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Equality, Justice and Baseball

 

If only the world was as simple as the picture above would have you believe. According to the logic of this picture, as a society must pick between equality and justice; apparently these are two are mutually exclusive concepts. The picture makes an interesting enough point; but as usual, its central message cannot hold up to a thorough analysis of the concepts.

The Progressives will have you believe that when the three game viewers are treated equally and provided one box, the short guy losses out and cannot watch the game. However, when the resources are distributed more justly, all three fans are able to see their favorite major leaguers in action. According to this picture, the outcome is a true win-win!

It should be obvious that these boxes did not appear out of thin air. At some point, these boxes were produced by someone — knowing who produced them is of extreme important when trying to decide how they should be allocated.

The first question that must be addressed is: who owns the boxes? If the short guy, knowing he wouldn’t be able to see over the fence, created all three boxes to stand on, then those boxes are his property to use as he pleases. If he traded one box for a hot-dog and the other box for a beer, we can chide the short guy for an apparent lack of foresight but say nothing of substance other than he believed he would be better off making the trade.

On the other hand, still assuming the short guy made all the boxes, if he didn’t trade the boxes that means they were stolen by the medium and large guys. That is obviously theft, a result that would be antithetical to market action and open to prosecution in the court of law.

What if the stadium owns the boxes? In order to create value for their customers and to maximize profits, they would figure out a way to distribute the boxes so that all the fans could see the game. If the short guy came to the game and couldn’t see the action, he would not stay and purchase concessions, or even come to a game in the future. The stadium can calculate approximately how many boxes to build based on the test of profit and loss, a result that is impossible without market interactions.

What if the tall guy made all the boxes? This begs many further questions. Did they all have an opportunity to build boxes before the game? How was the tall guy able to build so many boxes before a baseball game? What were the medium guy and the little guy doing before the game? The answers to these questions dramatically change whether or not the outcome was “just.”

If the tall guy made tall the boxes while the short guy spent his time tailgating, can we really say it is just to steal the labor of the tall guy and give the boxes to the short guy? Assuming the short guy is able to create boxes, he should not be rewarded for the hard work of somebody else while he was out tailgating by playing corn-hole, listening to music and drinking beers.

Opponents will say this analysis is missing the point: the picture proves that resources need just distribution, your questions are too specific for this general point and thus erroneous. This assumes that resources simply exists and can easily be distributed by enlightened bureaucrats. If the boxes represent resources, there is a complicated production process in place to bring these items into being, a process that will never occur if property rights are not respected.

In the real world, resources are seldom used by humans without transformative labor first bringing them into being. In this way, people are free to keep the fruits of their labor, and the world capital structure will be based around the comparative advantages of the various market participants. Perhaps the tall guy did make all the boxes because he is a fantastic carpenter. We would arrive at “justice outcome” in the picture through free trade. The tall guy might create all the boxes, even though he doesn’t need one**, because that frees up the medium guy to buy three hot dogs and the short guy to buy three beers. Sure, the tall guy could get his own beer, but he is the most apt to creating all three boxes that must be completed before the game starts. If the short guy couldn’t finish an entire box before the game on his own, he is better served trading for a box by providing another valuable resource. Therefore, the free market would not only arrive at the “just” outcome by allowing trade between the three individuals, but it would provide hotdogs and beers in addition to just the boxes, an increase in the well-being of all!

What really breaks down the case of the social justice crusader is extending their own logic in the picture. Who gets to sit in the seats behind home plate? How is it not unjust that these three individuals are relegated to the outfield while there are perfect good seats behind home plate to be shared by all?  What about the players themselves, who decided who gets to play on the field? It seems unjust that these fans do not get an at-bat, after all wouldn’t that be more fair? Just because the players are more athletic and practice more doesn’t mean they should get all the at-bats, does it? As long as we are just stealing boxes from some and giving them to others, there is no reason to say that stealing seats or at-bats would be any different.

Justice has always been personified in the legal realm with a balanced scale, signifying equal treatment under the law. This is the only meaningful definition of equality. Equality of results is an impossibility — nobody has the same talents, desires, motivations, aspirations, etc. Justice means that you own your body and the fruits of your labor. Justice is destroyed be redistribution schemes that steal the labors of some and give them to others, ultimately impoverishing everyone in the process.

**For this reason, Ford is willing to produce thousands of automobiles even though they can’t drive them all, Apple will produce thousands of computers even thought they can’t use them all, and Samsung will produce thousands of TV’s even though they couldn’t watch them all. The market allows specialization which dramatically increases overall production.

Free Markets Don’t Fail

The free market has taken a severe propaganda beating over the last 100 years. To the average Joe, first thing that comes to mind when the free market is mentioned is “monopoly” or “wicked industrialist” or “social darwinism” or any other caricature that serves to aggrandize government intervention in the economy.

Let’s put the market to the test. By comparing the harshest words and critics of the market to reality, it will be obvious that anti-market propaganda is only, well, propaganda.

The first free market complaint comes form read this article by Ian Fletcher, Why Free-Market Economics is a Fraud:

It’s time to start getting honest about a very simple fact: Nobody, but nobody, really believes in free markets. That’s right. Not the Republican Party, not the libertarians, not the Wall Street Journal, nobody.

Here’s why: a truly free market is a perfectly competitive market. Which means that whatever you have to sell in that market, so does your competition. Which means price war. Which means your price gets driven down. Which means little or no profit for you.

This border-line incoherent definition is the worst possible explanation of a “truly free market” imaginable. The description fails to touch on even the most fundamental points made by those who espouse the free market philosophy. The free market is better defined as a vast network of social cooperation that satisfies millions and millions of complex individual desires through voluntary trade in which, as Ludwig von Mises put it, “everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as the satisfaction os his own.” In this way, society is vastly more productive and people who only know how to “flip a burger” can afford luxuries unimaginable to the greatest kings of Europe.

The above bastardized definition of the free market by Fletcher is a failed attempt to satisfy economists definition of “perfect competition,” which means firms in a given market sell identical products, there are no barriers to entry/exit, all firms have a small share of the overall market and that buyer have complete information. It would also mean that all firms are “price takers,” meaning they have no influence over the market price and therefore could not initiate a “price war” like Fletcher claims.

Make no mistake, even if the perfect competition model wasn’t butchered by Fletcher, this would still be an unconvincing criticism of the market. Perfect competition is only a model, an artificial construct used by economists. The main flaw of the perfect competition model is that it sets up an ideal world that is completely unachievable, and then when the real world fails to achieve this impossible ideal, it criticizes the market and begs for intervention. This is not a sound way to approach economic analysis.

Fletcher goes on to write about how businesses will brand their products to appear different or completely avoid competition at all costs. This is an odd criticism, akin to Yogi Berra saying that place “is so crowded nobody goes there anymore.” For starters, it just isn’t true. There are numerous industries with competition so fierce that profit margins are microscopic (think the restaurant industry, grocery stores or retail sales), yet businesses on the outside still attempt to enter this space to sell their products to consumers.

Fletcher continues:

Now let’s consider the other side of the equation. We’ve looked at free markets in things you sell. Now let’s consider free markets in things you buy.

Here everything gets turned around. If I’m buying something, I want the freest possible market in that product.

I don’t, to take an example recently on my mind, want there to be only one market for live Christmas trees in my town. I want there to be two (or more), and right next to each other so I can easily comparison shop. And I want to shop for more-easily shippable goods on the Internet, if possible, where I can potentially find the lowest price in the entire world.

I want, in other words, every seller’s nightmare. Which every smart seller will use every legal trick in the book to avoid.

As a result, nobody with any wits about them really believes in free markets. People believe in them when it’s in their interest, but not when it’s the other way around.

This is a systemic, structural condition, so anyone who tells you they believe in “free markets” is either lying, stupid, or hasn’t thought the whole concept through properly.

Fletcher’s logic would embarrass a 5th grader. Simply put, he argues that customers love free markets while businesses hate free markets; so therefore free markets cannot work and do not exist. This is ludicrous. Of course any business wants to be the only seller of a good. Everybody wants to receive millions for what they sell and get what they want for free. Even a pure altruist would benefit from selling napkins for $2 billion a piece — they could turn around and donate all the proceeds to the poor or whatever cause sparked their interest.

Fletcher’s flat criticism is nothing new. Ludwig von Mises, arguably the greatest free market economist of the 20th century, who could never be described as “lying, stupid, or hasn’t thought the whole concept through properly,”  wrote in 1949 that “to the farmer no price of wheat, however high, appears unjust. To the wage earner no wage rates, however high, appear unfair. But the farmer is quick to denounce every drop in the price of wheat as a violation of divine and human laws, an the wage earners rise in rebellion when their wages drop.” Despite this “systemic” condition, the market continues to thrive. Consumers remain completely in charge and “vote” with their dollars every day to decide which products and services meet their satisfaction and which ones no longer serve their best interests. Yes, certain businesses have found it profitable to lobby the government for special privileges and to limit competition, but this is an intervention into the free market by government — making it is rather silly, or should I say stupid, to blame the market for the government intervention.

Believing in the free market does not make you stupid, it actually means you are aware enough to know what you cannot possibly know, which is why nobel economist F.A. Hayak once said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

What Better Call Saul Teaches about Politics

1. The next video (#9) in the Economics in One Lesson Video Series — “How the Price System Works” — has just been posted on our site. Check that video out here: http://www.libertyandthings.com/how-the-price-system-works/ 

If you haven’t seen any videos in this series, start at the introduction: http://www.libertyandthings.com/hazlitt-introduction/

2. AMC’s Better Call Saul is the best show on television right now. The Breaking Bad spin-off, chronicling the life of Saul Goodman before he met Walter White, is top-notch, just like the original show that captivated millions.

While watching Better Call Saul, one lesson becomes clear: In the illegal drug industry, which operates outside of the rule of law, only the most ruthless survive. Drug-dealers that are capable of murder will thrive while the others….not so much. The dealers and kingpins who are the best at lying, cheating, stealing, deceiving are the ones that get on top (that these issues would lessen or disappear if drugs were legalized is a topic for another day.)

This observation is not original, not even by a long shot; it is obvious to any viewer of Better Call Saul; or to people that have watched any movie about illegal drugs; or to anyone that has thought about how the world works for more than two seconds.

Yet hardly anyone connects this obvious lesson to politics. Make no mistake, though: Getting ahead in politics requires those exact same qualities of ruthlessness. Those politicians most adept at lying, cheating and deceiving without remorse are the ones who survive, take office and make the laws. The best-of-the-best acquire leadership roles.

F.A. Hayek points this out in his brilliant analysis on pg. 158 of The Road to Serfdom:

“If I had to live under a Fascist system, I have no doubt that I would rather live under one run by Englishmen or Americans than under one run by anybody else. Yet all this does not mean that, judged on our present standards, our Fascist system would in the end prove so very different or much less intolerable than its prototypes. There are strong reasons for believing that what to us appear the worst features of the existing totalitarian system are not accidental by-products but phenomena which totalitarianism is certain sooner or later to produce. Just as the democratic statesman who sets out to plan economic life will soon be confronted with the alternative of either assuming dictatorial powers or abandoning his plans, so the totalitarian dictator would soon have to choose between disregard of ordinary morals and failure. It is for this reason that the unscrupulous and uninhibited are likely to be more successful in a society tending toward totalitarianism” [emphasis added.]

The Road to Serfdom is a must read, and chapter 10 “Why the Worst Get on Top” is one of the best. Hayek’s analysis is timeless and brilliant, must like our Hayek Mug!

Check it out: http://www.libertyandthings.com/shop/mugs/f-a-hayek-mug/ 

How to Enjoy Capitalism

Karl Marx wrote in the Communist Manifesto that the “bourgeois, not content with having the wives and daughters of their proletarians at their disposal, not to speak of common prostitutes, take the greatest pleasure in seducing each others’ wives.” This broad-brushed, insignificant “analysis” is typical of Marx’s writings.

Today’s critics of capitalism are no better. These critics bemoan greed, materialism or inequality; as if these things are separate from human nature and somehow caused by allowing free trade and voluntary association.

Ludwig von Mises and Milton Friedman have a far better perspective on the matter. Mises wrote:

“It is inherent in the nature of the capitalistic economy that, in the final analysis, the employment of the factors of production is aimed only toward serving the wishes of consumers.”

Friedman’s famous point shows a slightly different angle:

“Industrial progress, mechanical improvement, all of the great wonders of the modern era have meant relatively little to the wealthy. The rich in Ancient Greece would have benefited hardly at all from modern plumbing: running servants replaced running water. Television and radio? The patricians of Rome could enjoy the leading musicians and actors in their home, could have the leading actors as domestic retainers. Ready-to-wear clothing, supermarkets — all these and many other modern developments would have added little to their life. The great achievements of Western capitalism have redounded primarily to the benefit of the ordinary person. These achievements have made available to the masses conveniences and amenities that were previously the exclusive prerogative of the rich and powerful.”

Mises and Friedman are correct; Marx is painfully mistaken. For this reason, we are happy to announce the “Enjoy Capitalism” T-shirt and Mug. Stand up for the truth with our latest design:

My Pleasure vs. Take a Number; Capitalism wins again…

Picture the typical anti-capitalism activist. Maybe you pictured a far-left hippy living in a commune somewhere. Maybe you pictured a college professor, or even an idealistic student who doesn’t know any better.

No matter who you pictured, their refrain is usually the same: Capitalism is evil because it “commodifies” people; it makes them care too much about materialism or money.

Nothing could be further from the truth.

Even setting aside the ultimate “commodification” of human beings performed by the state — military conscription — the confused anti-capitalism still has the story entirely backwards.

Think about your last trip to the DMV. You took a number, you waited in an excessive line, you were forced to pay for “services” you didn’t want and the attitude of the the government bureaucrats working there was angry and sour.

Now picture your last trip to Chick-Fil-A. You went there because you wanted to, they moved hundreds of people through the line as quickly as they could, they fixed any problems with a smile (and a “my pleasure”) and they were generally happy to have you dine with them.

We’re supposed to believe that because money exchanged hands capitalism “commodified” people?

And further, we’re supposed to believe that more industries should operate similar to the Department of Motor Vehicles? This is a fundamental mischaracterization that can’t be tolerated any longer.

Capitalism is about the division of labor and social cooperation. It is about freedom and voluntary cooperation. “Getting ahead” in a market economy necessarily means you must serve your fellow man. Socialism is the exact opposite in every respect, or as Mises put it: “Socialism: is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.”

We hope we’ve served our fellow man with the two newest shirts in the Capitalism line:

Murray Rothbard Debunks 10 Economic Fallacies

Making Economic Sense — Chapter 2

The following is Chapter 2 of Murray Rothbard’s great book Making Economic Sense. The book can be accessed in full by clicking here.

TEN GREAT ECONOMIC MYTHS

Our country is beset by a large number of economic myths that distort public thinking on important problems and lead us to accept unsound and dangerous government policies. Here are ten of the most dangerous of these myths and an analysis of what is wrong with them.

Myth 1: Deficits are the cause of inflation; deficits have nothing to do with inflation.

In recent decades we always have had federal deficits. The invariable response of the party out of power, whichever it may be, is to denounce those deficits as being the cause of perpetual inflation. And the invariable response of whatever party is in power has been to claim that deficits have nothing to do with inflation. Both opposing statements are myths.

Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old Treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit.

Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

Some policymakers point to the 1982–83 period, when deficits were accelerating and inflation was abating, as a statisti- cal “proof’ that deficits and inflation have no relation to each other. This is no proof at all. General price changes are deter- mined by two factors: the supply of, and the demand for, money. During 1982–83 the Fed created new money at a very high rate, approximately at 15 percent per annum. Much of this went to finance the expanding deficit. But on the other hand, the severe depression of those two years increased the demand for money (i.e., lowered the desire to spend money on goods) in response to the severe business losses. This temporarily compensating increase in the demand for money does not make deficits any less inflationary. In fact, as recovery proceeds, spending picked up and the demand for money fell, and the spending of the new money accelerated inflation.

Myth 2: Deficits do not have a crowding-out effect on private investment.

In recent years there has been an understandable worry over the low rate of saving and investment in the United States. One worry is that the enormous federal deficits will divert savings to unproductive government spending and thereby crowd out productive investment, generating ever- greater long-run problems in advancing or even maintaining the living standards of the public.

Some policymakers once again attempted to rebut this charge by statistics. In 1982–83, they declare deficits were high and increasing while interest rates fell, thereby indicating that deficits have no crowding-out effect.

This argument once again shows the fallacy of trying to refute logic with statistics. Interest rates fell because of the drop of business borrowing in a recession. “Real” interest rates (interest rates minus the inflation rate) stayed unprecedentedly high, however—partly because most of us expect renewed infla- tion, partly because of the crowding-out effect. In any case, sta- tistics cannot refute logic; and logic tells us that if savings go into government bonds, there will necessarily be less savings available for productive investment than there would have been, and interest rates will be higher than they would have been without the deficits. If deficits are financed by the public, then this diversion of savings into government projects is direct and palpable. If the deficits are financed by bank inflation, then the diversion is indirect, the crowding-out now taking place by the new money “printed” by the government competing for resources with old money saved by the public.

Milton Friedman tries to rebut the crowding-out effect of deficits by claiming that all government spending, not just deficits, equally crowds out private savings and investment. It is true that money siphoned off by taxes could also have gone into private savings and investment. But deficits have a far greater crowding-out effect than overall spending, since deficits financed by the public obviously tap savings and savings alone, whereas taxes reduce the public’s consumption as well as savings.

Thus, deficits, whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the pub- lic, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden on the American people to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits.

Myth 3: Tax increases are a cure for deficits.

Those people who are properly worried about the deficit unfortunately offer an unacceptable solution: increasing taxes. Curing deficits by raising taxes is equivalent to curing some- one’s bronchitis by shooting him. The “cure” is far worse than the disease.

One reason, as many critics have pointed out, raising taxes simply gives the government more money, and so the politicians and bureaucrats are likely to react by raising expenditures still further. Parkinson said it all in his famous “Law”: “Expenditures rise to meet income.” If the government is willing to have, say, a 20 percent deficit, it will handle high revenues by raising spending still more to maintain the same proportion of deficit.

But even apart from this shrewd judgment in political psy- chology, why should anyone believe that a tax is better than a higher price? It is true that inflation is a form of taxation, in which the government and other early receivers of new money are able to expropriate the members of the public whose income rises later in the process of inflation. But, at least with inflation, people are still reaping some of the benefits of exchange. If bread rises to $10 a loaf, this is unfortunate, but at least you can still eat the bread. But if taxes go up, your money is expropri- ated for the benefit of politicians and bureaucrats, and you are left with no service or benefit. The only result is that the pro- ducers’ money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around.

No, the only sound cure for deficits is a simple but virtually unmentioned one: cut the federal budget. How and where? Anywhere and everywhere.

Myth 4: Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall).

The financial press now knows enough economics to watch weekly money supply figures like hawks; but they inevitably interpret these figures in a chaotic fashion. If the money supply rises, this is interpreted as lowering interest rates and inflation- ary; it is also interpreted, often in the very same article, as rais- ing interest rates. And vice versa. If the Fed tightens the growth of money, it is interpreted as both raising interest rates and low- ering them. Sometimes it seems that all Fed actions, no matter how contradictory, must result in raising interest rates. Clearly something is very wrong here.

The problem is that, as in the case of price levels, there are several causal factors operating on interest rates and in different directions. If the Fed expands the money supply, it does so by generating more bank reserves and thereby expanding the sup- ply of bank credit and bank deposits. The expansion of credit necessarily means an increased supply in the credit market and hence a lowering of the price of credit, or the rate of interest. On the other hand, if the Fed restricts the supply of credit and the growth of the money supply, this means that the supply in the credit market declines, and this should mean a rise in inter- est rates.

And this is precisely what happens in the first decade or two of chronic inflation. Fed expansion lowers interest rates; Fed tightening raises them. But after this period, the public and the market begin to catch on to what is happening. They begin to realize that inflation is chronic because of the systemic expansion of the money supply. When they realize this fact of life, they will also realize that inflation wipes out the creditor for the ben- efit of the debtor. Thus, if someone grants a loan at 5 percent for one year, and there is 7 percent inflation for that year, the creditor loses, not gains. He loses 3 percent, since he gets paid back in dollars that are now worth 7 percent less in purchasing power. Correspondingly, the debtor gains by inflation. As cred- itors begin to catch on, they place an inflation premium on the interest rate, and debtors will be willing to pay it. Hence, in the long-run anything which fuels the expectations of inflation will raise inflation premiums on interest rates; and anything which dampens those expectations will lower those premiums. There- fore, a Fed tightening will now tend to dampen inflationary expectations and lower interest rates; a Fed expansion will whip up those expectations again and raise them. There are two, opposite causal chains at work. And so Fed expansion or con- traction can either raise or lower interest rates, depending on which causal chain is stronger.

Which will be stronger? There is no way to know for sure. In the early decades of inflation, there is no inflation premium; in the later decades, such as we are now in, there is. The rela- tive strength and reaction times depend on the subjective expec- tations of the public, and these cannot be forecast with cer- tainty. And this is one reason why economic forecasts can never be made with certainty.

Myth 5: Economists, using charts or high speed computer models, can accurately forecast the future.

The problem of forecasting interest rates illustrates the pit- falls of forecasting in general. People are contrary cusses whose behavior, thank goodness, cannot be forecast precisely in advance. Their values, ideas, expectations, and knowledge change all the time, and change in an unpredictable manner. What economist, for example, could have forecast (or did forecast) the Cabbage Patch Kid craze of the Christmas season of 1983? Every economic quantity, every price, purchase, or income figure is the embodiment of thousands, even millions, of unpredictable choices by individuals.

Many studies, formal and informal, have been made of the record of forecasting by economists, and it has been consis- tently abysmal. Forecasters often complain that they can do well enough as long as current trends continue; what they have dif- ficulty in doing is catching changes in trend. But of course there is no trick in extrapolating current trends into the near future. You don’t need sophisticated computer models for that; you can do it better and far more cheaply by using a ruler. The real trick is precisely to forecast when and how trends will change, and forecasters have been notoriously bad at that. No economist forecast the depth of the 1981–82 depression, and none pre- dicted the strength of the 1983 boom.

The next time you are swayed by the jargon or seeming expertise of the economic forecaster, ask yourself this question: If he can really predict the future so well, why is he wasting his time putting out newsletters or doing consulting when he him- self could be making trillions of dollars in the stock and com- modity markets?

Myth 6: There is a tradeoff between unemployment and inflation.

Every time someone calls for the government to abandon its inflationary policies, establishment economists and politicians warn that the result can only be severe unemployment. We are trapped, therefore, into playing off inflation against high unem- ployment, and become persuaded that we must therefore accept some of both.

This doctrine is the fallback position for Keynesians. Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the gov- ernment to stop its inflationary creation of new money.

The tradeoff doctrine is based on the alleged “Phillips curve,” a curve invented many years ago by the British econo- mist A.W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemploy- ment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic Establishment.

By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, infla- tion was only about one to two percent per year, and unem- ployment hovered around three or four percent, whereas later unemployment ranged between eight and 11 percent, and infla- tion between five and 13 percent. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation-unemployment tradeoff.

But ideologues seldom give way to the facts, even as they continually claim to “test” their theories by facts. To save the concept, they have simply concluded that the Phillips curve still remains as an inflation-unemployment tradeoff, except that the curve has unaccountably “shifted” to a new set of alleged trade- offs. On this sort of mind-set, of course, no one could ever refute any theory.

In fact, current inflation, even if it reduces unemployment in the shortrun by inducing prices to spurt ahead of wage rates (thereby reducing real wage rates), will only create more unemployment in the long run. Eventually, wage rates catch up with inflation, and inflation brings recession and unemployment inevitably in its wake. After more than two decades of inflation, we are now living in that “long run.”

Myth 7: Deflation—falling prices—is unthinkable, and would cause a catastrophic depression.

The public memory is short. We forget that, from the beginning of the Industrial Revolution in the mid-eighteenth century until the beginning of World War II, prices generally went down, year after year. That’s because continually increas- ing productivity and output of goods generated by free markets caused prices to fall. There was no depression, however, because costs fell along with selling prices. Usually, wage rates remained constant while the cost of living fell, so that “real” wages, or everyone’s standard of living, rose steadily.

Virtually the only time when prices rose over those two cen- turies were periods of war (War of 1812, Civil War, World War I), when the warring governments inflated the money supply so heavily to pay for the war as to more than offset continuing gains in productivity.

We can see how free-market capitalism, unburdened by governmental or central bank inflation, works if we look at what has happened in the last few years to the prices of computers. Even a simple computer used to be enormous, costing millions of dollars. Now, in a remarkable surge of productivity brought about by the microchip revolution, computers are falling in price even as I write. Computer firms are successful despite the falling prices because their costs have been falling, and produc- tivity rising. In fact, these falling costs and prices have enabled them to tap a mass market characteristic of the dynamic growth of free-market capitalism. “Deflation” has brought no disaster to this industry.

The same is true of other high-growth industries, such a electronic calculators, plastics, TV sets, and VCRs. Deflation, far from bringing catastrophe, is the hallmark of sound and dynamic economic growth.

Myth 8: The best tax is a “flat” income tax, proportionate to income across the board, with no exemptions or deductions.

It is usually added by flat-tax proponents, that eliminating such exemptions would enable the federal government to cut the current tax rate substantially.

But this view assumes, for one thing, that present deductions from the income tax are immoral subsidies or “loopholes” that should be closed for the benefit of all. A deduction or exemp- tion is only a “loophole” if you assume that the government owns 100 percent of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy. Lowering the overall tax by abolishing deductions for medical care, for interest payments, or for uninsured losses, is simply lowering the taxes of one set of people (those that have little interest to pay, or medical expenses, or uninsured losses) at the expense of raising them for those who have incurred such expenses.

There is furthermore neither any guarantee nor even likeli- hood that, once the exemptions and deductions are safely out of the way, the government would keep its tax rate at the lower level. Looking at the record of governments, past and present, there is every reason to assume that more of our money would be taken by the government as it raised the tax rate backup (at least) to the old level, with a consequently greater overall drain from the producers to the bureaucracy.

It is supposed that the tax system should be analogous to roughly that of pricing or incomes on the market. But market pricing is not proportional to incomes. It would be a peculiar world, for example, if Rockefeller were forced to pay $1,000 for a loaf of bread—that is, a payment proportionate to his income relative to the average man. That would mean a world in which equality of incomes was enforced in a particularly bizarre and inefficient manner. If a tax were levied like a market price, it would be equal to every “customer,” not proportionate to each customer’s income.

Myth 9: An income tax cut helps everyone; not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut.

This is the so-called “Laffer curve,” set forth by California economist Arthur Laffer. It was advanced as a means of allow- ing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy its tax cut, be happy at the balanced budget, and still receive the same level of subsidies from the government.

It is true that if tax rates are 99 percent, and they are cut to 95 percent, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District’s gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to the chagrin and confusion of D.C. bureaucrats, they had to repeal the tax.

But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.

There are some other problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If—a big if—we are really at the upper half of the Laffer curve, we should then all want to set tax rates at that “optimum” point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.

Myth 10: Imports from countries where labor is cheap cause unemployment in the United States.

One of the many problems with this doctrine is that it ignores the question: why are wages low in a foreign country and high in the United States? It starts with these wage rates as ultimate givens, and doesn’t pursue the question why they are what they are. Basically, they are high in the United States because labor productivity is high—because workers here are aided by large amounts of technologically advanced capital equipment. Wage rates are low in many foreign countries because capital equipment is small and technologically primitive. Unaided by much capital, worker productivity is far lower than in the United States. Wage rates in every country are deter- mined by the productivity of the workers in that country. Hence, high wages in the United States are not a standing threat to American prosperity; they are the result of that prosperity.

But what of certain industries in the U.S. that complain loudly and chronically about the “unfair” competition of prod- ucts from low-wage countries? Here, we must realize that wages in each country are interconnected from one industry and occu- pation and region to another. All workers compete with each other, and if wages in industry A are far lower than in other industries, workers—spearheaded by young workers starting their careers—would leave or refuse to enter industry A and move to other firms or industries where the wage rate is higher.

Wages in the complaining industries, then, are high because they have been bid high by all industries in the United States. If the steel or textile industries in the United States find it difficult to compete with their counterparts abroad, it is not because for- eign firms are paying low wages, but because other American industries have bid up American wage rates to such a high level that steel and textile cannot afford to pay. In short, what’s really happening is that steel, textile, and other such firms are using labor inefficiently as compared to other American industries. Tariffs or import quotas to keep inefficient firms or industries in operation hurt everyone, in every country, who is not in that industry. They injure all American consumers by keeping up prices, keeping down quality and competition, and distorting production. A tariff or an import quota is equivalent to chop- ping up a railroad or destroying an airline—for its point is to make international transportation artificially expensive.

Tariffs and import quotas also injure other, efficient Ameri- can industries by tying up resources that would otherwise move to more efficient uses. And, in the long run, the tariffs and quo- tas, like any sort of monopoly privilege conferred by govern- ment, are no bonanza even for the firms being protected and subsidized. For, as we have seen in the cases of railroads and air- lines, industries enjoying government monopoly (whether through tariffs or regulation) eventually become so inefficient that they lose money anyway, and can only call for more and more bailouts, for a perpetual expanding privileged shelter from free competition.

But Who Would Build the Roads?

For a long time in America, the government has built and maintained a vast majority of the roads. This creates a phenomenon whereby the average person is unable to see how the “road industry” would operate in the absence of government intervention. Economist Murray Rothbard cleverly theorizes, if the government made all the shoes and privatization of shoes was suggested, people would ask:

“How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? How would the shoe firms be capitalized? How many brands would there be? What material would they use? What lasts? What would be the pricing arrangements for shoes? Wouldn’t regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn’t have the money to buy a pair?”

The point is: the private sector can handle road production. Nobody knows exactly what the roads would look like after different business models were tried and the tastes of consumers evaluated. Would there be less roads overall? Would there be more? Are the roads currently overbuilt? Would the road companies charge membership fees, collect money in a pay-as-you-go fashion, or fund themselves entirely on billboards and advertisements? Would they compete for customers by making roads safer or would they aim to reduce congestion and traffic jams? Would there be local road companies or national brands? No article (or book for that matter) could possibly predict exactly what type of roads competition and free enterprise would bring — and that is just fine.

Removing the inefficient producer from the equation — that is; federal, state and local government — would undoubtably reduce costs, congestion, pollution and lead to happier, more satisfied commuters.

If the above analysis is too abstract, consider this: Every year commuters in the Washington D.C. area lose 82 hours of their time (the average wage earner would make $1,956 in 82 hours) and $1,834 in extra fuel costs due to traffic jams. After setting the price of using scarce resources such as roads at zero, the government attempts rationing schemes like HOV lanes and ramps that completely fail to reduce congestion on crowded roads. To add insult to injury, these same drivers are also forced to pay over $800 million in “jurisdictional subsidies” to the local government-run metro system. Commuters face the choice of major traffic delays or taking a decrepit metro system that has caught fire on multiple occasions in the past few years.

Government operated transportation services in the DC area are nothing short of a disaster — yet few people are even able to identify the government as the source of the problem. How could the free market possibly do any worse than this?

As mentioned before, nobody can say precisely what the system of roads would look like if left entirely to free enterprise. There are hundreds of questions, concerns and objections to allowing the market to handle production and ownership of roads. In the space below, i’ll only address the most obvious benefit of private roads; as well as the most obvious concern.

Traffic jams aren’t a natural consequence of living in a densely populated area; traffic jams are a pricing problem and are therefore entirely preventable. If major roads, such as I-66 in the DC area, were privately held the owners would prevent daily, recurring or predicable traffic jams by using market clearing prices. If it cost, say, $10 per direction to get to work; some people would continue to drive alone, others would only drive in special circumstances or when they were running late, some people would arrange work-from-home situations and other people would be more motivated to carpool. Just like bread at the grocery store, prices will keep the roads open for most urgent demanders of roads at any given time.

Would the poor get left behind with privately owned roads? After all, in the prior congestion example, the price would have to be set high enough to reduce the volume of traffic. What must also be true, however, is that new opportunities will arise. For example, the major impediment (under government owned roads) to running an affordable shuttle or bus service during rush hour is the inability to keep a set schedule. Traveling 10 miles could take 20 minutes or 1.5 hours. This uncertainty is devastating to a bur or shuttle service. With private ownership and market prices, traveling 10 miles could take 10 minutes and shuttles would affordably get people from A to B without leaving behind the poor.

But not so fast. Maybe people would rather sit in traffic than pay a lot of money. Maybe people would live closer to work and there would be more apartment complexes and less suburban sprawl. Maybe other forms of transit like subway systems, bikes paths or ride-sharing would grow in popularity. All that can be said with certainty is that we will never know what consumers prefer if the roads are owned by a government monopolist that doesn’t allow competition and choice.

It doesn’t have to be this way — just like the market can handle shoe production, the market can handle the production and use of roads and transportation services.

 

How to Convince Someone to Become a Libertarian

If Libertarians are anything, they are passionate. Libertarians want more people to understand the philosophy of freedom; so they cite stats, figures, authors and books that influenced their thinking and hope other people will respond to the message in the same way. Too often these “great” arguments fall upon deaf ears.

It isn’t easy to convince someone to change their worldview, but it can be done. If there was an exact “blueprint to conversion” that existed, I would just publish that and watch the world turn into a better place. Instead, there are a few general principles you should be aware of that will help you be more persuasive as you explain to others why libertinism is right for them.

Establish Trust

Step one to convert someone to libertarianism is to establish trust. Nobody is going to change their mind unless they see you as trusted messenger — someone who is knowledgable, honest, sincere and responsible.

Listen

You cannot establish trust without listening. As a libertarian, you are willing to think outside of the box. You know far more about politics and economics than most people; so naturally you want to shout your philosophy from the rooftop for everyone to hear.

This is not how people communicate. Normal human interaction doesn’t go out the window just because you understand the business cycle. Communication is a process of back and forth.

Listening is often more important than speaking. An intent listener, who asks thought provoking questions, will be viewed as a great conversationalist by others. Aim to spend 70% of the conversation listening and only 30% of the conversation talking.

There are two main benefits to listening. First, you will learn a bunch of new and useful information about the person. You will find out the issues they care about, why they care about them and how they came to hold certain beliefs. Second, as a good listener you will build trust and open the door for further communication.

No Arguments

Dale Carnegie wrote “there is only one way under high heaven to get the best of an argument – and that is to avoid it.” This is great advice for libertarians. There are only two possible outcomes to an argument. You either lose the argument; or you “win” the argument and leave the other person annoyed and looking for post-hoc rationalizations, which they will easily find.

In other words, an argument accomplishes nothing and in the end both sides walk away more convinced than ever that they were correct.

Conversation > Argumentation

Argumentation creates a “gloves up conversation” were both sides enter into fight mode. If you actually want to convince somebody to become a libertarian instead of picking arguments, the person must be in conversation mode instead of fight mode. If you are having a conversation instead of an argument, mutual respect is earned and disagreement becomes welcomed and even tolerated. People are open to new ideas and new lines of thought when they are in conversation mode, but not when they are in fight mode. No matter what the topic, keep your cool and seek conversations instead of arguments. 

You’ve Got Trust — Now What?

Show that your values align.

It is essential to create strong foundation if you are building a house. Only later will you add finishing touches like plumbing, painting, trims, etc. When you are discussing ideas with others, you must take the very same approach. Libertarians are viewed as radicals. To break down barriers and make a persuasive case for liberty, you must show people that you share common ground and believe in shared values.

Luckily, most of us share many common values with one another. This is true regardless of our existing political persuasions. Everyone, whether on the left, right or libertarians; believes in fairness, caring, loyalty, truth, justice, equality, security, freedom, etc. The difference between left and right lies not in the values we share, but often in the definition or application of the values (for example, equality as material conditions or equality as equal under the law).

Here’s the point: nobody is going to listen to your 5 point plan about how to fix the tax code if you haven’t shown your values align — that you’re ultimate goal is human flourishing instead of haphazard destruction. Prove values align first, then later you can work your way to detailed policy prescriptions.

Appeal to Emotion

In his book The Righteous Mind, psychologist Johnathan Haidt breaks down the human mind into two distinct and divided parts: the “conscious verbal reasoning” (what libertarians tend to use in persuasion) and the “automatic and intuitive” mental processes.

The problem for libertarians is the division in our minds is not equal. The automatic and intuitive part of the brain — the part most libertarians ignore during persuasion — controls up to 98% of our mental processes.

This means the conscious verbal reasoning part of our brain is like a human being sitting atop a massive elephant. If 98% of mental processes are controlled by “automatic” forces, you will have no success in political persuasion without “speaking to the elephant first.” Since many libertarians (including myself) came to hold their beliefs through logical argumentation, this is a tough pill to swallow; but it shouldn’t be a complete surprise that in order for libertarianism to gain a broader appeal we need to “speak to the elephant” instead of passing out copies of Human Action and hoping that logic will prevail.

This begs the question: How do you speak to the elephant? These moral beliefs that make up the elephant and influence us, according to Haidt, break down into five primary categories:  1. fairness (vs. cheating) 2. caring (vs. harm) 3. respect for authority (vs. subversion) 4. loyalty (vs. betrayal) 5. purity (vs. degradation). Sometimes Haidt adds a 6th category that libertarians understand well: liberty (vs. coercion). 

Talk About “Caring” and “Fairness”

We know in order to be persuasive advocates for liberty we must show others that our values align. We understand that we must appeal to the emotional side of people. But where exactly do we start?

Jonathan Haidt’s research provides an interesting jumping off point. He shows that of the five moral foundations; liberals, conservatives and independents all hold the values of “caring” and “fairness” in high regard. While conservatives view all the “moral foundations” as equally important, liberals and independents view caring and fairness as vastly more important than the other moral foundations.

This means you must show how freedom, free enterprise, tax cuts or whatever issue you are talking about is “caring” or “fair.” If you do this you are speaking directly to a moral foundations that everyone shares in common. This is especially important if you are speaking to a diverse audience containing a mix conservatives, liberals and independents. 

Here are a few brief examples of how to weave the moral foundations of caring and fairness into your argument:

“It is not fair to take 50% of someones labor whether they are poor, middle class or rich. We need tax relief from the government, not tax increases — the government already takes well above anything resembling a fair share.”

“The average joe is far worse off when government forcibly takes their money and wastes it on bombs overseas”

In the second example, “caring” was implied and not explicitly stated. This is because it is not enough to state that “freedom is fair” or “freedom is caring”, you must genuinely appeal to the moral foundation in order move the elephant. Zingy one liners are not enough to change an entire worldview, they are just the beginning.

The best way to illustrate important moral foundations and move the elephant comes from storytelling. 

Illustrate Issues Through the Use of Stories

Think about how powerful the impact of a good story can be. It can be about a friend, a friend of a friend or somebody from an entirely different country or time period; a well crafted emotional story will stir up a noticeable physical reaction in an audience. We are literally hard-wired to understand and respond to storytelling, which is why human beings have used stories to pass on knowledge and traditions for thousands of years.

If we want to “move the elephant” and help people understand the importance of liberty, we must understand how and when to use our stories effectively. Some people call this process getting a“Ph D” in liberty:  personalize, humanize and describe the issue.

For instance, take the issue of healthcare. As libertarians, we understand that it is not within the proper scope of government to provide healthcare for people (even before we consider the inefficiency and worse health outcomes). But to the average Joe, educated in government schools and busy thinking about his life, family, and career; who cares about the “proper scope” of government when they believe peoples very lives are on the line?

To illustrate the importance of the issue, in a way that is impossible to ignore and anybody can understand, tell a story. 

For example, “before Obamacare was passed, we were told that if we like our doctor we could keep our doctor. If we liked our insurance plan, we could keep our insurance plan. Well, soon enough after the law passed, my mom received one of the cancellation letters. She is self-employed and had a plan that she was perfectly happy with — until bureaucrats in Washington decided they knew what health plan would be best for her better than she did. After days and weeks on the phone, shopping in confusing exchanges where the rules are always changing, she now pays [X amount] more than before for health insurance. And she is not alone, [ X amount ] of other Americans also lost their coverage and millions more are paying [ X amount ] in higher premiums. It’s not only the fact that she now has to pay more for a health plan she does not want — she was lied to by people who will suffer no consequences for their decisions.”

Contrast that story with the way libertarians usually communicate: “Here’s a fact, there’s a fact, here’s an amount, there’s an amount; i’ve proven my case now listen to me.”

The fact of the matter is, when you buttress your facts with personal stories (like example 1), instead of all facts or all emotion; you can make a very compelling case for freedom and free enterprise.

“Frame” Your Stories

When you “frame” a story, you are picking particular symbols and imagery to make your argument. In other words, you choose the terms of the debate.

For example, if you are asked “how can we ensure that the rich are paying their fair share,” and you answer using the term fair share, you have already lost the listener because this is a loaded question. There is no way to answer this leftist frame because before you even answer, and no matter how you answer, the implication is that the rich are not paying enough money.

This frame must be rejected and a new one inserted in its place. “The entire concept of there being a fair share is complete nonsense, the real issue is that Americans need tax relief from an out-of-control-government.”

See what happened there? A well-crafted frame strikes both ways — now the conversation is about taxation with the implication that we need “relief” from it. You only need “relief” from things that are negative — from an illness, irritation or soreness of some kind.

Word choice is more important than most people realize and can be the difference between “just a conversation” and somebody who is seriously considering the ideas that you are putting forward. 

To be effective at framing, you must spend time before a conversation thinking out the frames that improve your argument and help people understand your point. Most people, even those who think well on their feet, won’t be able to think of the best possible frames on the spot.

Don’t use Fancy Inside Baseball Language

Never use the word deontological, esoteric, minarchist or anarcho-capitalist (well, maybe not never, but be careful). Choose your words deliberately in order to make a point. Speak in a language that others understand. Others will figure out how smart you are without resorting to words that nobody outside libertarianism understands, and in the process you will convince more people to appreciate freedom.   

Explain Why

End the Fed. Abolish the FDA. Cut taxes and spending. Ok. But why? Just asserting “freedom” won’t be enough for someone that doesn’t already agree with you. You must explain why the fed harms everyday Americans; why the FDA encourages worse health outcomes and why high taxes and spending never accomplish their stated goals.

Consider the person you are trying to convince: their entire life they have heard nothing but good things about these institutions, if they have heard anything about them at all. Even if you frame your argument carefully, no catchy slogan will make somebody question the existence of institutions that have lasted for over a hundred years without a very convincing why attached to it.

Constructive Solutions

You need to articulate constructive solutions. Most people are not creative enough to envision a world without government roads or schools — and if they were you probably wouldn’t be having this conversation with them in the first place. Be ready to explain why and how the market provides goods and services more effectively than the government. If you cannot offer constructive solutions, you are probably not ready to be convincing others to change their world view. 

Resist the temptation to answer “the market can do that.” Libertarians understand the market means millions and millions of people working together to solve problems, but this is an incomplete answer to someone who does not already understand the concepts of spontaneous order and free enterprise. If you can begin to show how “the market can do that” by offering constructive solutions, your argument will be much more persuasive.

Why — How  — What

The “golden circle,” a concept put together by Simeon Sinek, is an examination and explanation of effective communication patterns used by inspired leaders and people.

Sinek says most communicators start with begin by explaining “what” they do — in terms of tasks.

“We make computers” or “we’re a law firm” or “we make automobiles.” Pretty straightforward. Chance are, if I asked you what you do for a living, you will say “I’m a student” or “I’m an attorney” or “I’m in sales.”

Next, most communicators say “how” they get these tasks done — in terms of what makes them better or more effective at achieving those tasks than others.

“Our computers are beautifully designed and user friendly” or “our firm has the best lawyers and we always perform well” or “our car has the latest navigation systems, leather seats and great gas mileage.”

Most of us we say what we do, explain how we are better and then expect a result to follow. For our purposes, the result we want is someone to become or think about becoming a libertarian.  Most of us make case for liberty somewhat like this: “I believe in the non-aggression principle; it is the most simple and accurate ethical principle that is applicable to all interactions. Want to become a libertarian?”

However, Sinek explains that the most effective communicators explain the “why” before they explain “how” and “what.” In other words, most people communicate backwards; the best organizations and people lead with “the why.” This is because “people don’t buy what you do they buy why you do it.”

Sinek’s observation actually ties together many of the concepts discussed above in this post.

The takeaway is we must begin by explaining why we believe in libertarianism even before explaining what libertarianism actually means.

“I am a libertarian because I want to see the maximum amount of human flourishing, innovation and overall prosperity. Libertarianism does this by removing the shackles of government intervention from the economy and establishing international peace through trade relationships. Libertarianism is simple and effective; and can be summarized using the nonaggression principle: No person or group has the right to initiate violence against others.”

The second case for liberty was much more powerful than the first — and all we did was switch the order of how the information was presented. Flip the order and watch the lightbulbs go off in everyone you converse with. 

Sinek’s explanation of his golden circle concept can be watched here in about five minutes.

Ask Questions

You don’t want to be on the defensive during a conversation. If the other side keeps asking pointed questions about who should bake cakes for whom — and you never ask questions of their premises or inconsistencies — you’re going to get stuck defending “more challenging” aspects of the philosophy without covering the big picture. Remember, the details are like “the plumbing” or “the what” — you must get big picture acceptance of values and “the why” before explaining the minutia will yield any results.

The other side wants to get you stuck in a “gotcha” moment. Instead of answering every question, stop and ask one of your own: “what is it that you are trying to achieve? What is your end goal? What is your vision of a better world?” These question can realign the conversation in a way more consistent with liberty.

Even better, asking questions of the morality or efficiency of the other side puts them on the defensive. When they are on the defensive, you will have a terrific opportunity to point out their philosophical inconsistencies and explain the attractiveness of liberty.

Sell Freedom

“Sell me this pen.” This famous scene from The Wolf of Wallstreet has an important lesson. In sales, the mistake most people make, according to Leonardo DiCaprio’s character, is that they describe the features of the pen or enthusiastically tell you why the pen is outstanding or how it is different. “This pen is beautiful, it writes smoothly, it’s got the best ink and is really comfortable to hold.”  Or “this pen is hands down the best pen i’ve ever used.” Try this experiment at home: everyone tries to sell the pen incorrectly.

The real way to sell the pen is to find out what the person is looking for in a pen, or if they even want a pen to begin with. Once you learn this information, you can make the sale based upon this knowledge or quit wasting your time and move on to the next person.

Consider yourself a salesperson for liberty and find out what the other person is looking for. This lesson meshes perfectly with the previous analysis of establishing shared values, asking questions and being a good listener. When you come across someone who is uninterested or unwilling to open their mind, that’s ok too; you have to know when to pick your spots and when to walk away.

Gently Point out Inconsistencies

“The libertarian sees no inconsistency in being “leftist” on some issues and “rightist” on others. On the contrary, he sees his own position as virtually the only consistent one, consistent on behalf of the liberty of every individual.” –Murray Rothbard

As Rothbard points out, libertarians are the only group that remain consistent across a wide variety of issues.

Famed community organizer Saul Alinsky wrote in his book “Rules for Radicals” that you must always “make the enemy live up to its own book of rules.” Alinsky believes that nobody can live up to their own book of rules. This means both liberals and conservatives suffer from major inconsistencies according to their own value systems. If you can point these out, conversationally and not militantly, you will make progress in “selling” liberty.  

Liberals claim to care for the poor, yet their policies trap often people in poverty. They claim that capitalism “commodifies” people without considering that its actually government that routinely commodifies the populace. Do you feel more like a commodity at the DMV or at Chick-fil-A?

Liberals claim that capitalism encourages greed without considering all societies have greed; and even worse, centralizing greed into one massive government structure results in mass inequality and in some cases mass murder.  You can always find failed government policies that harm people and create unfair outcomes — use these to convince liberals the power of free enterprise.

Conservatives suffer from the same inconsistencies. They’ll talk a big game about freedom; that is, until freedom can be used by individuals to do something they disagree with. The conservative will articulate the corrupt nature of politicians and their wasteful domestic spending, yet put complete trust in the exact same political figures who advocate for reckless military adventures abroad.

In short, the person you are trying to convince will always have philosophical inconsistencies that run counter to their prevailing value structure. If you can locate and point out the inconsistency, gently, you will provoke further thought from someone. The word “gently” is important: If you berate them and smack them over the head with their inconsistencies, you will simply push them to some sort of post hoc rationalization of their previous position. This is extremely easy to do for the human mind; in fact, it is one of the reasons so few people ever change their minds at all. The phrase “gently point out” doesn’t mean “compromise your beliefs,” it means being persuasive through friendliness and building trust.

Knowledge

It is important to realize how well you understand libertarianism. If you can understand complicated articles and were able to get through Human Action, chances are you “understand” a great deal. It is one thing to understand a concept, it is another thing to explain it to somebody else.

Before you go out into the world and attempt to apply your knowledge by talking with other people, make sure you have explained it before. Whether it be on a blog, a video or in front of the mirror doesn’t matter; what is important is that you have articulated ideas and not just read about them. In the end, practice makes perfect.

What are the Most Convincing Libertarian Arguments?

While you should never open with the terms minarchist, anarchs-capitalist or any other “inside baseball” terminology that evoke negative frames from the onset, it is equally important not to “water-down” the message of liberty. The message is persuasive enough on its own, most people have just never heard it articulated well or even at all (How many times were you assigned Bastiat, Mises or Hazlitt in school?)

Here are a few of the most convincing starting points:

**Sometimes you will have policy discussions that are spontaneous, but there are always principles that are universally applicable. While you shouldn’t speak on matters that you are not familiar with, generally the answer will lie somewhere below.

The non-aggression principle: “That no man or group of men may aggress against the person or property of anyone else. This may be called the “nonaggression axiom.” “Aggression” is defined as the initiation of the use or threat of physical violence against the person or property of anyone else.” — Murray Rothbard

Natural Rights: This can sometimes be more effective as an explanation than the nonaggression principle. Natural rights are covered in most schools; this makes it an easier sell because people are at least vaguely familiar with the concept (the first wall of resistance is broken).

Ask people, after the right to life, liberty and property; what additional rights exist? Hint: the answer is none — any additional “right” somebody tries to add infringes upon the right to liberty of somebody else. How can healthcare be a “right” if that means forcing doctors to work against their will? How can food be a “right” if that forces farmers to work for other people.

Fortunately, free enterprise is the best way to allocate these resources and allow for innovation; but even if free enterprise was less efficient, the natural rights argument would still hold. Libertarianism is a winning philosophy because it holds both the moral high ground and achieves the best practical results.

Frederic Bastiat’s The Law: Bastiat builds upon the natural rights case by showing the only legitimate function of the law and thus government is to protect natural rights. Bastiat illustrates how a society that encourages “legal plunder” deviates from the proper function of the law and rewards political cronyism. Soon society devolves into a situation where everyone tries to get ahead at the expense of everyone else (using legal plunder), which is a recipe for disater.

How does Bastiat define legal plunder? Very simply: “See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

The Law is a must read for anyone who wants to understand the logical implications of the natural rights philosophy. Read the first twenty pages, they are packed with information and if you read 20 pages of The Law, you’ll definitely want to finish the rest (its short, my  version is 55 pages.)

Henry Hazlitt’s Economics in One Lesson: The subtile of this book says it all: it is the “Shortest and Surest Way to Understand Basic Economics.” Hazlitt takes one basic economic rule — “never focus only on the immediate and seen effects of a given policy; always trace the effects for all groups over the long run” — and applies this lesson over and over until the reader can recognize and apply this lesson to a variety of issues; such as the minimum wage, rent control, tariffs, bailouts and much more.

Just about anyone can understand and apply this book. Nobody is stupid because they don’t “see the unseen” on their own; help them to understand this point by clearly and consistently applying Hazlitt’s lesson (we even have a video series to help you better learn the important lesson).

A Few Final Thoughts

Show the moral superiority of liberty. Most people, libertarian or not, agree with the basic thrust of the non aggression principle. They may deviate for this issue or that issue; they may make “real world” exceptions, but they agree with the idealism at the core of the statement. This can be a good starting point — an agreement of values — to get the conversation going and get that important early agreement.

Take the moral superiority argument much further. Illustrate how only free enterprise creates win-win opportunities for people because its entirely voluntary. Teach how only free enterprise requires service of your fellow man — despite the Orwellian language government employees use when the call themselves “public servants.” Economic freedom requires service because the only way to get rich in this system is to solve a problem and sell a product that your fellow man needs.

Explain how it would be immoral to hinder the only system that has ever taken people out of poverty. The moral argument is a winner — everyone wants to appeal to their idealism and believe they are on the side of what is right. Prevailing narratives aside, free enterprise is vastly superior on a moral level than government command economics.

Use the internet to your advantage

We live in a miraculous time. Like never before, we can hold people accountable for their previous statements with a simple youtube video. I’ve convinced people, not through my own persuasion, but by simply pointing them in the direction of videos like “Peter Schiff was Right” or written testimony of Ron Paul compared to Fed Chairman Ben Bernanke

Access to this type of information is a game changer. More and more people will start to see the failures of government intervention because they actually have access to opinions that differ from the 3 main news channels.

Never Be Discouraged

We have the right message. The case for liberty is strong. Not only do libertarians hold the moral high ground, freedom is superior on practical utilitarian grounds as well. It is easy to bemoan the obstacles in the way of freedom, but there has been tremendous progress made over the last thirty years. The state keeps growing and spending; but more and more people are waking up to the message of liberty. With the internet, people are finally able to learn the truth, no matter how much propaganda they had to swallow in school.

Since the libertarian argument takes the moral high ground and wins on utilitarian grounds, that means we have a messaging problem. Sure, there are institutional obstacles in our way, but we must understand where and how to improve the way we sell libertarianism.

Practice the messaging tips, read and learn as much as possible and get out there and convince people of the truth found in the philosophy of freedom.

To Understand the Future, You Must Understand the Past: Housing Bubble Edition

There are advantages to living in the year 2016. An underrated advantage is instant access to information — records to hold those who were wrong accountable or to learn from those who were right — at the click of a button.

Given that all the major media outlets were wrong about the 2008 financial crisis, it is important to ask, did anybody get it right? It just so happens that many free market economists saw exactly what was coming — and the most public example of someone sounding the alarms comes from Congressman Ron Paul:

Testimony from 2003  —

“Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.”

Ron Paul predicted exactly how the housing crisis would unfold, and then he was ignored and the economy promptly collapsed. So, after the crisis struck, everybody had a “come to Jesus” moment and listened to Ron Paul for the solution, right?

Of course not. They listened to Fed Chairman Ben Bernanke, who was asked about a potential housing bubble in 2005  (two years after Ron Paul’s testimony above) and said:

“Well, unquestionably, housing prices are up quite a bit; I think it’s important to note that fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places. So it’s certainly understandable that prices would go up some. I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy.”

Bernanke, as late as 2007, remained completely oblivious as to what was going on in the economy. In that year, he said:

“The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.”

It would be nice if people started listening to those that actually predicted the “Great Recession” instead of the Fed Chairman doubling as a the village idiot.

10 Events of Economic History that your Textbook Got Wrong

There’s only one way to say it: History textbooks stink. They are boring, biased and often factually incorrect. Even when they get the basic facts right, the interpretations leave much to be desired. This is especially true when economic analysis is required, a science that all historians cover but few actually understand.

Here are ten events of economic history that your U.S. History textbook probably got wrong. This post presents the standard textbook description and a more accurate interpretation of events based on free market principles (In another post, we cover the major reasons why textbooks and historians have been so wrong on these topics).

1. George Washington and the Fur Trade

Textbook Description: “In an effort to reduce trading fraud and the resulting conflict, Congress created government trading posts, or “factories,” where Indians could come for fairer treatment. Often, however, Indians found themselves deeply in debt to government traders. In 1822, Congress abolished the factory system.” – The American People
Reality: The government established trading posts called “factories” as early as the Washington administration because they believed trading with the Indians was an issue of national security that could not be left to private enterprise. From the beginning, government trading posts failed because they were inconveniently located, tried to sell natives agricultural equipment they didn’t want, and wouldn’t allow gifts or credit to be extended to natives. Government factories faced steep competition from John Jacob Astor who supplied the natives with products they demanded, traveled to them to make trades, and understood the intricacies of the fur trade market. Astor’s success was anything but assured, especially when competing against heavily subsidized government factories.

2. Commerce, John Marshall and Cornelius Vanderbilt

Textbook Description: “ [John Marshall] also encouraged a more freewheeling commerce in Gibbons v. Ogden (1824), which gave Marshall a chance to define the greatest power of the federal government in peacetime, the right to regulate interstate commerce. In striking down a steamboat monopoly granted by the state of New York, the chief justice gave the term “commerce” the broadest possible definition” – Nation of Nations

Reality: This textbook description is a mixed bag. Special government privileges, such as monopoly grants, are bad for the consumer. Monopoly grants reward political connections instead of entrepreneurial satisfaction of consumer demand. Therefore, when the Federal government uses its “greatest power” to remove arbitrary barriers to entry, this is a good thing. However, since textbooks universally focus on the U.S. government as the main character in their narrative, they usually miss the actual achievements of entrepreneurs that improve peoples lives. In this case, they have entirely left out the work of Cornelius Vanderbilt. 

Cornelius Vanderbilt made many significant contributions to the industrial development of early America. One of his first business ventures was to compete against the steamboat monopoly granted by the State of New York to Aaron Ogden. Vanderbilt was able out-compete Ogden and offered lower prices to consumers. Later, Vanderbilt switched to operating trans-Atlantic steamboats competing against heavily subsidized firms. Vanderbilt was able to out-compete these firms through innovation, increasing revenue by introducing cheaper 2nd and 3rd class fares, and technological improvements. Vanderbilt later sold off his steamship enterprise and focused on connecting New York and Chicago by railroad to provide grains to Europe through European shipping companies – allowing maximum overall productivity and lower prices by focusing on comparative advantage.

3. The Erie Canal and Public Works Projects

Textbook Description: “The project paid for itself within a few years. The Erie Canal reduced the cost of shipping a ton of goods from Buffalo to New York City from more than 19 cents a mile to less than 3 cents… Western states like Ohio and Indiana, convinced that their prosperity depended on cheap transportation, constructed canals to link interior regions with the Great Lakes. By 1840 the nation had completed more than 3300 miles of canals—a length greater than the distance from New York City to Seattle—at a cost of $125 million. Almost half of that amount came from state governments.” –Nation of Nations

Reality: After the completion of the Erie Canal, many state governments tried to mimic New York success through canal building projects of their own. New York’s distinct topography made completion of the Erie Canal easier than canal projects in other states. Pennsylvania, Michigan, Ohio, Indiana, Maryland, and Illinois all faced severe financial losses with their state run canal systems. The political incentives were to build canals through large voting districts, not the best-suited land with shortest routes that lower long-run operating costs. Even New York eventually lost money on its canal system by creating unprofitable branch canals. The major lesson of the time was that privately built internal improvements, on the whole, were more efficient and offered better returns than stated funded projects.

4. The Transcontinental Railroad and James J. Hill 

Textbook Description: “To the shock of much of the business community, he directed his attorney general to file suit to dissolve the Northern Securities Company, a giant railroad monopoly put together by James J. Hill and J.P. Morgan.” –The American People

Reality: The transcontinental railroad is always portrayed as a glowing achievement of government. Hill, like in the excerpt above, is only mentioned regarding antitrust legislation filed against him. It is far more interesting to learn that James J. Hill built the only transcontinental railroad that never went broke; and that it was built privately without any government funds (these two facts are not a coincidence).

James J. Hill’s privately funded transcontinental railroad was called the Great Northern Railroad. Hill was meticulous at making sure rails were built with quality materials, on low grades, with few curvatures, making the Great Northern unparalleled in quality. Hill’s railroad grew slowly, sustainably, and alongside the neighboring farm communities with which they served.

Hill’s subsidized competitors were paid by the mile, an incentive to build quickly in order to collect more money. This meant shoddy construction, on steep gradients, through unsettled land, and with large curvatures (to increase track length and thus receive more money). Once the transcontinental railroad was completed at promontory point in Utah, it was built so poorly that it later needed to be rebuilt and the operating costs were unprofitably high due to the steep gradients and curvy tracks.

5. Monopoly and Herbert Dow 

Textbook Description: Herbert Dow not mentioned by Nation of Nations or the American People.

Reality: Herbert Dow was a chemist that struggled, at first, to develop marketable products and faced the wrath of his investors. Over time, he was successful in controlling costs and managed to break the German cartel’s monopoly on chlorine and bromine. The German cartel, attempting to run Dow out of business, flooded the US market with cheap bromine they were selling at a loss. The Germans were unable to sustain the massive losses and eventually gave up. This example proves that “predatory pricing” is merely an idea with no real-world application and that markets are more efficient than government intervention.

6. Competition and the Wright Brothers

Textbook Description: The Wright Brothers are surprisingly not mentioned by Nation of Nations or the American People.

Reality: On the heals of subsidy disasters of the railroads in the mid to late 1800’s, the Federal government was slow to get back into the business of picking economic winners and losers. Scientist Samuel Langley, who had proved he could fly miniature unmanned planes and was “leading the international race to invent the airplane,” needed a $50,000 subsidy to create a manned “aerodrome,” which Congress eventually granted him after imagining the possibilities during war. The Wright brothers, bicycle shop owners from Dayton, spending less than $2,000 from their own pockets, were able to out-compete the more-experienced and better-funded Langley and produce the first manned flight vehicles. 

The important lesson here is that you never know where the next innovation is coming from. It is better to let market actors solve problems than to assign government officials this impossible task. The market is more than willing to fund experimental science and technology, government “encouragement” through taxation and regulation is unnecessary and even counter-productive.

7. The New Deal 

Textbook Description: “New Deal legislation did not solve the country’s problems, but it did strengthen the federal government, especially the executive branch… it promoted social justice and social reform, but it provided little for people at the bottom of American society, and less for African Americans and other minorities. The New Deal did not prevent business consolidation, and, in the end, it probably strengthened corporate capitalism.” –The American People

“The New Deal left a legacy of change. Under it, government assumed a broader role in the economy than progressives had ever undertaken. To regulation was now added the complicated task of maintaining economic stability—compensating for swings in the business cycle.“ –Nation of Nations

Reality: In 1929, for the first time ever, at the behest of President Herbert Hoover, the Federal government undertook a massive program of intervention in an attempt to counteract the onset of the Great Depression. The New Deal was in many ways a continuation of the initial Hoover interventions, despite Roosevelt’s campaign promises to balance the Federal budget. The New Deal and its wild spending, cartelized industry codes, political patronage, price and wage controls, and anti-business climate actually had the affect of deepening and extending the Great Depression by creating regime uncertainty – and thus a fear to invest – amongst American businesses.

8. The Marshall Plan 

Textbook Description: “The Marshall Plan was an economic miracle for Western Europe. By the end of the era, the region was entirely self-sufficient, and communism had been contained away from vulnerable countries. ” – Kaplan AP U.S. Prep Book 2011

Reality: The Marshall Plan – placed in proper context – is a classic case of “correlation does not equal causation.” While $17 billion of aid was given to Western Europe, and Western Europe recovered; and the Soviets denied aid offered to Eastern Europe, and Eastern Europe faltered; this phenomenon is better explained by the economic fundamentals underlying each region. The reason Western Europe recovered is simple – they embraced capitalism, individual liberty, and private property. These conditions were not present in Eastern Europe, which explains the tepid economic growth in the east.

The Marshall Plan was largely irrelevant to the economic recovery of Europe after the war. Aid never exceeded 5% of GNP in any one country, many countries – including hard-hit countries like France and Germany – saw notable recovery before Marshall Plan aid was received, and Marshall’s idea to have a “policy directed not against any country or doctrine but against hunger, poverty, desperation, and chaos” was overshadowed by special interests that accompany all government programs. Recovery in Europe, regardless of aid received, closely mirrored the removal of burdensome regulations placed on the economies of liberated countries by the Nazi party. 

9. Sound Money, Richard Nixon and the Gold Standard

Textbook Description: “To stimulate the nation’s sagging exports, he next stunned the world by taking the United States off the gold standard and devaluing the dollar. These moves effectively ended the “Bretton Woods” system of international currency stabilization that had functioned for more than a quarter of a century after World War II.” –The American Pagent

** Additional Note: Most textbooks examined did not even mention this monumental event

Reality: Nixon’s removal of the tie between gold and the dollar stemmed from the profligate spending by the United States government during the 1960’s. The government was spending a fortune on both “guns and butter” – the Vietnam War and the Great Society domestic programs. To keep U.S. finances in order, Nixon could have raised taxes to pay for the war or fund the Great Society programs, ended the war and the Great Society, or some combination of increased taxes and spending cuts. Unwilling to make tough political decisions, Nixon simply removed all ties between gold and the dollar created by the “Bretton Woods” system.

Essentially, this decision was the “easy way out” and amounted to the United States defaulting on its debts. Removing the last vestiges of the gold standard took away the final check on excessive government spending, paved the way for the stagflation of the 1970’s and ushered in wild central bank driven boom-bust cycles in the 21st century. 

10. The Housing Bubble 

Textbook Description: “As the American economy continued to deteriorate, financial and economic issues began to dominate the American presidential campaign Barak Obama claimed that a major cause of the economic downturn was the deregulation of business championed by many Republicans during the Bush administration; McCain countered that Obama favored much more government spending and an increase in taxes. A huge financial crisis broke in September, leading Congress to pass a major bailout package for financial institutions.” –  “5 Steps to a 5″ McGraw Hill

Reality: The major narrative surrounding the 2008 crisis — supported by politicians and media alike — was that “deregulation” of the banking sector caused the housing bubble. This narrative fails to explain obvious features of the crisis, most notably, where did banks get all that extra money to make risky loans in the first place?

Every single boom-bust cycle in United States history has been preceded by artificial credit expansion in the banking sector. This means that banks create money out of thin air and induce an unsustainable “boom” with this freshly printed money, a process that must eventually end in a recession. The reason there was a major bubble in housing was because the Federal Reserve Bank kept interest rates “too low for too long,” which means, simply put, that they were attempting to “stimulate” the economy by creating new money. 

Artificial credit expansion explains the reason a bubble appeared between 2000 and 2008, but it doesn’t explain why this bubble manifest itself in the housing sector. The government has long touted home ownership as an important part of achieving the American dream, so they enacted policies that made home ownership more appealing than it otherwise would have been. Two of the major culprits to blame for creating the housing bubble are the Community Reinvestment Act, which required banks by law to give loans likely to end in default to minority applicants (supposedly to “help” them); and Fannie Mae and Freddie Mac, quasi-governmental organizations which purchased mortgages from banks thereby freeing up additional capital to extend mortgages to even more applicants that would again be sold to Fannie and Freddie in a vicious cycle. There was always money available to purchase or flip houses, risky zero down and interest only loans became commonplace, and housing prices soared into the stratosphere.

Combine these government policies with the Federal Reserve money printing and you get the housing bubble of the early 2000’s. Unfortunately, the Federal Reserve’s response to this crisis was to create money even faster, once again, to “stimulate” the economy. This may have helped in the short term, but the problems will again surface once the interest rates are allowed back to their normal levels. 

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