Free Market and Capitalism?

Do you really know what “free market” is? How about “capitalism”? Think again.

During the initial stage of my study of Austrian economists, I was repeatedly warned by several article writers in the use of terms.  They keep on saying the need for distinction to avoid confusion. One example is the association between “Austrian thinkers” and “libertarians.” I commonly used these two terms interchangeably though I am aware that the former is originally a description referring to a group of thinkers whose primary concern is to establish a sound economic theory and the latter is more appropriate as a political description. Another example for need of distinction is between freedom and liberty. Someone said that liberty is inherent, while freedom is earned in the battlefield. This is somehow related to John Stuart Mill’s distinction claiming that liberty is “the freedom to act,” while liberty is “the absence of coercion.”At least in these examples, we have two separate terms. Personally, I have no problem using them synonymously provided that the distinct use of them is remembered especially when used in a specific context.

The task in clarifying terms turns difficult when similar terms are used, but with different meanings. An example of this that I recently encountered is the use of the words “bourgeois” and “proletariat.” The way Karl Marx employs these terms is different from the way an Austrian economist like Wilhelm Ropke uses the terms. But again, at least we have a clue to clarify the confusion for most people obviously know that the two men are coming from two separate intellectual camps.  We cannot say this in the use of the terms “free market” and “capitalism.”

I happened to have an opportunity to exchange ideas with a proud Marxist in Facebook. The thread is about the evil of capitalism. And of course, associated with it, is the idea of free market. The Marxist dominates the discussion and it appears that no one could refute his argument. And then, I added my comment saying that as far as Wikipedia is concerned, there at least 15 variations of capitalism, and I made an argument that the kind of capitalism that Marx attacked was not the capitalism of the Austrian school. He replied and gave me an overview lecture of what Marxism is and mentioned a little bit about the Austrian school as a group who protests against central banking, but I think, he still maintains the idea that capitalism (and free market) is just one. And then I happened to read one “tweet” from Mises Institute about George Reisman’s open letter to Warren Buffet. I posted the link on the thread and made a comment that here is one example of a believer in capitalism rebuking a wayward capitalist.

Doesn’t Adam Smith believe in free market system and capitalism? How about John Maynard Keynes? How about Milton Friedman and the Chicago School of Economics? And finally, how about the Austrian school? Here the task of clarifying terms is not easy for the economists using them seem to be coming from one camp.

In Gary North’s The Monetization of Everything posted last July 28, 2012, he mentioned about the influence of Milton Friedman as the primary thinker that established the theoretical framework to justify the existence and operation of central banking. In this sense, we can say that his influence in the field of economics is either almost equal or perhaps surpassed the influence of John Maynard Keynes. To me, what is surprising about Friedman’s influence is that while he paved the way for the US government to gain advantage of central banking, he at the same time, opposed the expansion of government’s power. Richard M. Ebeling made this clear in his article, Milton Friedman and the Chicago School of Economics.

While searching for data about Friedman and the Chicago School of Economics, I am anticipating that I will encounter information about them identifying them as belonging to the Keynesian camp. But to my surprise, Friedman and CSE opposed Keynesian economics. So I do not know what to do with North’s analysis. Not until I found Robert Murphy’s article posted last June 20, 2011, The Chicago School versus the Austrian School.

I did not carefully read Ebeling’s article at first. But when I reread it again, I understand that he too made a clear distinction between the Chicago School and the Austrian School, and at the same time, he mentioned few commonalities. However, it is Robert Murphy who made it crystal clear the distinction between the two schools.  Yes, in terms of opposition to Keynesian economics and basic free market ideas, the Chicago School shares them with the Austrian School. Moreover, the differences are too great that one wonders how these differences influence the actual economic practice. And the Chicago School is doing this in the name of free market and capitalism.

Reading Murphy’s article, he identifies that the areas of discrepancy between these two schools are in epistemology, methodology, interpretation of business cycle, application of Coase theorem, and above all,  in policy about the supply of money. I will not elaborate on all these differences. I will just mention two.

Following Mises, the Austrian school in general (except Hayek and Kirzner), claims that a sound economic theory should not attempt to be scientific due to the absence of necessary empirical evidence and its very nature that can only be verified by reason alone. This unsound move to make economics a scientific enterprise that afflicts all schools of economics including the Chicago School is the bane of economics since the time of Leon Walras (1834-1910), the so-called “mathematical economist.” Erick D. Beinhocker (The Origin of Wealth, 2006) claims that the bringing of mathematics to economics is an attempt to create a scientific theory of economics to make the system predictable. Beinhocker further claims that many experts these days from various academic disciplines acknowledge that Walras’ importation of the concept of equilibrium from physics is a critical scientific misstep that resulted to serious consequences that plagued economics since early 19th century.

Finally, the difference in idea and policy surrounding money supply further results into different understanding about the role of the Fed, the nature of monetary crisis, and the proposed solution to it. This is the greatest discrepancy between Chicago School and the Austrian School, two schools of economics that advocate both free market economy and capitalism.

A Social Order Friendly to Free Market Economy

Finally, we reach the third article, Free Economy and Social Order. I find this article difficult to understand at once for the writer’s use of terms is not the usual ones popularized in the mainstream academic institution. Anyway, I tried to grasp what Ropke is trying to say. To me, he speaks about the necessity of an intellectual atmosphere and social order friendly to economic activity for free market to thrive. Without this social order, any appearance of free market is actually an artificial device created by a socialist state. It is not real free market, but a highly centralized machinery created by the state.

Then the writer proceeds to explain what he meant by “free market,” by identifying its two pillars: freedom of prices and competition and genuine private property. He then describes that private property only exists if the “individual sphere” has dual protection against other individuals and the government.  Unfortunately, both the existing intellectual atmosphere and the social order are contrary to free market economy due to widespread influence of Marxist ideas. It is at this point that I find the article not easy to understand.

Ropke’s use of popular Marxist terms like “bourgeois” and “proletarianization” are different from the common understanding. He claims that Marxists are somehow successful in their distortion of the real meaning of these terms. I understand Ropke’s use of “bourgeois” as synonymous to “civilized” while proletariat is equivalent to a “nomad.” The author claims that free market economy thrives in an intellectual atmosphere and social order qualified as civilized. For him, this is reality and the natural order of things. He describes the appropriate place of free market in a civilized intellectual atmosphere and social order as follows:

Its place is in a society where certain elementary things are respected and are coloring the whole life of the community: individual responsibility; respect of certain indisputable norms; the individual’s honest and serious struggle to get ahead and develop his faculties; independence anchored in property; responsible planning of one’s own life and that of one’s family; thriftiness; enterprise; assuming well calculated risks; the sense of workmanship; the right relation to nature and the community; the sense of continuity and tradition; the courage to brave the uncertainties of life on one’s own account; the sense of the natural order of things.

The foregoing description is the essence of civilization and details the basic requirements for economic progress. This intellectual atmosphere and social order are now under serious threat due to the proletarianization of the economy, which Ropke emphasizes the very reason why he is skeptical about Keynesian and post-Keynesian economics. Evidences of this proletarianization are the dominant attitude of both the government and the people towards money, the participation of trade union representatives in the administration of corporations, and the diminishing responsibility of the debtor in the name of social justice. The writer ends his article by sharing two stories taken from the financial history of France to illustrate a “civilized” attitude towards money even in time of extreme national emergency.


In this overview of libertarian principles, we learn in the first article that free market thinkers have solemn responsibilities to specialize, not to expect support from giant corporations, focus on basic principles, and must demand honest money from the government. In the second article, we also realize historical facts and current evidences that support argument about the present-day existence of fascist policy. And finally, in the third article we learn the need of an intellectual atmosphere and social order for free market economy to grow and prosper.

Past Facts and Present Evidences for Fascist Existence

Llewellyn Rockwell’s The Fascist Threat speaks about past facts and present evidences for fascist existence. In our time, no one wants to be labeled a “fascist” for it has a derogatory connotation. No one wants to be identified with dictators like Hitler and Mussolini. Llewellyn Rockwell argues that great number of politicians, intellectuals, and political activists are not honest in this regard for if we will just look deeper into the structure and policies of mainstream politics and economics, we could not avoid, but conclude that fascism is very much alive. Rockwell understands fascism as:

…the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police State as the source of order, denies fundamental rights and liberties to individuals, and makes the executive State the unlimited master of society.

With the above understanding of “fascism,” here we can obviously see why the writer concludes that “fascism” does not only exist in the United States, but even in the entire European continent. I suspect that includes countries that pattern themselves after the model set by the west.

Rockwell narrates both familiar and unfamiliar historical facts about fascism. Several of these facts are:

  • The invisibility of fascism due to absence of great thinker like Marx actually makes it a far more serious threat to free market society
  • Fascism is just one color of socialism among many
  • Fascist’s economy described as “vampire economy” causing gradual death to free market
  • An example of this “vampirism” is the entrance of women into the workforce. It was subtly hailed as fruit of progressive ideas flourished in women’s economic liberation. Unrecognized by the majority, the real cause is the rising standard of living.
  • Origin of fascism associated with Mussolini
  • Fascism as basically nationalist
  • The role of the ideas of John Maynard Keynes for the implementation of centralized planning that basically characterized a fascist state
  • The definitive study of John T. Flynn on fascism in his book, As We Go Marching
  • Fascism as characterized by unusual collaboration between the extreme Right and the extreme Left
  • Fascism as a political compromise between two extreme ideologies actualized in cartelization mechanism to please both laborers and business owners, and
  • The subtlety of fascism for its toleration on private property, unequal salary, and religion

After narrating the above facts, Rockwell enumerates the 8 undeniable evidences for the current existence of fascism. I will just mention here five:

  • The absence of limitation in government’s power. This is totalitarianism. Rockwell writes, “…no matter how much you may believe that you are free, all of us today are but one step away from Guantanamo.” He further believes that US was a “nation conceived in liberty, but has been kidnapped by the fascist State.”
  • The government though not by law, but turns into a dictator in practice on the basis of “leadership principle.” The absence of a single dictator does not mean absence of dictatorship. The executive branch of government grows too powerful that the legislative and the judiciary can no longer provide balance. Related to this mark is the hope of the people for regime change. This is a lie for Rockwell rightly discerns, “The Obama State is the Bush State; the Bush State was the Clinton State; the Clinton State was the Bush State; the Bush State was the Reagan State” and that “rotation in office occurs not because of elections but because of mortality.”
  • The government’s intervention of the free market results to economic stagnation. Expected economic growth is largely missing even after the end of the Cold War and technological advancement. Government bureaucracy is the primary obstacle to economic growth. Quoting Bastiat, Rockwell writes:

The real cost of the State is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The State has looted us just as surely as a robber who enters our home at night and steals all that we love.

  • Organization of producers into cartels with direct knowledge and influence of the government. “Syndicalism” is the favorite term used by Rockwell to describe this kind of economic monopoly. He cites the events of past three years as evidences where “giant banks, pharmaceutical firms, insurers, car companies, Wall Street banks and brokerage houses, and quasi-private mortgage companies enjoying vast privileges” at the expense of the public.
  • The military receives the lion share in the total national budget. This is either rarely or never been seriously discussed in policy debates. The government wants to convince the American public that they are under serious threat from hostile regimes, instead of admitting that American militarism and imperialism as the primary threats to world peace.

Rockwell concludes his piece with a call to fight for liberty and a message of hope. He is confident that victory belongs to those who uphold liberty for it is based on truth and reality. He believes that fascism is ideologically bankrupt and about to collapse. In light of this, there is no reason for libertarians to despair, but to gather its strength and continue its fight for the future belongs to us. Such a movement is already on the rise:

It is not a formal alliance. It is made up of those who protest the Fed, those who refuse to go along with mainstream fascist politics, those who seek decentralization, those who demand lower taxes and free trade, those who seek the right to associate with anyone they want and buy and sell on terms of their own choosing, those who insist they can educate their children on their own, the investors and savers who make economic growth possible, those who do not want to be felt up at airports, and those who have become expatriates…It is also made of the millions of independent entrepreneurs who are discovering that the number one threat to their ability to serve others through the commercial marketplace is the institution that claims to be our biggest benefactor: the government.…The movement is intellectual. It is political. It is cultural. It is technological. They come from all classes, races, countries, and professions. This is no longer a national movement. It is truly global….We can no longer predict whether members consider themselves to be left wing, right wing, independent, libertarian, anarchist, or something else.


Responsibilities of Freedom-Lovers

In keeping with my goal to return to square one to understand Austrian economics, I decided to adopt a reading plan suggested by Economic Policy Journal. The aim of the 30 day reading plan is to provide an introduction and overview of libertarian principles. And I want to start with the first three articles.

Henry Hazlitt’s The Task Confronting Libertarians identifies four primary responsibilities a freedom-lover has to fulfill to contribute towards the reversal of fascist-socialistic trend. Llewellyn Rockwell’s The Fascist Threat contains undeniable evidences characterizing the current existence of fascist policy. And finally, Wilhelm Ropke’s Free Economy and Social Order shows that free market capitalism will never survive in a society that violates freedom in economic activity.

I invite my readers to either make your own reading plan or simply follow the suggested plan to familiarize yourself with basic libertarian principles. For those like me, who are interested to know what is really going on in world economy, I invite you to dig deeper and verify yourself if the ideas presented in these articles provide a better explanation of reality.

Reading the mentioned articles convinced me that the US government is actually a socialist state making use of fascism as a necessary transition towards its globalistic aim. This is difficult to see for it is hiding behind the mask of free market capitalism. What we now see as the present situation of global economy is not a result of the destructive forces caused by capitalism; but actually a destruction of it, by a fascist socialist state, which maintains its present existence through welfare and warfare.

Responsibilities of Libertarians

Allow me now to share my own thoughts resulting from my reading of the first three Austrian articles. Henry Hazlitt’s article enumerates several responsibilities that confront a freedom-lover given the existing political and economic trend. Most people find themselves helpless to respond against the inflationist and socialist trend. Hazlitt identifies during the time of the writing of this article that more than 100 member countries of IMF are leading into socialist direction. In this battle for ideas, libertarians are literally outnumbered and the dominance of welfarists, statists, socialists, and interventionists are evident in almost all fields.

Reading Hazlitt’s piece, I understand that freedom-lovers have at least four responsibilities:

  • Libertarians need to focus on few critical issues to provide informed answers to show the public that an alternative exists as a replacement to existing socialist trend.

Libertarians should go beyond generalities to be effective in winning the public to their side. We must provide convincing arguments on issues like:

…public housing, farm subsidies, increased relief, bigger Social Security benefits, bigger Medicare, guaranteed incomes, bigger government spending, bigger taxation, especially more progressive income taxation, higher tariffs or import quotas, restrictions or penalties on foreign investment and foreign travel, price controls, wage controls, rent controls, interest rate controls, more laws for so-called consumer protection, and still tighter regulations and restrictions on business everywhere.

  • Austrian thinkers must learn to accept the fact that they cannot rely on big corporations to support them in the conflict against government expansionism.

Hazlitt identifies four reasons for the timidity of big businessmen to protest against the increasing intervention of the state. These reasons are related to contracts and legal threats like breaking the antitrust law, being prosecuted for unfair labor practices, and hostile examination of their income tax returns. In the light of present-day occurrences, these reasons appear as excuses and we suspect that big companies have already joined the camp of the fascist-socialist state.

  • Austrian thinkers must concentrate on several basic libertarian principles.

Three of these are as follows:

First, that the government is taking something from somebody else in order to perpetuate a welfare state.

Second, that the statist proponents are either blind or simply ignoring the long-term consequences of their actions

And third, that the Austrian followers themselves should remain confident about the great advantages of liberty over policies of coercion

  • Finally, freedom-lovers must demand the government to provide honest currency and stop inflating the money supply.

Since the government is taking credit during economic “booms,” it must also take responsibility for economic “busts” for the primary cause of such “business cycle” is the government’s decision to inflate the money supply. This is why we need to seriously listen to Hazlitt’s call to vigilance:

If libertarians lose on the inflation issue, they are threatened with the loss of every other issue. If libertarians could win the inflation issue, they could come close to winning everything else. If they could succeed in halting the increase in the quantity of money, it would be because they could halt the chronic deficits that force this increase. If they could halt these chronic deficits, it would be because they had halted the rapid increase in welfare spending and all the socialistic schemes that are dependent on welfare spending. If they could halt the constant increase in spending, they could halt the constant increase in government power.

The solemn responsibilities of libertarians is best summarized in the words of Ludwig von Mises:

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping toward destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.


Note: The blogger is aware about the limitation of the term “Austrian school” originally referring to thinkers whose primary concern was to develop a sound economic theory. In this post, the phrases “Austrian thinkers” and “freedom-lovers” are synonymously used with “libertarians.”

Reforming Dominant Social Themes

Just last July 24, while studying Austrian economics, I stumbled one book in the web that caught my interest. I stopped both my study of Carl Menger’s Principles of Economics and my reading of current news. My interest was so intense that it took me less than three days to finish the 282 page book.

I forgot the exact way I came across with this book. The book is an investment guide, but not the common type that tracks companies and economic trends. It actually speaks about a “financial hurricane” resulting from a tension between global power elite and free market thinkers. The writer claims that in this tension, certainly, free market thinkers will win due to the power of information available in the web.

The prior influence of Edward Griffin was the reason why this book caught my attention in the first place. I initially encountered Griffin while reading Robert Kiyosaki’s books. I transcribed his video on “The Reality of Money” and made a lecture out of it. It was him who introduced to me ideas like inflation, fiat money, fractional reserve, and Mandrake mechanism. And that is why I find myself encountering familiar themes while reading the book.

The writer’s aspiration is that through his book, more people will be informed about the power of free market and to take responsible financial decision. Let me share a brief overview of this book:

  • Chapter 1 shares about a financial hurricane threatening to sweep all over USA (By the way, the writer wrote this book four years ago). The magnitude of this will largely depend on the response of both Russia and China to US dollar.
  • Chapter 2 talks about inflation and hyperinflation, which both the government and central banking are primarily responsible. They are therefore behind the “booms and busts” in the market.
  • I see chapters 3 to 8 evolving around the power elite as the central theme. Chapter 3 anticipates the potential barrier to objectively read the book due to its association with baseless “conspiracy theory.” The writer distinguishes between two types of power elites: the invisible and the visible. He admits that the identity of the invisible power elites is difficult to discuss due to lack of sufficient facts. He just limits his discussion among visible power elites and identifies their existence through organizations like Council on Foreign Relations, the Fabian Society, the Trilaterial Commissions, etc. Chapter 4 is an expansion of chapter 3 with particular emphasis on war as the tool of power elites to “achieve their hearts’ desire.” Chapter 5 identifies three primary financial institutions that were immediately established after World War 2 to achieve the power elites’ global agenda: International Monetary Fund (IMF), World Bank (WB), and Bank for International Settlements (BIS). Chapter 6 speaks about the intentional attack on freedom. Chapter 7 identifies the influence of David Rockefeller (pp. 142-143) in the implementation of such global plan. The writer also mentions in this chapter the importance of Keynesian economics for the “efficient” operation of central banking. And finally chapter 8 focuses on Federal Reserve. An interesting debate here is included between Flaherty and Edward Griffin, the author of Creature from Jekyll Island.
  • I find chapters 9 and 10 very encouraging. In chapter 9, the writer claims that power elites are alarmed due to the advent of the Internet for it is working against their plan and in favor of Austrian economists. In chapter 10, the author is calling to join the 2% free market thinkers through personal education via Internet.
  • Chapter 11 calls for vigilance due to power elites’ response to control the flow of information in the web through legal means. It is to be expected that various pretexts will be used to regain power over the worldwide web.
  • Chapter 12 contains the summary of “storm warnings” and “economic action alerts.” The writer believes that knowledge is our best weapon to frustrate the elites’ global agenda. He is calling us to understand the “business cycle” (p.192), monitor the reaction of power elites, and take necessary steps. Among many investment ideas mentioned by the writer, the three key ideas I remember are investing in China, silver, and biodiesel.

Now for my personal thoughts:

  • The book is not a typical investment guide. Before introducing “storm warnings” and “economic action alerts,” the writer presents arguments back up with historical facts and present-day events.
  • The writer’s call to alter the dominant narrative is not an easy task. Remember, that almost all macro institutions are dominated by the power elites, including governments, media, education, and even humanitarian institutions. Journals, white papers, and textbooks are used to convince the public about the reality of dominant social themes such as Islamo-fascism, global warming, war on terrorism, bird flu, etc.
  • The idea that inflation is currency debasement and the  “the surest way to destroy society” is according to another Austrian economist and Reformed Theologian is actually the essence of socio-economic offense of Israel against God during the Old Testament times. Gary North based this assertion on his exegesis of Isaiah 1:22.
  • Appearances deceive. In order to win public discourse, the power elites resort to distortion of terms and complex ideas to hide the truth from society. Terms like democracy, socialism, capitalism, and communism are used as masks to hide real identities. Many questions in my mind pop up while reading the book: If the establishments of Central America Free Trade Agreement (CAFTA) and North American Free Trade Agreement (NAFTA) are real application of the principles of free trade, why is it that the Austrian economists are still in the shadow? Do socialist countries like China and Russia really practice their economic principles? Is the United States really a capitalist country or is it in essence a socialist country hiding behind the name of capitalism?  Isn’t “democracy” used as a slogan to advance the cause of aristocracy? What is the difference between Hitler’s German empire and the European Union? Aren’t they similar in essence though different in appearances and the powers behind them? Which is better, a fascist dictator like Hitler or the global financial elites behind an empire?
  • And then I thought of the relevance of the book in Philippine politics. Majority of the Filipino masses are tired of pro and anti-Aquino and pro and anti-Arroyo rhetoric. These are diversions, a crafty mechanism to keep us in the matrix. Most of us fail to re-educate ourselves through alternative media; we still believe what the mainstream media is feeding us. Media is the tool utilized by those in power to shape public opinion. We cannot trust the system, and instead learn to trace the power behind it. And I believe, a study of central banking is a good place to start.
  • And one final observation related to religious leaders. While the world is facing a gigantic financial hurricane, and the powers that be continue their onslaught of the third world, and are finding ways to control the web, most religious leaders are either like scholars debating over social issues (without any intention to be part of the solution) or like pietistic monks escaping from their socio-political and economic witness.

The author of the book by the way is Anthony Wile, an educator, financier, and the Chief Editor of the Daily Bell. The title of the book is High Alert: How the Internet and the global power elite are causing a financial hurricane (You can refer to this page to purchase the book at Amazon). It was published in 2008.