Monday, March 26, 2012

Is Hyperinflation No Longer Unfathomable?

In recent times EJP's Robert Wenzel has been updating us on the persisting rise in the "price level" induced by the U.S. FED's policy of heavy inflation of the money supply. Today Reuters reports:
Bernanke Says U.S. Needs Faster Growth

(Reuters) - The U.S. economy needs to grow more quickly to bring down the unemployment rate further, Federal Reserve Chairman Ben Bernanke said on Monday, defending the central bank's policy of very low interest rates.
While he offered no indication that the Fed is keen to embark on a third round of bond purchases, Bernanke also made clear the Fed is in no rush to reverse course after responding aggressively to a deep recession.
It seems that the boost to "effective demand" which has been driving stock, commodity and food prices up is not to the Chairman's satisfaction. While Bernanke's critics have been pointing to the debilitating effects of this monetary inflation (price inflation being the first and foremost), the consensus seemed to be that a German style hyperinflation of 1919-1923 was not to be feared. 

Is it unreasonable to amend that attitude after Bernanke's latest statement? For if he judges that even more money is necessary to be pumped despite all the evidence of monetary saturation of the markets, I venture to suggest that no amount of "elasticity of the money supply" will suffice for the Chairman. 

Bernanke's claim that a larger money supply is necessary to reduce unemployment in the U.S. has been proven to be a great myth by the German hyperinflation. Below is a chart from Henry Hazlitt's The Inflation Crisis And How to Resolve It:


October 1923

November 1923

December 1923

January 1924

February 1924

March 1924

April 1924

May 1924

June 1924

Note that the peak of hyperinflation was in the late parts of 1923 and early 1924. Also note that, according to the same work:
there was a great increase in unproductive work. As a result of changing prices and increased speculation, the number of middlemen increased continually. By 1923 the number of banks had multiplied fourfold over 1914. Speculation expanded pathologically. When prices were increasing a hundredfold, a thousandfold, a millionfold, far more people had to be employed to make calculations, and such calculations also took up far more time of old employees and of buyers. With prices racing ahead, the will to work declined. The production of coal in the Ruhr, which in 1913 had been 928 kilograms per miner, had decreased in 1922 to 585 kilograms. The "dollar rate" was the theme of all discussions.
Therefore, the lower unemployment rates prior to the peak of the hyperinflation were to a certain degree a result of fake (so to speak) jobs. We have already been seeing fake jobs brought on by bubbles; however the reports of this sort of employment are increasing. 

With Bernanke in full printing mode, hyperinflation in our day may not be a far-fetched idea anymore.

Friday, March 23, 2012

Cooperation: How a Free Market Benefits Everyone

By Jefferey A. Tucker

The following attempts to explain the most important idea in the history of social analysis. The notion (actually, it’s a description of reality that is all around us but rarely noticed) has been around for centuries. It was first observed by ancients. It was first described with rigor by late-medieval monks working in Spain. It was given scientific precision in the classical period. It is the basis of advances in social theory in the 20th century.

In fact, it is an essential part of the case for freedom. It was the basis of the belief of our ancestors that they could throw off tyrannical rule and still not have society descend into poverty and chaos. The failure to comprehend this idea is at the very root of the pervasive bias against liberty and free enterprise in our times, on the Left and the Right. 

I speak of the division of labor, also known as the law of comparative advantage or the law of comparative cost, and also known as the law of association. Call it what you will, it is probably the single greatest contribution that economics has made to human understanding.

This law—a law like gravity, not a law like the speed limit—is a description of why people cooperate and the ubiquity of the conditions that lead to this cooperation. If you can take a few minutes to learn it, you will understand how it is that society functions and grows wealthy even without a visible hand directing its path. You will also see how the criticism that the market economy leads to the strong dominating the weak is actually a sham.

This law shows how it is that people can gain, materially and in every other way, by working together rather than working in isolation. They don’t just gain the sense of satisfaction that comes with participation in solidarity with one’s fellow man; they can actually gain in the real stuff of life, the goods and services that are available to us all.

What’s more, they gain more than the sum of their parts. Through cooperation and exchange, we can produce more than if we work in isolation. This applies in the simplest economic settings as well as the most complex ones.

It helps to lay this out more rigorously so that you can observe the magic of the marketplace at work. (I owe the following exposition to Ludwig von Mises in Human Action, Murray Rothbard in “Freedom, Inequality, Primitivism and the Division of Labor” and, especially, Manuel Ayau’s Not a Zero-Sum Game, which is available through

Let’s say you and I can both make bagels and pies. But there’s a problem: you make both with incredible efficiency. In fact, you do a better job at making bagels and pies than anyone who has ever lived. You are the world-class, all-time champion.

Meanwhile, I’m not so hot at either. My bagels taste as good as yours, but they seem to take me an age to make. My pies are the same way. I struggle and struggle, but try as I might, I just can’t seem to crank them out the way that you can.

What is likely to happen under these conditions? The intuitive answer, which you will hear in just about every sociology class in the country, is that you will make all bagels and pies. No one else will. You will lord it over the rest of us, and have massive market power. If anyone wants either, he or she must come to you and you alone. You are privileged, favored, rich, powerful, and the rest of us can only sit in awe and beg from you.

But in fact, that’s not what happens at all. Let’s back up a bit and see why.

Let’s say you and I have never met, and we are both making bagels and pies. Here is what happens in a 24-hour period: You make 12 bagels in 12 hours, and 6 pies in the remaining 12 hours. I, on the other hand, only manage to make 6 bagels in the first 12 hours, and a mere 2 pies in the remaining 12 hours.

Production in Isolation:


If we both work at this pace, the total production is 18 bagels and 8 pies.

In each case, the cost of what you decide to do is the thing you give up. So for you the cost of each pie is 2 bagels, and, likewise, the cost of each bagel is 1/2 of a pie. For me, the opportunity cost of making a pie is 3 bagels, and the cost of making a bagel is 1/3 of a pie.

Just looking at this, you might observe that you have your act together, whereas I’m pretty shabby. What chance in life do I have?

Well, my hope is bound up with the reality that your time and resources are scarce and you want ever more of each. So you begin to think about exchange. Even though I’m not very good at either pies or bagels, you can still see that you can make more of one thing or the other by encouraging our cooperation, thereby freeing up your time to do what you do best.

If you specialize in making pies, you still need some bagels. So you plan to exchange pies for bagels from me. With this thought in mind, you increase pie production and reduce bagel production. I, on the other hand, stop pie production completely and devote myself to bagel production in hopes of fobbing them off on you.

Production with Cooperation:


So you now spend a mere 8 hours on bagel making, in which time you produce 8 bagels; in the remaining 16 hours of your day, you are able to bake 8 pies. Meanwhile, I can now devote all of my time to bagel-making, and I turn out 12 bagels in 24 hours.

Let’s total up the production. Before cooperation: 18 bagels and 8 pies. After cooperation: 20 bagels and 8 pies.

So what is the gain here? Precisely two bagels. Can you believe it? Nothing else changed; there was no increase in our productive potential, no increase in technology, no change in consumer demand or the weather or the linearity of history itself. All that happened is that we agreed to produce in cooperative exchange rather than isolation, and voilà—two additional bagels.

You think there’s a trick? Go back and check the numbers and the assumptions. I’m just as shabby as ever, and you are just as fabulous. And yet there’s a role for both of us.

Let’s say we now exchange the goods we make. You might give me 2 of the pies you made in exchange for 5 bagels that I made. That leaves you with 13 bagels and 6 pies, while I now have 7 bagels and 2 pies.

After Our Exchange:


This would be reasonable, since those bagels you buy from me would have cost you 5 hours of production time. True, it took me 10 hours to make them, but what do I get if I exchange? I get 2 pies, which would have taken me 12 hours to make. So there is a sense in which I, by specializing, have saved 2 hours. And how many hours have you saved by encouraging me to make bagels? Five hours, during which time you made pies.

And what is the cost of exchange in material goods for each of us? You have given up 2 pies. I have given up 5 bagels. If our time is measured in terms of goods, you have given up the time equivalent of 4 bagels for 5 bagels, and thereby gained 1. I have given up 5 bagels but gained the time equivalent of 6 bagels, since my pie-to-bagel ratio is 3 to 1.

So who gained the most? In terms of bagels, we gain the same: one. In terms of time, I have gained more. In terms of pies, you have saved more. Who is the winner? Both of us. Again, what made us gain? Cooperation and exchange. Nothing more.

Now, you might say that this is absurd. No one sits around drawing exchange matrices to see how we might benefit by dividing up the production. But in fact, we do this all the time. I might be a wonderful musician and web programmer. But my advantage is web programming, so I leave the music production to other people, even if they do it less effectively.

It’s true in the business world: the boss might do an amazing job at accounting, clean-up, marketing, and customer support. He or she might do these things more efficiently than anyone else, but the cost of doing one thing is another thing given up. It makes sense to depend on others so that we can all specialize.

Consider the great 19th-century pianist Franz Liszt. He was the best and mostly highly paid musician in Europe. Let’s say he was also a great piano tuner. Would it make sense for him to give up practice time for a concert that would pay him $20,000 in order to tune his own piano? Not at all. He would rather pay someone $200 to do that. The opportunity cost of piano tuning for Liszt was very high, but for the tuner, it was very low. They exchange, and both benefit.

It is the same with doctors and nurses. The doctor might be great at prepping patients, but in doing so the doctor is giving up performing another surgery that would earn him many thousands of dollars.

Note that this makes sense even if one person has an absolute advantage in every area. What matters for the real world is not absolute advantage but comparative advantage. That is where the law of association comes into being. It is true for two people, two hundred people, two thousand people, or all people all over the world. Herein we have the case for international trade, for it changes nothing about people’s mutual advantage that they reside in different lands.

This is why it makes sense for both poor and rich countries to trade, as noted by Bartolomé de Albornoz as early as the 16th century:
If it were not for these contracts, some would lack the goods that others have in abundance, and they would not be able to share the goods that they have in excess with those countries where they are scarce.
Note that these gains come not from design but merely from the freedom to associate, which Pope Leo XIII called a human right in his encyclical Rerum Novarum:
If [the state] forbids its citizens to form associations, it contradicts the very principle of its own existence; for both they and it exist in virtue of the same principle, namely, the natural propensity of man to live in society.
Both the moral and practical advantages were reiterated by Pope John Paul II in Centesimus Annus:
It is becoming clearer how a person’s work is naturally interrelated with the work of others. More than ever, work is work with others and work for others: it is a matter of doing something for someone else. Work becomes ever more fruitful and productive to the extent that people become more knowledgeable of the productive potentialities of the earth and more profoundly cognizant of the needs of those for whom their work is done.
The law was formalized by David Ricardo in England, and further emphasized by economists ever since. The significance is impossible to exaggerate: It means that it is not necessary that all people of the world have the same talents in order to benefit from cooperation. In fact, it is the very diversity of the human population that makes it advantageous for them to work together and trade to their mutual benefit.

What this means is that isolation and self-sufficiency lead to poverty. Cooperation and the division of labor are the path to wealth. Understand that, and you can refute libraries full of nonsense from both the Left and the Right.

Originally published on June 27, 2008
Republished with the author's permission. 

Introducing Mr. Jeffrey Tucker

A century ago or so an outlaw was a person who raped, murdered and robbed. Today, thanks to the ever-expanding reach of the Nanny State, the above mentioned has been reclassified into a victim of society--or rather of those of us who feel strongly about their property rights and personal liberties. Violators of others' property, through the political process, have become respectable members of society: bankers, mayors, city councilors, members of legislature. Jaywalkers, farmers, people who wish to own a toiled that flushes away, non-recyclers, those who refuse to wear seat-belts, plant smokers and similar types of "non-violent criminals" have come to take the role of an outlaw.

One such "Bad Apple" is former editorial vice-president of the Ludwig Von Mises Institute in Auburn, Alabama, and former editor of, Jefferey A. Tucker. An accomplished essayist, and adjunct scholar with the Mackinac Center for Public Policy, Mr. Tucker is presently executive director of Laissez Faire Books, and author of Bourbon for Breakfast: Living Outside the Statist Quo (2010) and It's a Jetsons World: Private Miracles and Public Crimes (2011).

I have asked for and been granted permission to republish some of Mr. Tucker's past work. These represent clever critiques on the expansive nature of collectivist action in society of the most practical nature. Tucker's pointed jabs at the absurdity and regressiveness of "conservation laws," restrictions on voluntary exchange and private property, and backwardness of certain laymen views on economic issues, to list a few, are delightful reads to the champion of liberty, and mind-blowing eye-openers to the novice to the philosophy of absolute freedom.

While the essays that I will be republishing are nothing new to Misesians, they will be new to a portion of my audience, which I hope to convince to join the cause of Liberty.

Wednesday, March 21, 2012

Love Thy Master

If you thought North Koreans banging their heads in concrete was a pathetic show of totalitarianism, think again after viewing this clip: The Government of the Republic of Macedonia holds an open Cabinet meeting one day every month where citizens are welcomed to voice their grievances with the state of affairs. This is how the open meetings are conducted.

Monday, March 19, 2012

Socialism and Sheep

Here's an old fable I was reminded of yesterday:
A Wanderer approaches a Sheep.
Wanderer: "Dear Sheep, every Spring the Shepherd takes away your young and slaughters them. Yet you go on giving him your milk and wool. Why?"
Sheep: "It is true that the Shepherd milks me everyday, sheers my wool and slaughters my offspring, but I go on serving him because he provides the grass for me to graze on."
Just as the Shepherd "provides" the grass for the Sheep, so the State provides its subjects with jobs, "free" education and healthcare, pensions, protection, and countless other services that we are told could not be provided by the free market.

Friday, March 16, 2012

What's Behind All the Anti-Meat Propaganda?

The other day my mom forwarded me an email of the "You Know You Are a (insert variable) if You..." variety, concerning being a native of my hometown, Kumanovo, Macedonia. Among the ten or so reasons listed was "You always think there is a conspiracy afoot." For all I know this may have been a swipe at my dad and me, since we always try to see "that which is unseen," as Frederic Bastiat would have put it. Now, I hasten to make the distinction between seeking out the beneficiary of a government policy from that of a conspiracy theory. The former is based on evidence--though often chosen to be overseen or obscured; the latter is normally used by those who seek to obfuscate the fact that someone is benefiting at the expense of someone else.

In that vein, I got to thinking: What's behind all the State funded anti-meat propaganda of late? Being one who believes that people only look to gain a material benefit, I normally don't buy the argument that people seek to impose a lifestyle on someone else squarely out of being "bleating hearts"--or out of being plain evil, for that matter. Case in point: me! I propagate the ideology of liberty and capitalism because I believe it to be the ideology that will give me the most benefit in life.

For instance, I would not be able to enjoy the luxury of owning an automobile at a more than affordable price had Henry Ford not become stinkin' rich. Very few people take this idea further: if not for the mass produced automobile, there would be no mass produced transport trucks which deliver us countless consumer products that we enjoy at very affordable prices. Henry Ford's wealth is the result of the benefit he has bestowed on all of us; yet it's something that is of no concern to me. What concerns me is the fact that my life has been made all the better for it.

So, what can be behind all of the anti-meat propaganda? Approaching the issue logically, one should suspect producers of meat substitutes, like soy and tofu; but also nuts, mushrooms and beans.

How about the meat producers themselves? Crazy as this may seem at first glace, Agriculture Canada's Tobacco Transition Program suggests otherwise. Under this government boondoggle, Canada's Federal Government tried to encourage tobacco farmers to quit growing tobacco in favor for something "healthy," by buying out the entire annual crop from tobacco farmers. Instead of completely abolishing tobacco farming, this program managed to more than double the number of tobacco farmers in Canada (to the tune of no less than $284 million). A closer look at the issue revealed that, in a sense the number of tobacco farmers did not really double, since most of the "new" farmers were just spinoffs of the existing tobacco farms.

To anyone that understands the first thing about the interrelations of supply and demand, the notion that one's entire produce was guaranteed to sell no matter what, would have suggested that the Tobacco Transition Program was going to fail. However, the program was a failure only from the Taxpayers point of view; but not from the point of view of the tobacco farmers that got paid despite not having to make the same sort of forecasts about future demand that any other free market entrepreneur has to! Therefore, Canadian tobacco farmers in collusion with the Canadian Government cheated the every honest business person and laborer in the country.

And, there would have been no such opportunity to make easy money on the backs of Taxpayers had tobacco not been declared a demon crop first. Thus, it makes perfect sense to me that the meat industry itself may be behind some of this anti-meat push; for once pronounced deadly, meat farmers will also need to be transitioned into growing something "healthy."

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