South Korea and Austrian Economics

It’s a frustrating day! I wrote a draft yesterday for my next post, but as I checked my documents today, I could not find it. You know the experience of rewriting again a paper that took you some time to organize your thoughts. There is no certainty that I could come up with the same form I did yesterday. I simply decided to start anew.

I remember writing yesterday that I decided not to write further about the remaining four news articles from The Korea Herald, which I stated in my earlier post due to irrelevant content. Instead, I replaced them with three links related to “South Korea, Interventionism, and Austrian Economics”. I dropped “It’s time for Japan and South Korea to go nuclear.”

The first link directs to a Spanish blogger and investor who identified himself as jrv. His article’s title is Thoughts about Austrian Economists in the Present Context and Investing. Jrv’s profile and portfolio are impressive.  I could relate to his learning experience, but his investment successes are still very far from me.  I think the most relevant part in his article for my research is the sixth paragraph where he describes the increasing influence of socialism on many countries especially in the US. He excluded South Korea from that tendency. This is his personal opinion, which awaits confirmation from other more reliable sources.

The article of Lawrence W. Reed appears to me a confirmation of the opinion of the above blogger. It is about “Good News from Korea, China, and Vietnam.” I will just focus on Korea where Reed reports about the progress of Austrian way of thinking in South Korea.

Though written on the same year that global economic crisis took place, I really consider it good news to know that an institution was established in the peninsula to advance the cause of the free market. The establishment of Center for Free Enterprise would serve as a stronghold to frustrate South Korea’s socialistic tendency.

I envy South Korea for having free market thinkers like Dr. Byoung-Ho Gong and Dr. Chung-Ho Kim. Dr. Gong is the founder of CFE and Dr. Kim is the current president. They performed great service both for the future of liberty and their country by translating the books of classic Austrian economists into their language. How I wish that such academic labor would be emulated in our country, the Philippines.

The third link is actually a forum thread. It attempts to answer the question about South Korea’s economic prosperity. The first response contains five additional links. I already wrote my summary on the first article. My next writing task will focus on the four remaining links.

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Free Market’s Failure Justifies Welfare

Reading the fourth article from The Korea Herald issued as of November 6, 2012 convinced me about the influence of mainstream social theme about the alleged “crimes” of free market. The writer identified two among those crimes. These are the increasing socio-economic inequity and the collapse of traditional family values that left both the children and the elderly unattended.  Due to free market failure as the mainstream rhetoric wants us to believe, the entry of government welfare is now justified. And this serves as the rallying point of the three presidential candidates in South Korea: Park Geun-hye, Moon Jae-in, and Ahn Cheol-soo.

Among the three candidates, it was reported that Moon Jae-in is the boldest in his welfare platform and dreams to be “ ‘the first president of South Korea as a welfare state’ ”.  Ahn Cheol-soo’s source of financing for his “reliable welfare” program is commendable. It is similar to the monetary policies advocated by Ron Paul, the Tea Party US Congressman who is passionate to spread the Austrian economics way of thinking. Ahn’s “cut government spending” and “tax exemption measures” are really great ideas that will somehow help ease the existing economic situation in the country due to global crisis.

Listening to the voice of Austrian economists, a different diagnosis would come out concerning the alleged crimes of the free market in South Korea. They identify government’s intervention of the free-market as the primary culprit. Mainstream media and the academic community feed the public with such wrong notion for the government’s interventionist policy to escape public attention.

This fourth article really caused me to think hard. So I searched for other sites to learn how they look at the situation in South Korea. I typed in the search browser two lines of thoughts: South Korea and welfare state and South Korea and Austrian economics. And among numerous links, I chose four:

So in addition to the writing task I mentioned in the previous article, I add the above four. I am also thinking about reflecting on the economic situation in my country, the Philippines.

Honest Economy

Do not use dishonest standards when measuring length, weight or quantity. Use honest scales and honest weights, an honest ephah (dry measure), and an honest hin (liquid measure). I am the Lord your God, who brought you out of Egypt (Leviticus 19:35-36).

God gave this command for Israel to govern her economic activity with honesty. God expects Israel to obey this command. God states the reason in giving this command – He is the one who liberated them from slavery in Egypt. By stating this reason, in a way, God is telling His people that if they fail to follow His command, He is also able to send them back to slavery.

Through this command, God demonstrates that He and His word are sovereign in man’s economic activity. Israel is to be the “salt” and “light” of the world through their economic activity as a nation. If honesty rules supreme in their economic activity, God is properly represented by His people before the world.

Exercising honesty in economic activity entails a standard. This standard must be fixed. Without this standard, it is impossible to maintain order and harmony in economic activity. This standard is evident in the market through the use of physical measurements.

This measurement can assume diverse forms – scales, weights, and balances. To tamper with this standard of measurement is a clear violation of God’s command.

People who are prone to violate this command are those who have access or control over such physical standard of measurement. In the market, it is the sellers. People trust the sellers. Without trust, economic activity is difficult to maintain. But when sellers abuse people’s trust and cheat them by tampering weights, they are actually robbing the people.

Honest Money

Tampering physical measurements has both immediate and ultimate consequences. When sellers get away with their unjust economic practices, corrupt people win and honest people lose. It further reduces the efficiency of the market for buyers will be more cautious in the next economic transaction screening fraudulent economic practices. God does not tolerate such men indefinitely. Ultimately, he will bring wicked men and their evil economic practices into judgment.

In our time, tampering physical measurements is done in various ways. One common example is by “injecting water” into fowl’s meat. In this case, it is not the weight that is tampered, but the goods. But the offense remains the same. There is deceit and honesty no longer governs man’s economic activity.

When it comes to monetary transaction, fraud and deceit are more difficult to uncover. Unlike in the old days when people used gold and silver as medium of exchange, it was easy to identify whether the fineness of gold or silver coins was tampered. But in a world of paper money, fraud is hiding behind human laws and that is why people cannot see it.

The idea of paper money originally came into existence to represent gold money in bank reserve. Each paper money represents a corresponding gold coin in reserve. This is just and honest. To issue therefore a paper money to the public without the reserve is fraudulent. It is theft. It is a kind of tampering with weights and physical measurement.

The big problem now in the existing monetary system is the creation of paper money without even a reserve. Austrian economists call it “counterfeiting.” It is a form of theft. It is a clear violation of God’s economic command.

Note: The original idea in this article is taken from Chapter 3 of Gary North’s book, Honest Money.

Ten Basic Libertarian Principles

Based on the reading guide provided by Robert Wenzel of Economic Policy Journal, I came up with my own understanding of libertarian principles. I intentionally removed from my list articles that are too difficult for me. My purpose for coming up with my own list is to use it as a reference for my teaching assignment.

I am aware that mastering the principles in the list does not make one a specialist in free market. The basic goal is to supply with necessary framework for an intelligent understanding of free market ideas. In case any aspiring libertarian attains to the level of ability to distinguish among confusing terms used under the banner of “free market” and “libertarian,” then I can say that such a person achieves an end far greater than the original goal.

Each of these principles is expressed in a form of a summary statement or paragraph capturing the central idea of a corresponding article written by a reputable Austrian economist. Any mistake in interpretation is the responsibility of the blogger and if any reader is not satisfied with it, I suggest reading the source articles directly to come up with his own understanding.

Principle # 1 – A libertarian has fourfold tasks to fulfill, namely: to specialize knowledge focusing on concrete issues; not to expect from giant corporations for assistance in his fight for liberty; to focus on few basic libertarian principles in order to win his battle for freedom; and to demand honest money from the government.

Principle # 2 – A libertarian sees the serious threat posts against free market economy by fascist policy, which existence is proven by historical facts and present-day evidences

Principle # 3 – A libertarian believes that for free market economy to grow and flourish; it needs an intellectual atmosphere and social order friendly to it

Principle # 4 – Though a libertarian hopes for public opinion to accept a sound economic theory; he should learn to accept that the public may not, for a time; this is due to the absence of empirical evidence because of its nature that can be verified by reason alone.

Principle # 5 – A libertarian foresees that the government act of socializing public health will result into corruption and poor service due to absence of freedom in economic activity.

Principle # 6 – A libertarian believes that the only rational explanation for the “booms” and “busts” of business is due to government intervention and the creation of central banking.

Principle # 7 – A libertarian believes that Keynesian and Hitlerian economic policies are basically the same and their modern-day equivalent in capitalist and democratic countries are evident through governments’ central planning.

Principle # 8 – A libertarian equipped with Austrian economic perspective has the ability to see things and events in our society that most people do not see. Everything is now seen from a new perspective. The invisible hand of socialist states becomes evident. Dominant social themes are used to justify the expansion of the government’s power.

Principle # 9 – A libertarian discerns the true color of a socialist state. Socialism’s failure as an economic system causes it to hide behind an environmental cause for it to continue its suppression of the free market.

Principle # 10 – A libertarian understands socialism’s distortion of the concept of human equality to destroy the power of free market economy. Free market is blamed as the primary obstacle to the optimal development of the common man. The final result of such a trend is a return to a primitive social order where superior men will no longer serve the common men, but dominate them; not unless the rising generation will experience a new enlightenment that will prepare the way for a kind of social order where true free market economy has the freedom to grow and flourish. Only in such a society that an average man can be fully developed; a society where differences and inequality among men are accepted as basic parts of reality.

Savior of Capitalism and Champion of Free Market

Coming from the world of theological education, it surprises me to see that the pattern of theoretical confusion also exists in economics. I thought that the field of economics operates in the world of certainty and predictability. I was wrong.

I realize this confusion as I encounter reputable economists. And I think the most popular of them is Milton Friedman.

Milton Friedman’s Honorable Titles

July 31, 2012 marked the centennial birthday of Milton Friedman described by Stephen Moore of The Wall Street Journal as “the man who saved capitalism” and the “world greatest champion of free market.” The Foundation for Economic Education confirms this in their Twitter updates honoring Milton Friedman as “one of the twentieth century’s most influential champions of individual liberty and free markets.”

Like Moore and FEE, several economists wrote articles yesterday to commemorate the greatness of the man. Professor Richard Epstein of Ricochet accepts Friedman as an “articulate public defender of free market” and is calling for recognition for the latter’s “great contributions to the science of economics and the cause of freedom throughout the world.” He especially mentions Friedman’s contribution to the idea of “stable currency.” Daniel J. Flynn of City Journal even quotes Friedman’s “ideological opposite,” Paul Krugman who admits that Friedman is “a man of intellectual courage” and “one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the public that ever lived.” And finally, Michael Walker of National Post seems to represent the official position of Canadian economists in giving honor to Milton Friedman as “the most influential economist of the 20th century” and believes that Friedman’s “work will continue to have an effect as long as humans engage in economic activity.”

What an honor given to a deceased economist – savior and champion of free market and capitalism (by the way, all the mentioned writers above, advocate free market and capitalism)! However, not all people agree in giving Friedman those great titles. Moore though he refutes it, also reports his observation that the Occupy Wall Street movement identifies Milton Friedman as the “father of global misery.” There is truth in it, but it depends on how you look at it. If you are coming from the Left, indeed you would say that Friedman is the primary cause of global misery due to his “free market” and “capitalistic” ideas. On the other hand, if you are coming from Friedman’s camp, you would deny it and insist that Friedman is indeed a hero of capitalism and free market. The blame for economic recession then would go either to the government or central banking for their refusal to listen to Friedman’s teaching.

Austrians’ Perspective on Milton Friedman

But there is still another voice, the Austrian economists. I find four relevant articles refusing to give those honorable titles to Milton Friedman. I mentioned the first two articles in my previous post. Reading Richard M. Ebeling’s article, I state, “Yes, in terms of opposition to Keynesian economics and basic free market ideas, the Chicago School shares them with the Austrian School.” After reading Murray Rothbard’s, Milton Friedman Unraveled, I find my own statement misleading. From Rothbard’s point of view, there is no commonality between Milton Friedman and a true Austrian economist.

Including Rothbard’s article, the other two remaining articles are also very strong in their critique of Friedman’s position. I already mentioned that for Robert Murphy, the great difference between the Austrian and the Chicago schools are in the areas of “epistemology, methodology, interpretation of business cycle, application of Coase theorem, and above all, in policy about the supply of money.”

Gary North’s article is the most recent. It is written this day.  In Detours on the Road to Freedom: Where Milton Friedman Went Wrong, he dissected Stephen Moore’s article and from a true Austrian perspective, he pointed out, which part is acceptable and which part is misleading. In conclusion, for North, there is no reason to celebrate Friedman’s “victory party” as the hero of free market economy.

For North, agreeing with Rothbard’s analysis, Milton Friedman remains a Keynesian. He is a Keynesian economist who opposed Keynesian economics. This makes Friedman’s position confusing for many libertarians and free market thinkers, but not for North and Rothbard.

Milton Friedman’s Alleged Contributions to Free Market Economy

Concerning the contributions made by Milton Friedman to economics, Nick Gillespie of Reason.com mentioned five, which I consider three of them relevant. These are the introduction of school vouchers, documentation of the role of government in inflation, and the integration of economic freedom with political and cultural freedom.

Stephen Moore continues his praise of Friedman “as an influential voice for global economic freedom,” “the savior of capitalism,” an opponent of central planning, and the “apostle of free market.” Basing on the study of Andrei Schleifer of Harvard, he ascribes to Friedman as the one who opens the door to the 25 years of prosperity; referring to the era from 1980 to 2005 as “the Age of Milton Friedman.” Nick Gillespie voiced out such confidence earlier than Moore that in his July 28 article last year, he claimed that the Friedman’s century is just starting; it’s far from being over. Speaking of such an era, Moore describes it as a time of “remarkable progress” for humanity resulting from the implementation of free market ideas. He further describes that Friedman’s influence result to growth in living standards, improvement of life expectancy, educational attainment, and democracy. And above all, “absolute poverty declined” resulting to the liberation of over 200 million people from poverty.

Michael Walter confirms the widespread influence of Milton Friedman especially to Canadian economy due to his monetary policy of “flexible exchange rates.” He laments that the countries of European Union failed to listen to the wisdom of Friedman and that is why they are now sinking into financial pit. In line with economic policy to offer solution to global economic crisis, the Economist article posted July 28 this year claims that if Milton Friedman would be alive at present, his answer would be “deregulation.”

Daniel J. Flynn also mentions the “flexible exchange rates” and “school vouchers” among the contributions of Milton Friedman. Furthermore, he adds among Friedman’s significant contributions are putting “an end to wage-and-price controls,” “legalizing private gold ownership,” and reducing tax.

It appears to me that among the admirers of Milton Friedman, Flynn refutes the arguments of those who deny the economic impact of Friedman’s “free market ideas” describing the man as “real world economist,” “pragmatic libertarian,” and “a product of the concrete jungle.” As such, Friedman refused to isolate himself into some economic “idealist’s fantasy land.” His realism explains his inconsistency.

Milton Friedman’s Failure and Harm Done to Free Market Economy

Both Gary North and Murray Rothbard refused to accept Milton Friedman as member of libertarian camp. They exposed his real economic position. Both of them agree that even though in appearance Milton Friedman opposed Keynesian economics, but in reality, he still remains a Keynesian economist.

Gary North gave a detailed analysis of Friedman’s position. I just want to mention two. First, North identifies Friedman as a disciple of Irving Fisher, an advocate of “central bank-based fiat money economy.” In the eyes of Friedman, Fisher is “the greatest American economist.” However, according to North, Ludwig von Mises sees Fisher’s fiat money economics differently; it is a threat to liberty. As a faithful follower of Fisher, Friedman agrees that minimal inflation is acceptable. Second, Friedman’s followers welcome his 1971 book, A Monetary History of the United States as a masterpiece. But for North, the book did more harm than anything that Friedman wrote.

Among the ten articles that I used as my source, I find Murray Rothbard’s the most difficult and most penetrating to the real economic position of Milton Friedman. His article was written in 1971. For Rothbard, he finds it unacceptable to consider Friedman a convert from the “New Deal” to libertarianism. Instead an appropriate description of Friedman would be the statist version of “free market” and “libertarianism.” This serves as a reasonable explanation why Friedman was a favorite of the Establishment.

Except from the fallacy of Friedman’s ideas about the stability of money and uncritical acceptance of central banking as given, his concept of macro-statism as basic framework required for the existence of micro free market is also erroneous. As far as Rothbard is concerned, the macro and micro economics are inseparable. Friedman was attempting to synthesize two irreconcilable economic theories. If you retain macro economics as separate from micro economics, in time you will see the termination of free-market activity.

Personally, I think Milton Friedman gave free-market a bad name in the eyes of the public. Knowingly or unknowingly, instead of championing free market, he actually promotes statism at the expense of free market. We hope that by July 31, 2013, as the world will celebrate Milton Friedman’s 101st birthday, we will see economists giving him honor not as the savior of capitalism and champion of free market, but a hero of a new form of Keynesianism. And I think that would be honest.

In closing, let us listen to Murray Rothbard’s warning:

The libertarian movement has coasted far too long on the intellectually lazy path of failing to make distinctions, or failing to discriminate, of failing to make a rigorous search to distinguish truth from error in the views of those who claim to be its members or allies. It is almost as if any passing joker who mumbles a few words about “freedom” is automatically clasped to our bosom as a member of the one, big, libertarian family. As our movement grows in influence, we can no longer afford the luxury of this intellectual sloth. It is high time to identify Milton Friedman for what he really is. It is high time to call a spade a spade, and a statist a statist.