Saturday, August 23, 2014

The Price of Being a Pioneer



That Galileo, Kepler, Bacon, Jung, Pascal, and Descartes – all men of the 17C – are better known than their elders in science is the kind of wrong that happens in all fields of culture.  The pioneers, the first who struggle out of the established systems and who form new and useful conceptions, appear only half right, incomplete, and their names stay remote.  But they are perhaps more to be cherished than those who come after, who clear off the debris and offer a neater, more full-blown view.
Jacques Barzun, From Dawn to Decadence

Barzun identifies several 17th century individuals who built upon foundations that came before, in many cases during the Middle Ages.  Many, but not all, of the pioneers from the earlier time are lost to us, although their work influences us even today.  Barzun suggests that none of these later, more well-known, men of genius stood on their own.

Barzun also recognizes that these earlier pioneers often were not quite right, in some cases incomplete.  I wonder how it could be otherwise – when truly charting a new and unknown course, is it even conceivable that every step, every conclusion, remains valid after subsequent developments in the field?  Yet, there would be no “field” in which to discover error without these pioneers.

This is a post about Murray Rothbard, unquestionably a pioneer.  There is no developed body of libertarian thought without him.  Separately, no one made Austrian economics more readable for the layman than he did.  This is to say nothing of the significant work he did in revisionist history and power-elite analysis.

I will focus on two aspects of his work, the aspects that I believe best fit the description above by Barzun: the development of libertarian thought and the work he did to make Austrian economics accessible to the layman.

Libertarian Thought

I wonder if there even is libertarian thought had Rothbard not existed.  I don’t mean concepts about liberty, natural law, property rights, etc.  These all existed in bits and pieces before Rothbard was born.  I mean an integrated and well-developed philosophy; work that explains the theory, practical application, and how to get there from here.  When are interim steps toward liberty appropriate?  Rothbard offers the answer.  The immorality of nuclear weapons – not only in use but even in possession?  Rothbard applies consistent libertarian theory to answer the question.  Developing a consistent application of the non-aggression principle to a wide variety of circumstances?  Rothbard has likely covered whatever subject you have in mind.

Do you have a question regarding pretty much any libertarian topic?  Odds are high that Rothbard has already addressed it.  Do you want to point someone to a readable book on the topic?  Odds are high that Rothbard wrote it.

Accessible Austrian Economics

Admit it: Mises can be tough to read.  How many people would slog through The Theory of Money and Credit as their introduction to this school?  (I tried; it didn’t work.)

Pick up anything by Rothbard on the subject and it reads about as easily as your favorite novel.  Human Action too tough?  Try Man, Economy, and State.  This is to say nothing about his countless works applying Austrian economics to events of both his time and through history.

I would be remiss to not mention Henry Hazlitt in this regard – he wrote so wonderfully well and also brought Austrian economic analysis to the layman.  But no one offered a meaningful fraction of the output and breadth that Rothbard did.

What’s the Point?

Rothbard is often a favored target, a whipping boy for some in the libertarian and Austrian communities.  In the broad libertarian community, he is derided as a purist, not practical.  To some Austrians, his views on fractional reserve banking are derided – and used to justify marginalizing him as an economist.

I return to the quote from Barzun:

The pioneers, the first who struggle out of the established systems and who form new and useful conceptions, appear only half right, incomplete, and their names stay remote. 

Thankfully (due to the efforts of another pioneer), Rothbard’s name has not stayed remote.  I myself have disagreement with Rothbard on a handful of subjects; I feel quite settled that my conclusions are correct and his are not – of course, I could be wrong.

But they are perhaps more to be cherished than those who come after, who clear off the debris and offer a neater, more full-blown view.

Even with my disagreements, I stand in awe and respect of the man and his work.  He was a pioneer in these two fields – and this says nothing of the work he did to advance the ball on many other subjects.  Rothbard is to be cherished far more than any who have come after – without Rothbard, there would be no “after”; virtually no one to offer criticism. 

I feel on firm ground to suggest that there would be no libertarian movement as we have come to know it if Rothbard did not exist – perhaps, more generously, his four-plus decades of work advanced the science by a century or two.  In other words, our time would not yet enjoy this knowledge.

As to Austrian economics, whatever his critics might offer, what cannot be taken away is that Rothbard has done more to bring more people to this school than any other individual alive or dead. Perhaps this is why they criticize.

We have seen the recent explosion of interest in both Austrian and libertarian concepts, driven by the fortuitous confluence of Ron Paul, the internet, and the financial calamity of 2007 / 2008.  Without Murray Rothbard, while the same events would have transpired, it is easy to imagine there would have been no cohesive message with which to make sense of it.

Bernard of Chartres, in the twelfth century, had exclaimed: “We are dwarfs who have climbed on the shoulders of giants.”  He nonetheless concluded that, thus carried by the Ancients, he could “see farther than they could”.

Is it surprising that aspects of both libertarian thought and Austrian economics have advanced beyond Rothbard, in some cases calling into question some of his conclusions?  To expect otherwise is to defy both progress and logic.  Yet all of the critics are truly dwarfs – many not even able to admit that they are standing on the shoulders of a giant – when compared to this man.  For every possible criticism, there are 100 reasons to be grateful.

The errors or disagreements make the man even more remarkable.  Through these, we are reminded he was merely human.

As Barzun offers, this is why we cherish such pioneers.

Friday, August 22, 2014

The Money Multiplier



I have received more than one kind and gentle email due to my post entitled “Austrian View of Fractional Reserve Banking: Tamny Mostly Right, Shedlock Mostly Wrong.”  The emails raise an objection to the following from that post:

Tamny: To Austrians, fractional banking leads to “excess credit creation” through what they refer to as a “money multiplier.”

The problem is that the very notion of a “money multiplier” is a logical impossibility; one that dies of its illogic rather quickly if analyzed in the lightest of ways. To explain what isn’t, banks are generally required to keep a 10% deposit cushion. Simplified, if a bank is the recipient of a $1,000 deposit, it can generally only lend out $900, or 90% of its deposits. What might surprise some is that the previously described loan is what has many Austrians up in arms.

To which I wrote in that post:

Please read the preceding again.  $1000 doesn’t become $10,000.  In fact, on prudently calculated reserves, $1000 doesn’t become more than $1000 in any economically meaningful sense.  The bank is confident in lending out $900 because it believes the depositor will not demand more than $100 from his deposit. (Emphasis added.)

It is interesting: the two individuals – the initial depositor and the subsequent borrower – hold two accounts totaling $1900.  But digits on paper aren’t excess credit creation in any economically meaningful sense of the term. (Emphasis added.)

I will preface my comments with the following: First, fractional reserve banking as practiced today is not fraud.  Second, markets are perfectly capable to regulate excess leverage at financial institutions.  I will not expand on either of these here as I have written on each topic more times than I can count.  These are not the primary purpose of this post; I only introduce these to clarify the baseline from where I will begin my analysis.

Given these two points (not fraud, markets capable of regulating leverage ratios), I lose interest quickly on the topic of proper banking / money / credit / currency issues.  If the market is capable of handling the issue, anything more I might write about it suggests central planning – one reason it strikes me that advocates of a 100% gold-backed standard are central planning.

As I do not think much further about the topic, it behooves me to consider that my statement in the earlier post might not be well thought through – as suggested by the emails.  The emails I have received come from multiple individuals whom I consider quite well versed on such matters; therefore it seems to me prudent to see if my statement holds water.

With that, let’s begin:


  • Depositor A deposits $1000 at Bank A.
  • Bank A, having previously calculated a prudent reserve ratio, determines it can lend $900 of these funds to Borrower 1.
  • Borrower 1 now acting as Depositor 1, deposits $900 in Bank B.
  • Bank B, again calculating prudently, loans $810 to Borrower 2.
  • Borrower 2 now acting as Depositor 2, deposits $810 in Bank C.
  • Prudent Bank C loans $729 to Borrower 3.
  • Borrower 3, as Depositor 3, deposits $729 in Bank D.

And so on….

You get the idea.

There are four depositors in my example; in total, they have deposited $3439 – far more than the initial $1000 deposit.  They each hold account statements that, when summed together – equal $3439.  If I continue the example, the sum of the account statement totals would be $10,000 – no surprise.  As best as I understand Rothbard and those who point to this fact – a fact I do not dispute – this is the crux of the issue.

Now, why do I emphasize “prudent” reserve ratios?  Simply to not muddy the example with poor business judgment on the part of bank management.  Poor judgment by an entrepreneur might be cause for insolvency, but not a cause to ban the practice (do we really want to initiate force to ban what some might consider an imprudent business arrangement?).

So, in my example, prudent bank reserve ratio means Depositor A never draws more than $100 from his balance – he draws some, he adds some – but overall it fluctuates around the $1000 initially noted on his account statement.  Same for Depositors 1, 2, & 3 with their respective balances.

So, Depositor A never draws more than $100; Depositor 1 never draws more than $90; Depositor 2 never more than $81.  My example ends there, but if extended all the way to Depositor N (100 is more than enough), exactly $1000 is drawn in total by all 100 depositors at any one time – the same $1000 initially deposited.

Now, I admit the example is simple – each bank likely has hundreds or thousands of depositors – all that matters is the prudence of the aggregate ratio (and with larger numbers, the risk of error would seem to be reduced); individual banks on a day-to-day basis will likely move above or below the target ratio (after all, the withdrawal from one bank often gets deposited into a different bank) – but, if prudently calculated, this is why there is some reserve (in my example, 10%) to offset this risk.  Adjustments can be made over time if the overage or underage persists.

So, the math is correct, as depicted by Rothbard.  But the implications are incorrect: not all $10,000 can be spent at the same time – only $1000 can. 

“But,” you exclaim, “what if more than $1000 is demanded at once?”

It is beyond the purpose of this post to answer this question in any detail, but I offer a hint: other than cash withdrawals (a tiny fraction of the modern economy), every withdrawal in one place is a simultaneous deposit in another – therefore, privately-agreed-upon interbank transfer agreements will mitigate this risk; if this proves insufficient for any individual, grossly imprudent bank – bankruptcy.  In either case, the problem will be resolved and assets will transfer to entities as decided by contract and bankruptcy court.  But to avoid diving too far down the path of another issue, suffice it to say that I see no Austrian or libertarian reason to insert monopoly force in order to mitigate the risk of poor entrepreneurial judgment.

In summary, there is not more in circulation than the amount initially deposited.  I have a sense that this is economically meaningful.

Maybe I am wrong about all of this: If I am wrong in my conclusion, I welcome comments as to why and why it matters (don’t say “inflation”: you have a right to your property; you have no right to the value of your property).  Also, I welcome comments about what might be done about it – while respecting free markets, private contracts, the NAP, and private property.

Thursday, August 21, 2014

Austrian View of Fractional Reserve Banking: Tamny Mostly Right, Shedlock Mostly Wrong



One day most Austrian economists will decide that free markets, sufficient to provide and regulate the production of all other goods, will be sufficient to provide and regulate the production of money and credit.

One day most Austrian economists will decide that a contract is a contract.

One day most Austrian economists will understand that it isn’t fraud if one acts according to an agreement.   

One day most Austrian economists will understand that lending out (at a prudent – meaning market-derived and reinforced – reserve rate) deposits subject to immediate withdrawal has no greater distortive effect to the economy or prices as lending out against a time deposit.

One day most Austrian economists will conclude that the enemy is the monopoly, not fractional reserve banking.

Today is not that day.

John Tamny recently wrote a post at Forbes, “The Closing Of The Austrian School's Economic Mind.”  In reply, Mike Shedlock responded with “Idiot's Guide to Austrian Economics.”  The subject is fractional reserve banking.  These two commentaries deserve some examination. 

NB: Both Tamny and Shedlock broadly generalize and apply their criticisms and defenses to the entire Austrian school.  On the subject of fractional reserve banking, there is significant disagreement within this school.  Neither author states this important point. 

With this, let’s begin.
Tamny: …the thought processes that inform the modern “Austrian School” more and more read as statist, monetarist in their conceit about what’s allegedly the proper supply of money and credit, and probably most offensive of all, the reasoning at times reads as Keynesian.

Tamny levels three charges here:
1)      Austrian thought processes regarding money and credit are statist: I have often commented that it would take government action to prevent a depositor and banker from consummating a deposit contract along the lines of today’s bank deposit contract – the target of FRB critics.
2)      Conceit about the proper supply of money and credit: who is to say what the market might accept as backing for currency, or the appropriate reserves for banking, or the proper amount of credit?  Yet proponents of 100% gold-backed money and credit are saying.
3)      Keynesian reasoning: I look forward to reading Tamny’s charge on this.

Suffice it to say – at least on two of the three points – Tamny is correct (to the extent certain Austrian school economists hold such views).  Tamny goes into detail on each of the three:

Tamny: [banks] borrow money from depositors seeking a return on their savings, and who don’t need access to their savings right away, only to lend the money borrowed to individuals who do need it right away. The profits come from borrowing at one rate of interest, then lending longer term at a higher rate. To many Austrians, this non-coerced act of exchange between consenting individuals is a fraud, and needs to be treated as such by the state. The Austrians want government to restrain what they deem a violation of property rights.

Tamny gets to what I believe is one of the major stumbling blocks for many in this conversation.  It is only fraud if the bank contracts to do one thing yet does another – to the disadvantage of the counterparty.  Fractional reserve banking – as in the bank promises to warehouse your deposit, charges you for the service, but lends it out instead – does not exist in today’s banking contract.

Tamny: But what the Austrians who decry fractional banking seem to miss is that no well-run business ever implodes due to lack of money, and this includes banks. With the latter in mind, well-run banks making quality loans arguably need the smallest of cash cushions.

Tamny gets to the heart of the point made by both Mises and Rothbard – the market will regulate the lending practices of banks just fine.  If the loans are good and reserve requirements are prudently calculated (and certainly if cross-banking backstops are developed in the market), a bank will not run out of money.  No, this most definitely is not an excuse for fraud – there is no fraud; read the contract.

Tamny: To Austrians, fractional banking leads to “excess credit creation” through what they refer to as a “money multiplier.”

The problem is that the very notion of a “money multiplier” is a logical impossibility; one that dies of its illogic rather quickly if analyzed in the lightest of ways. To explain what isn’t, banks are generally required to keep a 10% deposit cushion. Simplified, if a bank is the recipient of a $1,000 deposit, it can generally only lend out $900, or 90% of its deposits. What might surprise some is that the previously described loan is what has many Austrians up in arms.

Please read the preceding again.  $1000 doesn’t become $10,000.  In fact, on prudently calculated reserves, $1000 doesn’t become more than $1000 in any economically meaningful sense.  The bank is confident in lending out $900 because it believes the depositor will not demand more than $100 from his deposit.  If the bank calculates wrongly, and both the depositor and the subsequent borrower withdraw the full $1900, the bank (and depositor) might have a problem.  The ability to withdraw on demand is conditioned in the contract.  Is bad business judgment a crime?

Wednesday, August 20, 2014

Who Will Pass the Laws?



I have been thinking about this question since the time I posted “An Anarchic Possibility for the Modern World” in which I offered possible market solutions to most if not all government functions.  I wish I had dealt with this question of who will pass the laws in the referenced post.  I will take a crack at it now.

Perhaps I am oversimplifying this, but it seems to me that all “law” will be found in the contracts – explicit or implicit – behind either insurance or homeowners associations (in some cases, either could be used or both in conjunction). 

For example, customers will demand insurance against theft, assault, etc. – safety and security of person and property.  Will enough customers demand insurance against everyone else in the world smoking pot?  It is difficult to imagine that many people would want to pay the premium for this rider.

Speed limits, jaywalking, property appearance and zoning, access?  The HOA would be ideally suited to decide “laws” (more like covenants) on such issues.

This concept has similarities to law in the Middle Ages; much of law was personal, individual.  It was based on sacred oaths – while not exactly a contract, close enough.

In any case, I welcome thoughts on this – am I oversimplifying?  What are some examples of NAP-respecting laws that might not find solutions via the methods described in the short paragraphs above? 

Monday, August 18, 2014

An Anarchic Possibility for the Modern World



This is a topic which I have purposely avoided writing about in any detail for quite some time; only due to recent feedback here, it seems it best that I clarify my views.

The topic is my vision of a possible framework for an anarcho-capitalist society in the modern world.  By possible, I mean to suggest “one of many possible models”; I also mean to suggest “may not be adopted in any way shape or form.” 

“Why”, you wonder, “has bionic avoided elaborating on this?”  I’ll tell you: first, it seems rather presumptuous for anyone to suggest they know the way on this topic – how might billions of people choose to live in a world where the non-aggression principle and respect for private property are held dear?  Second, even as much as I have thought about this, I don’t have all the answers and cannot provide all of the details – I am not ashamed to admit I would make a poor central planner.  Third: the dreaded transition – how to get there from here.  These issues leave any post on this topic open for the countless objections for which I do not or cannot have an answer.

With that out of the way…I have written about anarchic – or at least vastly decentralized – societies that have existed in our past.  Two such examples include the highland people of Southeast Asia and much of the European Middle Ages (here and here).  These examples are found, obviously, in a much simpler time and place – not in anything resembling a complex division-of-labor society.  In other words, while the “laws” might have been friendlier to my anarchic way of thinking, the successful application within a more complex society and global economy is, at minimum, in question.

What is the problem looking for a solution?  It is the problem for which today’s centralized state is justified (albeit, being a monopoly, it has vastly exceeded these bounds), as follows:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness [I would say “property”].--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed….

In my libertarian world, this would be a statement for the necessity of “governance,” not government as it is known today.  I translate this statement as follows: governance is established to provide for my safety and security in cases where it is beyond my ability to do so as an individual.  In addition to this, many today consider government (as the term is commonly used) indispensable in providing certain so-called public goods (by this, I do not meet government owned; I lack a better term to describe streets, etc.).

To achieve these ends within my proposed framework, the fundamental requirement should be obvious but I will state it anyway: the institutional arrangements must respect the non-aggression principle and be, therefore, both voluntary and respectful of the inherently necessary property rights associated with this.  Beyond this, it will be helpful to my case if the institutional arrangements offer some demonstration of success in our modern, division-of-labor world – it will not be enough to demonstrate that anarchic (or, at least liberal) institutions worked when individuals were able to hide their crop underground, or when commercial relationships extended no further than the boundaries of one’s fiefdom.

With this, I offer the following two institutions – both prevalent in modern society, and arguably both either already resolving or are structured to resolve the two issues identified above: safety and security, and so-called public goods. 

Sunday, August 17, 2014

The City-State



I continue with my review of The Rise and Decline of the State, by Martin Van Creveld.  The introduction can be found here.

Van Creveld’s opening chapter covers what he describes as the time before the state – pre-history to AD 1300.  In this chapter, he reviews tribes – with and without rulers, city-states, and early empires – e.g. China and Egypt.  In this post I will focus on his section regarding the city-state.  As in all such sweeping views of even a specific aspect of history, much of what is written is a generalization – not all aspects will be found in every city-state.

…the outstanding feature of classical city-states was that their citizens appointed certain persons among themselves to govern all of them. …we are talking here not of rulers but of magistrates.

Unlike many of the tribal societies before, governance of the city-state was not based on descent.  This position also did not come with the concept of “ownership”; the appointed magistrates did not “own” all of the property or the people – they were not necessarily the wealthiest or most powerful citizens of the city, they did not lord over the other citizens:

On the contrary, in both Greece and Rome “government” (arche, imperium) was defined as a form of authority exercised by some persons over others who, unlike family members and slaves, were their equals (homoioi) in front of the law and did not “belong” to them…

There was no distinction corresponding to our customary (and superficial) separation of executive, legislative, and judicial branches.  Instead, “[p]erhaps the most important single institution was the popular assembly.”

Rome was perhaps unique in that it had four different assemblies, each comprising a different section of the population; elsewhere, one assembly was found – an assembly of all adult makes, excluding those who were part of another household, slaves, and foreigners.  In Athens, some forty meetings per year were held:

The assembly’s main function was to pass laws, known as nomoi in Greece and leges in Rome; but it also elected the magistrates and pronounced the final word on questions of war and peace.

The assembly also possessed the right to use ostracism in order to exile those citizens felt to be a public danger – an approach sometimes suggested as viable by those advocating a more libertarian / anarchic solution to certain offenses.

Next in importance to the assembly were the various magistrates.  Whereas many might be selected by lot, the most important ones were invariably elected… In Greece…the objective was usually to enable as many citizens as possible to rule and be ruled in turn.

The process of selection by lot is known as sortition:

…election by lot, a method of choosing public officials in some ancient Greek city-states. It was used especially in the Athenian democracy, from which most information about the practice is derived. With few exceptions, all magistrates were chosen by lot, beginning with the archons in 487–486 bc; likewise the Boule (council) of 500 and the juries of the law courts were chosen by lot. The practice of sortition obviated electoral races and provided for the regular turnover of officeholders. The operations of government were thus not in the hands of experts, but, through the system of sortition, the Athenian democracy provided at least some practical political education for its citizens.

The rationale of sortition was the equality of all citizens.

We could do worse than elect our politicians by lot…wait a minute…we already do worse!

The situation of law, crime, and punishment deserves mention.  There were several courts in which a trial could be judged.  The system was a jury system:

Thus, in Athens, the assembly elected a pool of 6,000 potential jurors each year; to forestall bribery, the decision as to who would serve on each court each day was made by lot with the aid of a specially constructed machine…In this way the classical city-state became the first, and for a very long time only, political community to take juridical powers out of the hands of the ruler(s).  No magistrate, not even the Roman consuls whose power was greater than that of all the rest, in an ancient city-state possessed the right to inflict capital punishment on a citizen in peacetime unless he had first been permitted to present his case before a citizens’ court….

There was no concept of committing a crime against the state:

In the absence of the state as a legal persona against which offenses could be committed, our modern distinction between civil and criminal jurisdiction did not apply.  It made no difference whether the matter before the court involved a dispute over an inheritance or murder; instead a line was drawn between cases which involved only individuals and those which, like peculation, treason, impiety, and – in Rome – insulting the greatness or majestas of the Roman people, concerned the community as a whole.  In the former cases, the only ones who could bring suit were the injured person or, if he was no longer alive, his relatives; the second type could be prosecuted by any citizen who wished to do so.

There is, perhaps, some applicability in this to the concepts of law and justice in a more libertarian / anarchic society.

There was little concept of specialized personnel, large administrative bureaucracies, or regular armies.  There was no institutional training of personnel for positions in police work, accounting, or diplomacy.  The laws themselves, at least initially, came from oral tradition – similar to the discovery of law during the Middle Ages.

The expenditures of government were met with market duties and proceeds from the justice system.  The most important source, however, was the so-called liturgies – contributions made by the wealthier citizens for specific purposes: staging a play, supplying an exercise hall, or erecting a public building.  Beyond any altruistic motives, such payments often helped to increase popularity and therefore gain sympathy from a jury pool – as such wealthy people were certain to be dragged into court on occasion.

Voluntary payments for so-called public goods; an interesting idea.  Instead of buying off the politicians via “campaign contributions,” they bought off the population directly, thus circumventing the tremendously expensive middle-man.

Thus ends Van Creveld’s overview of the governance in an ancient city-state; in addition to my being exposed to this history, it also provides real-world examples of institutional possibilities absent a (or at least via a greatly reduced) central, monopoly state government.