excerpt from John Denson’s book A Century of War: Lincoln, Wilson and Roosevelt.]

The Christmas Truce, which occurred primarily between the British and German soldiers along the Western Front in December 1914, is an event the official histories of the “Great War” leave out, and the Orwellian historians hide from the public. Stanley Weintraub has broken through this barrier of silence and written a moving account of this significant event by compiling letters sent home from the front, as well as diaries of the soldiers involved. His book is entitled Silent Night: The Story of the World War I Christmas Truce. The book contains many pictures of the actual events showing the opposing forces mixing and celebrating together that first Christmas of the war. This remarkable story begins to unfold, according to Weintraub, on the morning of December 19, 1914:

Lieutenant Geoffrey Heinekey, new to the 2nd Queen’s Westminister Rifles, wrote to his mother, “A most extraordinary thing happened. … Some Germans came out and held up their hands and began to take in some of their wounded and so we ourselves immediately got out of our trenches and began bringing in our wounded also. The Germans then beckoned to us and a lot of us went over and talked to them and they helped us to bury our dead. This lasted the whole morning and I talked to several of them and I must say they seemed extraordinarily fine men. … It seemed too ironical for words. There, the night before we had been having a terrific battle and the morning after, there we were smoking their cigarettes and they smoking ours.”

Weintraub reports that the French and Belgians reacted differently to the war and with more emotion than the British in the beginning. The war was occurring on their land and “The French had lived in an atmosphere of revanche since 1870, when Alsace and Lorraine were seized by the Prussians” in a war declared by the French. The British and German soldiers, however, saw little meaning in the war as to them, and, after all, the British King and the German Kaiser were both grandsons of Queen Victoria. Why should the Germans and British be at war, or hating each other, because a royal couple from Austria were killed by an assassin while they were visiting in Bosnia? However, since August when the war started, hundreds of thousands of soldiers had been killed, wounded or missing by December 1914.

It is estimated that over eight thousand young Germans had gone to England before the war to be employed in such jobs as waiters, cooks, and cab drivers and many spoke English very well. It appears that the Germans were the instigators of this move toward a truce. So much interchange had occurred across the lines by the time that Christmas Eve approached that Brigadier General G.T. Forrestier-Walker issued a directive forbidding fraternization:

For it discourages initiative in commanders, and destroys offensive spirit in all ranks. … Friendly intercourse with the enemy, unofficial armistices and exchange of tobacco and other comforts, however tempting and occasionally amusing they may be, are absolutely prohibited.

Later strict orders were issued that any fraternization would result in a court-martial. Most of the seasoned German soldiers had been sent to the Russian front while the youthful and somewhat untrained Germans, who were recruited first, or quickly volunteered, were sent to the Western Front at the beginning of the war. Likewise, in England young men rushed to join in the war for the personal glory they thought they might achieve and many were afraid the war might end before they could get to the front. They had no idea this war would become one of attrition and conscription or that it would set the trend for the whole twentieth century, the bloodiest in history which became known as the War and Welfare Century.

As night fell on Christmas Eve the British soldiers noticed the Germans putting up small Christmas trees along with candles at the top of their trenches and many began to shout in English “We no shoot if you no shoot.” The firing stopped along the many miles of the trenches and the British began to notice that the Germans were coming out of the trenches toward the British who responded by coming out to meet them. They mixed and mingled in No Man’s Land and soon began to exchange chocolates for cigars and various newspaper accounts of the war which contained the propaganda from their respective homelands. Many of the officers on each side attempted to prevent the event from occurring but the soldiers ignored the risk of a court-martial or of being shot.

Some of the meetings reported in diaries were between Anglo-Saxons and German Saxons and the Germans joked that they should join together and fight the Prussians. The massive amount of fraternization, or maybe just the Christmas spirit, deterred the officers from taking action and many of them began to go out into No Man’s Land and exchange Christmas greetings with their opposing officers. Each side helped bury their dead and remove the wounded so that by Christmas morning there was a large open area about as wide as the size of two football fields separating the opposing trenches. The soldiers emerged again on Christmas morning and began singing Christmas carols, especially “Silent Night.” They recited the 23rd Psalm together and played soccer and football. Again, Christmas gifts were exchanged and meals were prepared openly and attended by the opposing forces. Weintraub quotes one soldier’s observation of the event: “Never … was I so keenly aware of the insanity of war.”

The first official British history of the war came out in 1926 which indicated that the Christmas Truce was a very insignificant matter with only a few people involved. However, Weintraub states:

During a House of Commons debate on March 31, 1930, Sir H. Kingsley Wood, a Cabinet Minister during the next war, and a Major “In the front trenches” at Christmas 1914, recalled that he “took part in what was well known at the time as a truce. We went over in front of the trenches and shook hands with many of our German enemies. A great number of people [now] think we did something that was degrading.” Refusing to presume that, he went on, “The fact is that we did it, and I then came to the conclusion that I have held very firmly ever since, that if we had been left to ourselves there would never have been another shot fired. For a fortnight the truce went on. We were on the most friendly terms, and it was only the fact that we were being controlled by others that made it necessary for us to start trying to shoot one another again.” He blamed the resumption of the war on “the grip of the political system which was bad, and I and others who were there at the time determined there and then never to rest. … Until we had seen whether we could change it.” But they could not.

Beginning with the French Revolution, one of the main ideas coming out of the nineteenth century, which became dominant at the beginning of the twentieth century, was nationalism with unrestrained democracy. In contrast, the ideas which led to the American Revolution were those of a federation of sovereign states joined together under the Constitution which severely limited and separated the powers of the national or central government in order to protect individual liberty. National democracy was restrained by a Bill of Rights. These ideas came into direct conflict with the beginning of the American War Between the States out of which nationalism emerged victorious. A principal idea of nationalism was that the individual owed a duty of self-sacrifice to “The Greater Good” of his nation and that the noblest act a person could do was to give his life for his country during a war, which would, in turn, bring him immortal fame.

Two soldiers, one British and one German, both experienced the horrors of the trench warfare in the Great War and both wrote moving accounts which challenged the idea of the glory of a sacrifice of the individual to the nation in an unnecessary or unjust war. The British soldier, Wilfred Owen, wrote a famous poem before he was killed in the trenches seven days before the Armistice was signed on November 11, 1918. He tells of the horror of the gas warfare which killed many in the trenches and ends with the following lines:

If in some smothering dreams you too could paceBehind the wagon that we flung him in,And watch the white eyes writhing in his face,His hanging face, like a devil’s sick of sin;If you could hear, at every jolt, the bloodCome gargling from the froth-corrupted lungs,Obscene as cancer, bitter as the cudOf vile, incurable sores on innocent tongues—My friend, you would not tell with such high zestTo children ardent for some desperate gloryThe old Lie: Dulce et decorum est Pro patria mori.The Latin phrase is translated roughly as “It is sweet and honorable to die for one’s country,” a line from the Roman poet Horace used to produce patriotic zeal for ancient Roman wars.

The German soldier was Erich M. Remarque who wrote one of the best anti-war novels of all time, entitled All Quiet On The Western Front, which was later made into an American movie that won the 1930 Academy Award for Best Picture. He also attacked the idea of the nobility of dying for your country in an unnecessary war and he describes the suffering in the trenches:

We see men living with their skulls blown open; We see soldiers run with their two feet cut off; They stagger on their splintered stumps into the next shell-hole; A lance corporal crawls a mile and half on his hands dragging his smashed knee after him; Another goes to the dressing station and over his clasped hands bulge his intestines; We see men without mouths, without jaws, without faces; We find one man who has held the artery of his arm in his teeth for two hours in order not to bleed to death.

Thomas Hardy’s poem “The Man He Killed,” was published in 1902 and was inspired by the Boer War but it captures the spirit of the Christmas Truce in 1914:

Had he and I but metBy some old ancient inn,We should have sat us down to wetRight many a nipperkin!But ranged as infantry,And staring face to face,I shot at him as he at me,And killed him in his place.I shot him dead because—Because he was my foe,Just so: my foe of course he was;That’s clear enough; althoughHe thought he’d ‘list, perhaps,Off-hand like—just as I—Was out of work — had sold his traps—No other reason why.Yes, quaint and curious war is!You shoot a fellow downYou’d treat if met where any bar is,Or help to half-a-crown.

The last chapter of Weintraub’s book is entitled “What If— ?” This is counterfactual history at its best and he sets out what he believes the rest of the twentieth century would have been like if the soldiers had been able to cause the Christmas Truce of 1914 to stop the war at that point. Like many other historians, he believes that with an early end of the war in December of 1914, there probably would have been no Russian Revolution, no Communism, no Lenin, and no Stalin. Furthermore, there would have been no vicious peace imposed on Germany by the Versailles Treaty, and therefore, no Hitler, no Nazism, and no World War II. With the early truce there would have been no entry of America into the European War and America might have had a chance to remain, or return, to being a Republic rather than moving toward World War II, the “Cold” War (Korea and Vietnam), and our present status as the world bully.

Weintraub states that:

Franklin D. Roosevelt, only an obscure assistant secretary of the navy — of a fleet going nowhere militarily — would have returned to a boring law practice, and never have been the losing but attractive vice presidential candidate in 1920, a role earned by his war visibility. Wilson, who would not be campaigning for reelection in 1916 on a platform that he kept America out of war, would have lost (he only won narrowly) to a powerful new Republican president, Charles Evans Hughes.

He also suggests another result of the early peace:

Germany in peace rather than war would have become the dominant nation in Europe, possibly in the world, competitor to a more slowly awakening America, and to an increasingly ambitious and militant Japan. No Wilsonian League of Nations would have emerged. … Yet, a relatively benign, German-led, Commonwealth of Europe might have developed decades earlier than the European Community under leaders not destroyed in the war or its aftermath.

Many leaders of the British Empire saw the new nationalistic Germany (since 1870–1871) as a threat to their world trade, especially with Germany’s new navy. The idea that economics played a major role in bringing on the war was confirmed by President Woodrow Wilson after the war in a speech wherein he gave his assessment of the real cause of the war. He was campaigning in St. Louis, Missouri in September of 1919 trying to get the US Senate to approve the Versailles Treaty and he stated:

Why, my fellow-citizens, is there any man here, or any woman — let me say, is there any child here, who does not know that the seed of war in the modern world is industrial and commercial rivalry? … This war, in its inception, was a commercial and industrial war. It was not a political war.The Papers of Woodrow Wilson, Arthur S. Link, ed. (Princeton, N.J.: Princeton University Press, 1990), vol. 63, pp. 45–46.

Weintraub alludes to a play by William Douglas Home entitled A Christmas Truce wherein characters representing British and German soldiers have just finished a soccer game in No Man’s Land on Christmas day and are engaged in a conversation which very well could represent the feelings of the soldiers on that day. The German lieutenant concedes the impossibility of the war ending as the soccer game had just done, with no bad consequences — “Because the Kaiser and the generals and the politicians in my country order us that we fight.”

“So do ours,” agrees Andrew Wilson (the British soldier).“Then what can we do?”“The answer’s ‘nothing.’ But if we do nothing … like we’re doing now, and go on doing it, there’ll be nothing they can do but send us home.”“Or shoot us.”

The Great War killed over ten million soldiers and Weintraub states, “Following the final Armistice came an imposed peace in 1919 that created new instabilities ensuring another war.” This next war killed more than fifty million people, over half of whom were civilians. Weintruab writes:

To many, the end of the war and the failure of the peace would validate the Christmas ceasefire as the only meaningful episode in the apocalypse. It belied the bellicose slogans and suggested that the men fighting and often dying were, as usual, proxies for governments and issues that had little to do with their everyday lives. A candle lit in the darkness of Flanders, the truce flickered briefly and survives only in memoirs, letters, song, drama and story.

Weintraub concludes his remarkable book with the following:

A celebration of the human spirit, the Christmas Truce remains a moving manifestation of the absurdities of war. A very minor Scottish poet of Great War vintage, Frederick Niven, may have got it right in his “A Carol from Flanders,” which closed,

O ye who read this truthful rime From Flanders, kneel and say:God speed the time when every dayShall be as Christmas Day.

Did “Tight” Fed Policy Cause the Financial Crisis?

Recently Senator Ted Cruz aggressively questioned Janet Yellen on the Fed’s possible role in causing the financial crisis and subsequent recession. In particular, he claimed that “in the summer of 2008” the Fed “told markets that it was shifting to a tighter monetary policy,” and that this announcement “set off a scramble for cash, which caused the dollar to soar, asset prices to collapse, and CPI [growth — RPM] to fall below zero, which set the stage for the crisis.” Cruz asked Yellen if she agreed with Bernanke’s view from his new book, in which he says the Fed made a mistake by not cutting rates in September 2008.

In response, Yellen at first seemed befuddled by Cruz’s line of inquiry. She said that without further review she wasn’t going to second-guess Bernanke’s opinion that the Fed should’ve cut rates sooner. But she was quite sure that the Fed’s possibly delayed reaction didn’t cause the financial crisis, and in any event, Yellen reminded Cruz that by December 2008 the Fed had cut the federal funds rates down to 0 percent.

Several prominent “Market Monetarists” (such as Scott Sumner and David Beckworth) applauded Cruz’s position, because it dovetails nicely with their explanation that it was actually the Fed’s incredibly tight monetary policy that was ultimately responsible for the financial crisis and the Great Recession. In their view, “real factors” such as the collapsing housing market may have generated a run-of-the-mill recession, but it was Fed timidity that turned it into the worst economy since the 1930s.

The Market Monetarists chose their name out of deference to their intellectual heritage, namely the monetarism of Milton Friedman. Just as Friedman and Schwartz overturned the traditional Keynesian explanation of the Great Depression, by arguing that it was Fed inaction in the early 1930s that made the depression Great, so too do Sumner et al. in our time say that it was “tight money” that ultimately caused the Great Recession.

The Fed Dunnit, But Through Tight or Easy Money?

Ironically, many fans of the free market are attracted to Friedman’s explanation of the Great Depression, and the modern Market Monetarist explanation of the Great Recession, because these hypotheses still blame government and exonerate capitalism. Yet in the interest of accuracy and intellectual honesty, we have to ask: Do these explanations actually make sense?

The standard Austrian view is arguably the opposite of the Friedmanite/Market Monetarist views. Rather than blaming the Fed for “tight money” in the early 1930s and then again in 2008, the orthodox Austrian says that the Fed caused unsustainable booms through “easy money” in the 1920s and in the 2000s.

For more specifics, the interested reader should consult this lecture at Mises University where I sketch the different approaches to the Great Depression. For a longer treatment here is Murray Rothbard’s book on the causes of the 1929 crash and Hoover’s role in starting the Great Depression.

Regarding the housing bubble of our time, here is Mark Thornton’s prescient 2004 mises.org article. And although I certainly have not been Nostradamus at every turn, in the fall of 2007 (a year before the crisis) on these pages I used Austrian business cycle theory to warn that the US was in store for a recession that could be the worst in decades.

Does Cruz’s Story Make Sense?

For a detailed critique of the Market Monetarist approach from an Austrian perspective, see Shawn Ritenour’s 2013 article. For our purposes in the present piece, let me try a different approach to showcase the weakness of the approach.

Remember, Ted Cruz told Janet Yellen that in the summer of 2008, the “Fed told markets that it was shifting to a tighter monetary policy,” and that this is what ultimately caused the financial crisis a few months later. In other words, Cruz is not blaming “real forces” such as an unsustainable capital structure and the need to reallocate resources after the housing bubble. Instead, Cruz is blaming the Fed for shifting expectations in a way that increased the demand for money, and then not providing the market with the money it so desperately wanted.

In order to demonstrate how empty this explanation is, below I will reproduce three different Fed policy statements. Two of the statements had no dramatic effect on markets. However, one of the Fed statements below comes from the summer of 2008, and so (if Cruz is right) is responsible for creating a global financial panic and the worst economy since the 1930s.

So my question for the reader: Can you tell which of the following three Fed statements was the one Cruz is referring to? Which of the below caused global panic, and which two did investors shrug off? I have stripped out the level of interest rates and a few key phrases to keep things ambiguous about the date of the announcement, but not in a way that changes the tone of the three Fed statements as they originally appeared to markets.

Fed Statement #1:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at _____ percent.

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of ____ _____ ______ and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Fed Statement #2:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at _____ percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing ______ ______, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Fed Statement #3:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at _____ percent.

Recent indicators have been mixed and the adjustment in the ______ sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Scoring the Test

How did you do? I intentionally picked three Fed statements where the initial announcement was that the target interest rate was the same, so that any “signal” about looseness or tightness would have to be inferred from their discussion of the future. Could you tell which two of the above announcements were innocuous, and which one signaled a new tight money stance that caused a global financial crash not seen since the 1930s?

The answers are that Statement 1 was from August 2006, Statement 2 was from June 2008, and Statement 3 was from March 2007. Does it really sound plausible that the middle statement above was provocative enough to cause Lehman Brothers to fail and a major money market fund to “break the buck” a few months later?


It has been said that in Austrian theory “monetary factors cause the cycle but real phenomena constitute it.” In his canonical treatment, Ludwig von Mises certainly admitted that the commercial banks — through their policies of credit contraction and interest rate movements — could influence the precise timing of a crash. However, once an unsustainable boom was underway, a crash was inevitable. It would be foolish to think that a recession was due merely to the unwillingness of banks to continue with monetary inflation and artificially low interest rates.

Ted Cruz and the Market Monetarists are right to blame the Fed for the financial crisis, but they are focusing on the wrong end. The real problem was the Fed’s inflation of the early and mid-2000s that fueled the housing bubble and related malinvestments.

Yes, after a credit-fueled boom, the precise timing of the crash will probably occur when the central bank “tightens.” Yet that hardly means the recession is the fault of timidity. Ultimately, the only way to prevent painful busts is to avoid the pleasurable booms that precede them.

Technology and Government Shouldn’t Mix

We live in a time like never before in human history. Our scientific knowledge and technological capabilities are rapidly advancing, affecting nearly every aspect of human life. Examples are rife, from smart phones and robotics, to thought-controlled prosthetics, wireless power, even force fields. Countless others that sounded like science fiction a few years ago don’t even deserve mention today as they have become so commonplace.

In the nineteenth century, the Industrial Revolution marked the beginning of the process we see at work, when (mostly) free market capitalism unshackled society’s productive imagination. The key was that it allowed individuals to reap the fruits of their labor, providing incentives for workers and entrepreneurs by allowing them to accumulate capital. Capital accumulation is the prerequisite for a prosperous society, without it there can be no sustainable investment or economic growth.

Privately-Owned Technology Is Not a Problem

Yet many are beginning to worry that our technology could soon turn on us and actually bring about our demise. The renowned physicist Stephen Hawking speculated earlier this year that robots will eventually take over the world, but has since revised his stance, now suggesting that capitalist-technology is a greater threat and will bring about unsustainable inequality and poverty as automated production techniques displace human labor. Such fears display an ignorance of history and economic science.

First, economists have for centuries pinpointed labor and land (i.e., natural resources) as permanent factors of production, with capital goods (in this case machines) being ultimately produced out of them. As Murray Rothbard explains in chapter 9 of Man, Economy, and State, there has always been a scarcity of labor, meaning that machines don’t make labor obsolete, but are rather labor-saving devices that make goods drastically cheaper for consumers, enable more leisure time for everyone, and simply redirect labor to other ends. Human labor is always required in some capacity for all production processes — such as the maintenance of machines — thus it’s inconceivable that every single industry could possibly be automated, not to mention the new industries that emerge as labor is freed up from its previous areas of employment. (For a complete demolition of this argument, see here.)

Second, the chilling irony of modern technology isn’t the menace of an AI takeover, where our creations turn against us in an apocalyptic scenario (although it’s impossible to completely rule this out). More to the point is that for all the ways technology is drastically improving the quality of life for people everywhere, the ability to inflict death, harm, and destruction is also unprecedented; and these technologies are being harnessed virtually entirely by states.

State Ownership of Technology Is a Problem

Coercive governments, for as long as they’ve existed, have been abusive of individual rights and the integrity of human beings everywhere, from the torture devices of Medieval Europe, to the cannons of the Civil War. However, the State in its proclivity to inflict violence upon humanity has always been restrained by the technology available to it, whether it was the axe, the sword, or the club in ancient times.

Yet as productive society has advanced in its ability to satisfy human needs and wants, the regimes of the day have used new technologies to expand their weaponry arsenals. The twentieth century will be remembered twofold: for its incredible increase in wealth and prosperity on the one hand, but also for its terrible wars. Indeed, more people were killed by state-governments in the twentieth century than in the previous nineteen combined.

Today in the twenty-first century, the world is embroiled in warfare and disaster wrought by the State, while the glories of the market economy surround us everywhere we turn. Market-societies build us up, while states tear us down.

Despite the sadistic few among us, there’s no question that the overwhelming majority of people prefer peace and prosperity and use technology as a means toward these ideals. On the other hand, it bears repeating that the primary culprit in turning technology toward nefarious purposes is the State.

So perhaps the most profound question of our time is, going forward, how we will use our increasingly powerful technology: as a progressive force to the benefit of humanity by relieving our ailments, extending our life spans, and increasing our worldly comforts beyond our wildest dreams — or as a retrogressive force that acts to our detriment by inflicting pain and suffering and death upon people everywhere?