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  • Stephan Livera 8:00 PM on September 2, 2014 Permalink | Reply
    Tags: , ethics of money production, , guido hulsmann,   

    Cultural consequences of fiat: The Debt Yoke 


    The Ethics of Money Production

    This is part of the series on Cultural Consequences of fiat – as laid out by Guido Hulsmann in chapter 13 of his book, The Ethics of Money Production. One consequence of fiat money and inflation, is the comparatively easier issue of credit to individuals. Have you ever wondered why society seems so obsessed with debt? Have you ever noticed people being obsessed with getting the newest thing now, even at considerably high cost? At an underlying level, this is being driven by easier availability of credit in a government controlled fiat money and central banking system.

    In the truly free market, the interest rate reflects time preference of individuals and the availability of credit is limited by the level of real savings, which is driven by foregone consumption. In the government manipulated market, the interest rate is influenced by central banks, and given the nature of the fractional reserve and fiat banking system (and associated architecture, such as legal tender laws, bank bailout guarantees) – no such foregone consumption is required. One net effect of fiat money is credit expansion, or increase in the money supply. This leads to easier availability of credit, even where there is no commensurate foregoing of consumption.

    Once you combine this easy credit with another consequence of inflation, the constantly rising price level – it becomes nearly irresistible. These conditions act to impose penalties on cash savings. Now while it’s true that gold’s return is ‘barren’, at least its purchasing power does not rapidly decrease over time. So in this way, it was better and more conducive for the average person to save:

    “Carpenters, masons, tailors, and farmers are usually not very astute observers of the international capital markets. Putting some gold coins under their mattress or into a safe deposit box saved them many sleepless nights, and it made them independent of financial intermediaries.”

    Guido points out that this state of affairs is more beneficial to some than others:

    “It is clear that this state of affairs is very beneficial for those who derive their living from the financial markets. Stockbrokers,  bond dealers, banks, mortgage corporations, and other “players” have reason to be thankful for the constant decline of money’s purchasing power under fiat inflation. But is this state of affairs also beneficial for the average citizen? In a certain sense, his debts and increased investment in the financial markets is beneficial for him, given our present inflationary regime. When the increase of the price level is perennial, personal debt is for him the best available strategy. But this means of course that without government intervention into the  monetary system other strategies would be superior”

    Ultimately, this system creates more people who are financially dependent – with very negative consequences:

    “The net effect of the recent surge in household debt is therefore to throw entire populations into financial dependency. The moral implications are clear. Towering debts are incompatible with financial self-reliance and thus they tend to weaken self-reliance also in all other spheres. The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgment. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, alternatively, scorn for all standards of financial sanity”

    If you really want to help people, realise that agitating for a welfare state is targeting the symptom, not the cause.

  • Stephan Livera 8:00 PM on September 1, 2014 Permalink | Reply
    Tags: , , , , monetary system   

    You should read The Ethics of Money Production by Jörg Guido Hülsmann 

    I recently read The Ethics of Money Production (Free PDF here via mises institute) by Jörg Guido Hülsmann and I recommend you read it too. Most people don’t understand money and consequently, they don’t understand the true harmful economic impacts of the government imposed money system. Once you really understand the level of injustice perpetrated by central banking and intentional money supply inflation, it’s hard to go back.

    Guido skilfully makes the case against central production of money, arguing that it should instead be privately produced. This book was written pre-bitcoin, but the economic analysis contained within is still very relevant:

    There is a natural tendency in the market to spread the use of the most useful monies over the entire world, thus establishing one great network of human cooperation based on indirect exchange.”

    The case against central banking includes discussion of how we ended up with the unsound fiat money that we use today – and how the money we use today is not a result of the free market, but a result of government intervention.

    We have also argued that our present paper currencies and electronic currencies could not survive in a truly free market against the competition of commodity monies. They continue to be used because they enjoy the privilege of special legal protection against their natural competitors, gold and silver. At no time in history has paper money been produced in a competitive market setting. Whenever and wherever it came into being, it existed only because the courts and the police suppressed the natural alternatives. (page 68)

    As for how this process happens:

    The operation of the market process is perverted. Whereas on a free market there is a tendency for the best available products to be used, legal-tender laws combined with false certificates incite a race to the bottom. Since all money certificates are equal before the law, and because the legal tender provision overrules private contract, no money user has an interest in paying the higher price for a genuine certificate. And as a consequence no producer has an interest in fabricating such certificates; each one of them now tries to operate at the lowest possible costs. Sooner or later everybody pays with debased coins and fractional-reserve notes. Bullion disappears altogether from public use; it is held back—”hoarded”—or sold abroad. (Page 133)

    Guido explains how money supply inflation by government invariably causes the following:

    1. It benefits the perpetrators at the expense of all other money users
    2. It allows the accumulation of debt beyond the level debts could reach on the free market
    3. It reduces the purchasing power of money below the level it would have reached on the free market

    Now while the explanation of the ‘race to the bottom’ economic process above was fascinating, the part of the book I found most compelling was Chapter 13: The Cultural and Spiritual Legacy of Fiat Inflation. This part of the book explains inflation-specific institutions and habits. These include: centralising government further, assisting the government in carrying out warfare, influences the structure of businesses towards debt and it pushes people into debt and/or financial dependency.

    Ever wonder why society is so debt driven and seemingly impatient? The comparatively easy availability of credit within a fiat money economy is an underlying factor that very few people notice and truly understand.

    Overall, I found the book outstanding. I will write separate blog posts outlining the negative cultural impacts of inflation from the book. Look out for tag: cultural consequences of fiat.

  • Stephan Livera 10:30 AM on August 31, 2014 Permalink | Reply
    Tags: , private education   

    “Private schooling won’t help the poor, this is why we need government” 

    One common motif among proponents of government schooling is that private schooling either won’t be available to the poor, or won’t be of a high enough quality. This article by the James Tooley at the Independent Institute shows evidence going against the claim above.

    Private Schools for the Poor

    But if we reflect on these beliefs in a foreign context and observe low-income families in underprivileged and developing countries, we find these assumptions lacking: the poor have found remarkably innovative ways of helping themselves, educationally, and in some of the most destitute places on Earth have managed to nurture a large and growing industry of private schools for themselves.

    Turns out there were schools that were not government recognised in the area – and these schools were not necessarily terrible quality. Many of them were comparable, or even better than the public schools.





    Ironically, perhaps, the accepted wisdom does seem to be right on one point: private is better than public. Of course, no one suspected that private slum schools would be better. Yet our research suggests that children in these schools outperform similar students in government schools in key school subjects. And this is true even of the unrecognized private schools, schools that development experts dismiss, if they acknowledge their existence at all, as being of poor quality.

    So let’s summarise:

    • Private education for the poor does exist
    • Private education for the poor is not necessarily lower quality than government provided schooling. Actually, it’s often better quality.
  • Stephan Livera 12:30 PM on August 30, 2014 Permalink | Reply
    Tags: , , fractional reserve, , philipp bagus   

    Why is modern day society so debt driven? 


    Do you actually want to help the poor? Then, one good idea is to first do no harm. Rather than raging on about how the welfare state should be expanded to help the poor, I think you should consider the harmful effects of central banking, fiat money, and the overarching banking/money infrastructure – which act to harm the poor. This is a tricky topic so it is understandably very poorly understood.

    Some basic ideas that need to become more mainstream are:

    • The money we use is not free market money, it is socialised and centrally controlled money.
    • It’s not just the money, but also the fact that we are being economically and physically coerced into using government money e.g. legal tender laws, capital gains taxes, other privileges granted to banks and central banks.
    • Economic analysis allows us to understand the harmful effects of central banking and government intervention in money. These monetary interventions effectively transfer wealth from the poor to the rich.

    THE MATTERHORN INTERVIEW – August 2014: Prof. Dr. Philipp Bagus

    LS: Who are the biggest beneficiaries of the current monetary system, and why?

    PB: Always when new money is produced, the first receivers of the new money benefit to the detriment of the later receivers. The first receivers of the new money, can still buy at the old lower prices. Then prices are starting to go up as the money spreads through the economy. When the later receivers get the new money, prices have already risen. In the meantime, the later receivers have to watch that prices of gasoline, food and energy are rising but their income has not risen yet. So there is an immense redistribution in favor of the privileged early receivers of the new money. The foremost beneficiaries are the money producers themselves, central banks and the commercial banks, public and private.

    LS: Why does new created money flow predominantly to certain sectors of the economy, and what are those sectors?

    PB: The government sector is one of the early receivers of the newly produced money. The government has the power to tax, to regulate, and to bailout banks. Logically, the banks create new money to finance the government in turn for legal privileges, bailouts and so on.

    But there are other sectors that profit. In order to receive a loan of new money, one also has to provide collateral, such as bonds, stocks or real estate. So much of the new money flows to people who can provide such collateral, these are very rich individuals or also established corporations.

    The new money is also a shot into the arm for financial markets that have tended to grow enormously over the past 100 years, as it makes sense to invest the new money in more stocks and bonds, that keep rising in value and use them as collateral for additional loans and so on. The intermediaries of these investments, financial markets grow artificially.

    Before you go about attempting to use government to intervene further so that it can conduct a welfare state – you should first end the very harmful things it is already doing to the poor. End central banking and the associated infrastructure. The poor will greatly benefit from this, and so will the rest of society.

    photo credit: Nina Matthews Photography via photopin cc

  • Stephan Livera 4:58 PM on August 29, 2014 Permalink | Reply
    Tags: ,   

    Bitcoin’s legal status in Australia 

    From BRW article:

    Bitcoin might become money, says Tax Office

    Tax commissioner Chris Jordan has said Bitcoins are not money under the Tax Act but if transactions continue to grow in popularity, in future there may need to be a change to the legal ­definition.

    “Proponents want it to be treated like money,” he told the inquiry. “There’s a definition in the Tax Act of money. It’s got to be the legal tender of a country. We can’t say it’s money. If this grows more and more maybe the definition needs to change.”

    This entire situation seems absurd. This is a clear case where the monolithic government is slow to change with the times. In doing so, innovation and the chance to create a great deal of value are being destroyed.

    Now at this point, most people will just shrug and say, "Oh well, guess that’s just the price of having a legal system". They will think this is an unavoidable cost, or just some necessary evil that is required for order in society.

    There are good reasons to disagree. This is not the result of having a legal system, it is the price of having a monopoly legal system. A private law (anarcho-capitalist) society would have polycentric law, which would be driven by consumer demand.

    See What is Polycentric Law? by Tom Bell.

    To make legal systems better, we must make them compete against each other

  • Stephan Livera 12:30 PM on August 29, 2014 Permalink | Reply
    Tags: , Capitalism helps the poor, , Julian Simon   

    Does capitalism really leave the poor behind? 

    No, it doesn’t, and I intend to continually post evidence and reasoning contesting this absurd notion that “capitalism leaves the poor behind”. First of all, consider that such a statement has to be measured comparatively against other social systems or political philosophies. If anything, capitalism is the system that has enabled billions more people to live as a result of more abundant production processes, and these people have a higher standard of living than they did previously.

    One caveat: I am arguing this is true to the extent that capitalism has been permitted – seeing as there are elements of the system we live under today that are socialist or have heavy government intervention.

    Here’s Julian Simon in his Intro to The Ultimate Resource II: People, Materials, and Environment, written in 1996:

    The trend toward a better life can be seen in most of our own families if we look. I’ll dramatize the matter with an anecdote: I have mild asthma. As an overnight guest in a home where there was a dog, in the middle of the night I woke with a bad cough and shortness of breath caused by the dog dander. So I took out my twelve dollar pocket inhaler, good for 300 puffs, and took one puff. Within ten minutes my lungs were clear. A small miracle. A few decades ago I would have been sleepless and miserable all night, and I would have had to give up the squash playing that I love so much because exercise causes my worst asthma in the absence of an inhaler.

    And diabetes: If your child had diabetes a hundred years ago, you had to watch helplessly as the child went blind and died early. Nowadays injections, or even pills, can give the child as long and healthy a life as other children. And eyeglasses: Centuries ago you had to give up reading when your eyes got dim as you got to be 40 or 50. Then when spectacles were finally invented, only the rich could afford them. Now anyone can afford plastic magnifiers at the drugstore for nine dollars. And you can even wear contact lenses for eye problems and keep your vanity intact. Is there not some condition in your family that in earlier times would have been a lingering misery or a tragedy, that nowadays our increasing knowledge has rendered easily bearable?

    Travel to poor countries, but leave the capital cities and venture into rural areas. Ask farmers about their standard of living, present and past. You will find improvement everywhere, in all respects – tractors, roads to the market, motorbikes, electric pumps for wells, schools where there were none before, and children going to university in the city.

    Capitalism is not perfect, but it does better than the other social systems (especially better than Socialism) at raising the poor up out of poverty. Some people seem to arbitrarily expect better progress than what is already occurring. Unfortunately, their recommendations of government welfare programs and other intervention often end up being counter productive.

    Capitalism raises living standards everywhere. Just maybe not at the arbitrarily fast pace that you want it to. Don’t let the perfect be the enemy of the good.

  • Stephan Livera 2:31 PM on August 28, 2014 Permalink | Reply
    Tags: , , ,   

    Focus on inconsistent reasoning 

    I like the approach Michael Huemer takes in advocating libertarian political philosophy – his focus is a little different to the standard approach, and this creates much more powerful argumentation.

    Property, Georgism, and the Safety Net

    By focusing on double standards in the way individuals treat each other and the state, the argument points out inconsistency in most people’s own moral reasoning.

    My central line of thought does not start out like this: “My God, coercion is so awful, how can it ever be justified?” My central line of thought starts out like this: “Wow, we seem to have much more permissive attitudes toward the state than we have toward any other agent. How can that be justified?”

    This neatly avoids the problem of having to propose some unifying moral theory that everyone can get behind. The problem with the ‘unifying moral theory approach’ is that hardly anyone can agree on the approach. This makes it easy to deny the conclusion of the argument by denying a supporting premise. Michael Huemer’s approach is rhetorically superior because it deals with ideas that most people already agree with.

    As for the people who deny property rights entirely:

    My response to Matt on the subject of property rights is therefore similar to my earlier response to Kevin: I am not giving a theory of property, mainly because

    1. It is reasonable to take property rights for granted here, since there is hardly any thinker who rejects them (and certainly not either Matt or myself);
    2. If there were no property rights, taxation would be impermissible anyway – not because taxpayers would have rights to their pretax incomes, but because the state would fail to have any property rights over the taxes that they claim citizens owe them.

  • Stephan Livera 1:15 PM on August 27, 2014 Permalink | Reply
    Tags: intellectual monopoly, ,   

    “But without Intellectual Property laws, how will content creators get paid?” 

    This is a common concern that comes up in the Intellectual Property debate. Though some current means of getting paid for content creation rely on the state’s enforcement of IP laws, this is not the only way content creators can be paid:

    • Freemium model – A cut down version of the service is available free, and if the user wants more advanced features, they pay for the premium service
    • Crowdfunding / Assurance contract model e.g. Kickstarter – People enter into agreements to only fund the project if enough other people commit to funding it
    • Voluntarily choosing to pay for content to support the creator

    For a very large list, see Stephan Kinsella’s Examples of Ways Content Creators Can Profit Without Intellectual Property.

    The Creator-Endorsed Mark as an Alternative to Copyright by Stephan Kinsella runs through specific possibilities:

    Inventors invent to be first to market. Academics publish articles or books to enhance their reputation and increase their employability. Singers or musicians might give away recorded albums for free to gin up concert sales. Pharmaceutical companies, freed of enormous tax and regulatory (including the FDA) burdens would have much less need of a patent monopoly to help make up for these costs; and could profit from being first to market and reputation (notice that Tylenol still sells for about twice the price of the generics right next to it on the shelf?). Perfume and fashion thrive without IP. Open source software is plugging along. And so on. What about movies, or novels for profit? Various ideas have cropped up. Perhaps the author releases his first book for free to get a fan base; then withholds the sequel until a certain number of fans pledge to pay for the book. As for movies, perhaps they are released first in DRM format to elegant movie houses, before being released on DVD or digitally. (In Against Intellectual Property, n.67, I related the example of how drive in movie theaters, “faced with the prospect of free riders peering over the walls, installed—at considerable expense—individual speakers for each car, thus rendering the publicly available visual part of the movie of little interest.”) It is basically the task of entrepreneurship to figure out how to make a profit off of a given service, given the realities of costs of exclusion, ease of cheap substitutes, and so on.

    At some level, this kind of question is missing the real problem in today’s age of the internet. With so many content creators out there, and the cost of producing content becoming so much cheaper – the real problem nowadays is avoiding obscurity.

    Cory Doctorow on Giving Away Free E-Books and the Morality of “Copying”

    Why do you give away your books?
    Giving away ebooks gives me artistic, moral and commercial satisfaction. The commercial question is the one that comes up most often: how can you give away free ebooks and still make money?

    For me — for pretty much every writer — the big problem isn’t piracy, it’s obscurity (thanks to Tim O’Reilly for this great aphorism). Of all the people who failed to buy this book today, the majority did so because they never heard of it, not because someone gave them a free copy. Mega-hit best-sellers in science fiction sell half a million copies — in a world where 175,000 attend the San Diego Comic Con alone, you’ve got to figure that most of the people who “like science fiction” (and related geeky stuff like comics, games, Linux, and so on) just don’t really buy books. I’m more interested in getting more of that wider audience into the tent than making sure that everyone who’s in the tent bought a ticket to be there.

    Or see this part:

    So ebooks sell print books. Every writer I’ve heard of who’s tried giving away ebooks to promote paper books has come back to do it again. That’s the commercial case for doing free ebooks.

    So more accurately, in this day and age: First, worry about rising out of obscurity and then think about how to monetise your content.

  • Stephan Livera 1:09 PM on August 26, 2014 Permalink | Reply

    Intellectual Monopoly laws distort research and development 

    Intellectual Property government laws distort the types of research and development being done.

    Imagine you were living in a society which lauded you and gave you extra rights and socialised/outsourced protection of your ‘property right’ for doing one type of innovation over another. We would rightly say, at the margin, you are more incentivised to invest into innovations that will be protected through the socialised mechanism of the state. You would marginally stand to benefit more from this innovation than from other innovations.

    But this wouldn’t necessarily be in line with what society preferred, or what would benefit society more. Consider the alternate hypothetical world with no government IP laws – you would invest your research funding where you genuinely saw the best profit opportunity.

    This is one of the points made by Stephan Kinsella in his recent podcast with Tom Woods: Libertarianism and Intellectual Property.

  • Stephan Livera 12:36 PM on August 25, 2014 Permalink | Reply
    Tags: , , public choice economics,   

    Imagination isn't enough 

    Mike Munger makes a great point in Unicorn Governance:

    Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least 300 years

    One of the biggest barriers I face when discussing libertarianism is that people just imagine whatever government they want to – rather than realising that government in the real world with real people is different to ‘unicorn’ government.

    Here’s an interview with Richard Timberlake, monetary economist. Here he is responding to the question of whether rules based fiat money could outperform a gold standard:

    The key word in your question is "could." But the policymakers won’t allow it to. The reason they won’t is found in public choice economics, which argues that the policymakers, like all other human beings, have a stronger motive to further their own self-interest than to promote sound public policy

    So if you’re making an argument using terms like "public interest" or "common good", public choice economics is one way of rationally analysing and responding to this claim.

    Public choice theory analyses the individuals who form the government e.g. politicians, bureaucrats, and voters, pointing out that they themselves are largely driven by self-interest. So in a way, no government is truly only concerned with ‘the public good’.

    Is this argument alone enough to suggest that government is never effective on net? No, but that’s not the case being made here. The point here is: be realistic when you make the case. Don’t make a case for intervention based on ‘unicorn government’, make the case based on real world government. This means it has to be something that could be legislated by real world politicians, enacted by real world bureaucrats and/or voted for by real world voters. Please consider this next time you agitate for more government programs and policies.

    Individuals inside the government are not cut from a different cloth to individuals outside the government.

    • Bullion Baron 12:55 PM on August 25, 2014 Permalink | Reply

      I think that libertarians fighting for smaller government need to be mindful of the same limitations though (government in the real world with real people is different to ‘unicorn’ government). Libertarians would like to see a greater emphasis on individual freedoms (so would I), but I see many calling for government to make changes that simply wouldn’t be supported by the majority of voters, so are they chasing the same unicorn?


      • Stephan Livera 10:26 PM on August 25, 2014 Permalink | Reply

        Great point BB, I agree with your general idea. However, I’d differ slightly – I don’t think political action by libertarians will be very effective in literally getting people to ‘vote more libertarian’. Instead I think it really just serves a more educational purpose to the general public, to show that there are other ways i.e. don’t fall into the trap of the labor vs liberal false dichotomy.

        I’m a little skeptical about political action in general (though I admit it has some value), I think the change will come about through other means:

        • bitcoin as a superior money outcompeting fiat money
        • agorism (of which bitcoin will obv play an important role)
        • seasteading
        • charter cities
        • general education and talking to people e.g. blogging, YouTube videos, in person meetups

        That said, I think there is value in all of these methods, and libertarians should generally pursue whichever method they feel they are most skilled or effective at.


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