Pillars of Prosperity – Crisis Resulting from Faulty Political Ideas

Today, I decided to take a more focused direction in my personal study of Austrian economics. I want to come up with a basic understanding of monetary and economic theories. I made a list of my priority readings. I came up with seven books.

• Pillars of Prosperity by Ron Paul
• The Case for Gold by Ron Paul and Lewis Lehrman
• A History of Money and Banking in the United States by Murray N. Rothbard
• Theory of Money and Credit by Ludwig von Mises
• Inherit the Earth by Gary North
• Honest Money by Gary North, and
• Introduction to Christian Economics by Gary North

Let me start with Pillars of Prosperity. Part 1 talks about The Economics of a Free Society. I will begin with the first speech of the libertarian Congressman.

Faulty Political Ideas

The economics of free society is suffering due to erroneous political ideas. This is the central message delivered by Congressman Ron Paul in September 20, 1984 at the U.S. House of Representatives.

Reading Ron Paul’s speech makes me wonder about two things – the widespread ignorance of the American public about the message of Ron Paul and the tenacity of the Congressman for the past 28 years.

The Republican Congressman rightly diagnosed that the prevailing contradictions both in the economic and political affairs of the United States springs from a faulty political philosophy that will sooner or later result into political and economic crisis. Ron Paul was right all throughout this time. He has already foreseen the 2008 crisis 24 years in advance though he did not know the precise date of the crisis.

For Dr. Ron Paul, the primary problem of the United States is the expanding power of the government through regulations, taxes, overspending, welfarism, invasion of privacy, military spending, and international adventurism. He saw this expanding power of government as the ultimate threat to individual freedom. The fiscal crisis is secondary; it is the threat to liberty that must be taken seriously.

Dr. Paul describes this big government as the “cancer” in the land. The problem in finding a remedy to this cancer is solved through bigger government. This kind of remedy will make the cancer more dangerous and deadly.

Concerning monetary situation, in the eyes of Congressman Paul, electing politicians into public office whatever party they belong to will never solve the crisis. He is never surprised about the instability and the crisis of the US dollar. He has foreseen it coming since 1984. He just does not know the precise form and date of the crisis, but there is no doubt in his mind about the certainty of its coming. He describes the character of this crisis as:

“…a day that the world financiers will rush from dollars just as they have recently rushed into dollars, causing even worse chaos in the international financial markets” (p. 5).

One immediate consequence in the breakdown of the value of US dollar is failure in international trade. This has been proven repeatedly throughout history once a nation debased its own currency.

War is another result related to economic crisis. War benefits only the powers that be. Both economic depression and war are unnecessary outcomes of foolish decisions of politicians.

After describing the certain destination of a faulty idea of government, Dr. Paul claims that the only way to avert the crisis is to adopt a new attitude about the role of the government. Limited government is the solution. The government must keep away from the operation of the free market. The US government must stop intervening in the affairs of other nations.

The path to change is not easy. The public must be made aware about the existence and the influence of the shapers of public opinion. Seeing from this context, politicians are mere puppets.

Ideas are the primary weapons of libertarians to win this battle for limited government. Restoration of political and economic order is the immediate effect for having a limited government.

Congressman Paul offers six concrete proposals to cut the deficit. Among them are cutting budgets both for welfare and warfare, returning to sound money, and abolishing bank cartel. These are the tangible steps to bring freedom back to the people. The problem is big government and the restoration of freedom is the solution.

Personal Prayer

Creator of heaven and earth, my Redeemer, I am praying dear Lord that you bless my study of Austrian economics. Equip me with a basic understanding of monetary and economic theories for my writing and teaching. Bless my study of Pillars of Prosperity.

I do pray dear Lord that this kind of knowledge will spread all over the world so that governments and central banks will stop destroying the economy by continuous creation of fiat money. Raise lawmakers and politicians all over the world who uphold personal liberty, just laws, and free market activity not only in their talk, but also in their determination to introduce reforms. Enlighten the public so that governments will be made accountable for all their actions.

We admit Lord that we are but humans, your creatures. We are worried about the future of humanity. We do not know the future, but we know that you hold the future. Though the times are uncertain, we know that we can still trust you. Forgive us for not believing in you. Forgive our generation for our pride that in our intellectual sophistication we boast that belief in your existence is a mark of ignorance.

Forgive our governments for ascribing divinity unto themselves. Though they may deny it in words, but their actions tell otherwise. We have been witnessing for decades this messianic nature of the government. There are more regulations today than ever; governments are exacting excessive taxes from their citizens more than what you require; poor people are looking for the government to take care of them and evade their personal responsibilities; invasion of privacy and militarism are now becoming widespread. Change the minds of those in power.

Enlighten us to see that no matter whoever sits in the positions of power, nothing will change, the crisis remains, and getting worse. Forgive us for debasing our currencies (Isaiah 1:22) and for not accepting that it is a violation of your law. Enlighten our politicians. Give them knowledge and courage to fulfill their oaths when they took their public office.

Help us to see that the government is not the answer to present crisis. Change our attitude towards the government. Help us obey the government as she faithfully fulfills her ministry of justice. Abolish bank cartels and help us return to you and return to honest money.

The Laws Governing Goods-Character

In order to understand this post, one has to grasp first the previous two lessons taken from Carl Menger’s Principles of Economics.

• Real and Imaginary Goods, and
• Causal Connection between Goods

The laws governing goods-character explain about the dependence of goods-character of higher order of goods on command of complementary goods and on corresponding goods of lower order. The first law explains the fourth prerequisite (command of the thing sufficient to direct it to satisfy a human need) and the second law elaborates more the meaning of the first prerequisite (satisfaction of human need) for a thing to be qualified as real good.

In this lesson, I observe three things that remove the goods-character of a thing. These are:

• The unavailability of higher order of goods
• Absence of command over complementary goods, and
• The disappearance of a human need previously satisfied by first order of goods

Let us first deal with the first law that concerns the two bullet points above.

In explaining the impact of the unavailability of higher order of goods on the goods-character of related goods, Carl Menger identifies other interesting subjects such as unemployment and the distinction between backward and highly developed economies.

The subject of unemployment was mentioned when Menger cited the history of 1862 American Civil War. Due to war, the source of cotton in Europe was lost. Such lost resulted to the loss of goods-character of other related goods particularly labor services. Due to the unavailability of cotton, the services of laborers lose their goods-character resulting to the loss of jobs related to cotton industry. In this case, human need for cotton remains, but the command over higher goods was lost due to the absence of the source material.

The discussion on labor services is related to the distinction between backward and highly developed economies. Backward economy is characterized by dependence on one dominant crop and usually on one type of workers. Once the harvest season of that dominant crop is done, a shortage of labor services often occurs. And this is due to two reasons: few workers are motivated to work hard in time of abundance and harvest season of a single crop is confined into a very short period of time. In case this shortage of labor services persists where their demand is higher in an economy experiencing abundant harvest, the crops will lose their goods-character due to the absence of sufficient number of workers (whose services are also qualified as complementary goods).

In the case of highly developed economy where there are diverse products, complementary goods are in the hands of different types of workers. Usually, dependence on complementary goods is unappreciated unless a breakdown in the system will take place. Only then that people would realize the importance of command over complementary goods to retain the goods-character of higher order of goods.

To illustrate the importance of command over complementary goods, Carl Menger explains:

“Let us assume, for instance, that an economizing individual possesses no bread directly, but has at his command all the goods of second order necessary to produce it. There can be no doubt that he will nevertheless have the power to satisfy his need for bread. Suppose, however, that the same person has command of the flour, salt, yeast, labor services, and even all the tools and appliances necessary for the production of bread, but lacks both fuel and water. In this second case, it is clear that he no longer has the power to utilize the goods of second order in his possession for the satisfaction of his need, since bread cannot be made without fuel and water, even if all the other necessary goods are at hand. Hence the goods of second order will, in this case, immediately lose their goods-character with respect to the need for bread, since one of the four prerequisites for the existence of their goods-character (in this case the fourth prerequisite) is lacking (p. 59).”

The second law speaks about the dependence of the goods-character of higher order of goods on corresponding goods of lower order. Since goods of lower order is closer in terms of proximity of distance to satisfy a human need, the loss of such need will obviously affect the goods-character of goods of lower order. This cannot be said in the case of higher order of goods as long as other human needs still exist. This law only holds true in the case of higher order of goods if all the corresponding human needs also disappeared.

Menger gave two examples to clarify this law: quinine and tobacco. I just want to mention only his quinine example. He states that quinine ceases to be real good if the diseases it aims to cure disappear. The disappearance of the goods-character of quinine would immediately affect the goods-character of other higher order of goods. Menger makes it clearer.

“The inhabitants of quinine-producing countries, who currently earn their livings by cutting and peeling cinchona trees, would suddenly find that not only their stocks of cinchona bark, but also, in consequence, their cinchona trees, the tools and appliances applicable only to the production of quinine, and above all the specialized labor services, by means of which they previously earned their livings, would at once lose their goods-character, since all these things would, under the changed circumstances, no longer have any causal relationship with the satisfaction of human needs (p. 65).”

The second law elaborates more the meaning of the first prerequisite, the satisfaction of human need for a thing to be qualified as real good. It has been established so far that the existence of a human need in relation to particular goods makes these goods real goods. Furthermore, it has also been explained that the existence of this qualification does not depend on the proximity of distance to satisfy a human need. The important thing is to understand the causal connection between goods and the relationship of higher order of goods to lower order of goods in meeting a human need.

John Yoder on Christian and Economics

Searching for the response of theological education to 2008 global economic crisis led me to the link, Global Economic Crisis – Theological Responses and Resources. There are five categories under this heading: Responses by Christian Ethicists and Church Leadership, News Items, Theology and Economics, Theology of Work, and Other Sources.

The articles of thirty six theologians were placed under the category, Theology and Economics. I found the last article written by John Howard Yoder, The Church and Economics after Christendom: Brief Theological Considerations, as most informative among the first three articles that I have read so far.

John Yoder’s article was first written in German language in 1973, but posted on The Mennonite in 2009. The original intention for inviting Yoder to write the article was “to stimulate reflection and discussion on the topic ‘The Christian and Economics.’ ” After 39 years, I think that Yoder has given us a wealth of theological and historical insights, which we can use in our witness in the field of economics.

Yoder divided his piece under three major categories: biblical sources, models from the history of Christianity, and the contemporary situation. The biblical sources cover economic materials from doctrine of creation, the Law and the prophets, and in the coming of Jesus.

The creation account tells us that man is inescapably an economizing man, but the reality of the fall under the power of sin distorted man’s economic activity. Hence, there is a need for redemption to restore man back to faithful economic enterprise. But as Yoder noted, Christians have not always captured this “economic vision,” and instead, either “the essence of humanity was seen as a soul or spirit trapped in and separable from bodily reality.” This is dualism.

The coming of Jesus as Redeemer of humanity “includes a new economic order.” Many New Testament accounts are unintelligible apart from economic material. Two common examples of these are the ministry of John the Baptist and the beatitudes.

Based on biblical materials, the field of economics is part of Christian witness. The problematic part is the concrete implementation of this witness. The history of Christianity has given us several models in this concrete implementation, which can be generally categorized as “theocratic.” According to Yoder, throughout history, Christianity has given us at least five models: Catholic, Reformation, Revolutionary, Dualist-Pietistic, and Anabaptist.

In the Catholic model, “Economic relationships are understood as divinely established.” The primary advantage of this arrangement is that “the church itself emerges as an economic power…”

In the Reformation model particularly found in Zwingli and Puritanism, economic systems “are not simply accepted, but transformed.”

The revolutionary model has many variations. Its common characteristics shared with the second model are the mistaken identification of human programs with the plan of God and the use of force through the state. This paved the way for modern day state interventionism.

In the dualistic-pietistic model, such identification was opposed. “Economic structures are affirmed in their autonomy.” This avoids the alteration of the gospel due to its connection to specific political objectives.

Finally, the Anabaptist model rejects both the radical character of Reformation and revolutionary models on the one hand, and the conservatism of the Catholic and the Dualist-Pietistic models on the other hand. The Anabaptist model believes that the Christian community offers an alternative economic order and serves as a constant critique to the mainstream society. It affirms that the congregation is already in a new reality that it cannot force into the larger society. To some extent, I find this model similar to the one proposed by Austrian economists and libertarians of today. Presenting the overview of this model, Yoder states:

“Above all they did not assume that the same doctrine of right action must obtain for all, for believers and unbelievers. Neither did they suppose that those who govern were as a whole Christian. In other words, the lifestyle of a confessional community does not need to be developed into an ethic for all. Moreover, the community of faith does not necessarily need to be in the position to rule the world with its ethics.”

Based on Yoder’s “brief theological considerations,” four possible alternatives are available for us today in our quest for concrete implementation of Christian witness:

• Accepting the existing economic system, but maintaining internal critique
• Individual critique of the existing economic system
• Critique of the existing economic order accompanied by a vision and concrete action for radical change, and
• Critique of existing economic order by maintaining the unique and non-violent character of Christian community

Yoder admits that the potential options learned from biblical reflection and historical insights he proposed in the article are no longer evident in the theological and ecclesiastical alternatives considered today. Upholding non-violence and gradual change are uncommon these days. The prevailing response among Christians is similar to the Catholic and Dualist-Pietistic models, with attitude of indifference towards the existing economic system. But somehow hope still remains that in our own little way we could make a contribution for change. At the end of the day, each of us should examine ourselves if we have really responded to our responsibility as Christian witness.

Is Warren Buffett a Communist?

Many would laugh at the idea implied by the above question. How could a person in his right mind ask such a question referring to the most successful capitalist investor of our time? But such a question was asked by an informed economics professor to the great billionaire. His name is George Reisman.

In November 26, 2006, Ben Stein of the New York Times reported his interview with Warren Buffet. The billionaire admitted the reality of on-going class warfare initiated by the rich class and claimed that they are winning. George Reisman was worried about the social implications of the billionaire’s statement that prompted him to write an open letter after six years. In the middle of the letter, Reisman asked Warren Buffet, “You’re not a communist, are you?” And in the concluding advice, Reisman stated referring to Warren Buffet and his capitalist friends:

“And, of course, even you and most capitalists are not in fact advocates of capitalism, because you and they have accepted the essentials of Marxism along with almost everyone else.”

Our goal in this article is to introduce the real character of capitalism by presenting the main ideas in the open letter. We hope that this summary would provide an overview of capitalism and clarify common misconception about capitalism as exemplified by Scott Stephens.

The open letter is very educational. The major obstacle reading it is its length. It has 20 pages with 9,206 words. So I doubt if anyone would spend time reading such a long open letter.

Reisman started the letter with direct questions addressed to the billionaire implying that the latter was not really aware about the implication of his statement on class warfare. He then explained class warfare coming from Marx’s exploitation theory where capitalists are perceived as enemies of majority of humanity.

After giving that brief “lecture,” Reisman clearly identified that Warren Buffet’s understanding of capitalism has nothing to do with the real nature of true capitalism. He blatantly said that the billionaire was in fact ignorant about the actual character of capitalism and in terms of understanding “the most fundamental matters of economic theory and economic policy” the economics professor described Warren Buffett as much an “ignoramus” as he is “a ‘genius’ in the field of securities trading.” The professor then admonished the billionaire to correct his misconceptions and to withdraw his statement on class warfare.

After stating his admonition, George Reisman mentioned that despite of the billionaire’s misunderstanding of capitalism, the latter has actually blessed humanity with better standard of living due to his capitalistic endeavors. Seeing from this perspective, capitalists therefore are not exploiters and enemies of humanity as Marx’s exploitation theory emphasized, but innovators and benefactors. Self-inflicted guilt therefore among Warren Buffett and his friends is unnecessary. If Marx’s theory is correct, no amount of philanthropist acts could atone for the alleged crimes of the capitalists.

By “philanthropist acts,” I refer to the giving pledge signed by Buffet and his fellow billionaires and to his idea of raising taxes for highest earners and heaviest investors. According to the professor, these acts would finally result into the reduction of general standard of living due to its impact on production capital. In short, instead of helping society, such measures would actually lead into further economic destruction.

George Reisman then proceeded to explain the role of inflation (increase in money supply) in connection to capital gains. He believes that capital gains should not be taxed for they are not real gains. He then claimed: “The combination of inflation and capital gains taxation is a racket that puts money into the government’s hands at the expense of its citizens.”

The professor believes that the right way “to reduce the burden of taxation in the economic system is to start with the reduction of the taxes that land most heavily on saving and investment.” He further affirms that this type of tax reduction if complemented with similar reduction in government spending and regulations would result to better economy and higher standard of living.

George Reisman is against Warren Buffett’s idea of raising taxes for investors for the funds that would be collected could be utilized to finance more regulations hampering free market. Instead of increasing taxes, the professor advised Mr. Buffett to invest all the more in business capital for that would provide employment and the necessary products and services for the people.

The economics professor sees that socialism is the greatest threat to economic freedom. He mourned that the US Supreme Court has already abandoned its duty to protect people’s economic freedom for the last 75 years. Congressmen have passed laws under the influence of Marxist ideology. The real culprit for the economic woes of our time is the government’s growing intervention to prevent people from exercising their freedom to act concerning their basic economic rights and property. If this growing intervention of the government over the economic freedom of individuals would not be corrected, the future of humanity would be slavery and genocide as history clearly demonstrated to us in the experiences of Nazi Germany, Soviet Russia, and Communist China.

The only way to reverse the widespread influence of Marxism in the academe, the increasing restriction of people’s liberty, and the worsening economic tide is through an intellectual movement. The professor is calling Warren Buffett and his fellow billionaires to educate themselves in the economic theory and political philosophy of capitalism. He then introduced a list of free market thinkers and their books with specific emphasis on Ludwig von Mises and his works. He summoned Warren Buffett to finance this intellectual movement by helping spread those books in colleges and universities. He dreams to see of intellectuals to have deeper exposure in the ideas of best defenders of capitalism. He believes that the success of this intellectual movement would serve as the basis “for a peaceful and ever more prosperous world.” He describes that future dream as follows:

“…a world of respect for property rights and all other actual individual rights. This would mean a world of free trade, freedom of investment, and ultimately the free movement of people from everywhere to everywhere. Such a world would be a world in which no motive would exist for territorial aggrandizement on the part of any country, since its citizens would already be able to gain everything they might wish from the territory of any other country simply by buying its products, investing in it, or living in it.”

Typical Misunderstanding of Capitalism

In November 2008, Scott Stephens wrote his piece in response to global economic crisis. Rev. Stephens is the minister of Forest Lake Uniting Church and teacher of theology and ethics at Trinity Theological College. His article, Dishonest money: What the financial crisis tells us about ourselves is a typical example of misunderstanding the real character of capitalism.

If a capitalist billionaire himself with the caliber of Warren Buffett could misunderstand capitalism, it is but natural to see typical misunderstanding of capitalism similar to Rev. Stephens’. This is where we need discernment to see beyond the appearances of things and also the ability to distinguish between dominant social themes and alternative story.

The influence of mainstream media is very powerful to shape public opinion. Add to it the popularity of both the external and internal critics of capitalism. From the outside, we have the Marxists; and from the inside, we have people like Scott Stephens who himself enjoyed the blessings of capitalism. Both camps agreed in their analysis of the inherent flaws of capitalism.

The fear of Peter Schiff is not at all baseless. He is worried that the worsening crisis would be blamed on capitalism. This is exactly what is happening. Only few are able to take a deeper look at capitalism and realize that the so-called “inherent flaws” are really not coming from the free market, but from another version of it.

A good place to start in this social discernment is to learn the distinction between the economic positions of Warren Buffett and George Reisman. But before we do that, allow me to identify first the misunderstanding in Scott Stephens’ article. After reading Stephen’s article, you can compare it with George Reisman’s open letter to Warren Buffett and see for yourself the discrepancy between two versions of capitalism.

Scott Stephens rightly identifies as “dishonest money” the modern economic phenomenon of monetary expansion. The 2008 crisis not only exposed its faulty foundation, but according to Stephen should also lead to self-examination as to our participation in this crisis due to greed and extravagant lifestyle. Furthermore, it ought to direct us to a realization working for common good and the need for alternative community with a different economic system. He looks to the Church to provide such a community with an economic system different from capitalism.

This is the point that disturbs me, his association of “dishonest money” with capitalism. He appeals to history as his basis. He identifies that monetary expansion has been in existence since 4^th century B. C. Aristotle was actually “shocked to observe that the efficiency and simplicity of the market seemed to unleash something monstrous in the human heart.” He further narrates that as people perceived the potential of monetary expansion, they started to lust after unlimited profit. This seemingly unlimited increase in the quantity of money carried with it destructive moral vices like greed, dissatisfaction, and loss of self-control.  Stephens then mourned that those destructive vices in time have been turned into “celebrated virtues” serving as the basic foundation of modern economy. He then concluded, “Capitalism thrives only through these vices.”

As we will see in Reisman’s open letter, it is not actually the free market that unleashed those destructive vices. It was something else. It was the government intervention appearing as “free market.” Stephens’ reading of capitalism is a typical example of misinterpretation of capitalism and an evidence of the success of intervention done by the state.

Stephens’ hope “that those in positions of influence will find a just and effective response to the current credit contraction,” is actually a resignation. Can we really expect that those in power would initiate genuine monetary reform apart from the initiative of an informed public? As Murray Rothbard rightly identifies that due to the combination of both evil and good in human nature, those in power could actually utilize their privilege position for legalized theft.

Stephens’ longing for an alternative community with a different economic system exemplified by the Church could only happen on the basis of a solid understanding of what is really going on. This requires education leading to concrete action. Here I think the Austrian school of economics could provide the necessary tool for us to re-examine the real nature and character of free market economy. 

Part 2