Aristophanes on Inflation

Posted At : December 11, 2009 10:05 AM | Posted By : name
Related Categories: Good Resources of Others

The following article was written by Clifford F. Thies and appeared on the web site of the Ludwig von Mises Institute.
http://mises.org/daily/3885

It used to be that every economist worth his salt knew Gresham’s Law (or, if he was Polish, Copernicus’s Law): “bad money drives out good.” Narrowly understood, this rule says that when the government requires people to accept different forms of money at an exchange rate fixed by law, the form of money that is overvalued (the “bad money”) will circulate, while the form of money that is undervalued (the “good money”) won’t.

Now comes a new translation of the plays of Aristophanes by Paul Roche, among them “The Frogs,” which has the oldest known expression of this rule:

You know what I often think:
We treat our best men
The way we treat our mint
The silver and the golden
We were proud to invent
These unalloyed
Genuine coins, no less,
Ringing true and tested
Both abroad and [in] Greece
And now they’re not employed
As if we were disgusted
And want to use instead
These shoddy coppers minted
Only yesterday
Or the day before
(as if that matters).
(Aristophanes: The Complete Plays, trans. Paul Roche, New American Library, 2005, p. 573)

In “The Frogs,” two citizens of Athens descend into Hades for the purpose of resurrecting two well-respected politicians of the past to save the city-state from its current, corrupt rulers. The current rulers are said to be like the base-metal coins in circulation, while the rulers of the past are like the full-bodied, precious metal coins that formerly circulated.

The full-bodied coins “rang true”; that is, when flipped onto a solid wooden table, they gave out a distinctive ring. Think of Edgar Allen Poe’s “The Bells.” The heft, feel, and tone of the coins were sufficient, for most purposes, to distinguish a counterfeit from the genuine article. And these coins circulated abroad as well as at home because they had intrinsic value. In contrast, the debased coins were impossible to distinguish from any counterfeit, since they had no distinctive qualities, and were repugnant to foreigners and anyone else not compelled by law to accept them, just like current politicians.

The passage doesn’t actually say how the base-metal coins came to replace the full-bodied coins. Nevertheless, we can infer that the audience knew what had happened, since the play was a comedy, not an economics lecture. From historical sources, we know that Athens had been involved in a series of wars against Sparta and other Greek city-states, and that it was threatened by Persia.

The continuing expenses of these wars depleted Athens’s treasury. Even the gold and silver objects at the temple were melted and recast as money. Then the city resorted to debasement and to legal-tender laws compelling acceptance of the debased coins at the values of precious-metal coins. Soon, the coins were recast only with base metal.

The story of debased coins and their connection with fiscal imbalance and corruption is perennial. The prophet Isaiah (1:22) writes “Your silver has become dross, your wine diluted with water.” Dross is base metal. The silver coins that had formerly circulated had come to be replaced by coins of base metal. The base metals might be polished so as to look like silver, as in the case of many contemporary US coins, but this only hides the corruption that would otherwise be manifest in the coins.

Similarly, the Islamic scholar Ibn Taymiyyah (who can be viewed as a forerunner of Wahhabism) wrote, at a time of continuing warfare against Christians to the west and Mongols to the east, “If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches which they possess.” Like Isaiah and Augustine, Ibn Taymiyyah wrote at a time of decline in his civilization and called for revival and separation from the world.

Speaking of the Mongols, it is to the Emperor Kublai Khan that we owe the invention of paper money. Marco Polo, who brought the news of this innovation to the Europeans, wrote in his travelogue, “nor does anyone, at the peril of his life, refuse to accept it in payment.” During the later years of Kublai Khan’s reign, the issues of paper currency became excessive, and an inflationary cycle got underway.

During the reign of his successor, the fourth Mongol emperor, the world’s first “currency reform” was undertaken, with a forced conversion of the old currency for the new at the rate of five to one. The former prosperity was also replaced by corruption and decline.

Upon the overthrow of the Mongol dynasty in the 13th century, and the ascension of the Ming dynasty in China, history recorded yet another milestone in the evolution of money, the first inscription of a legal-tender law onto paper money: “This paper money shall have currency and be used in all respects as if it were copper money.” At the beginning of the Ming dynasty, 17 units of paper money were the equivalent of 15 units of copper money. By the 15th century, 5,000 units of paper money were the equivalent of 15 units of copper money. Economic conditions deteriorated, and the empire suffered incursions by the Tartars.

Our own country’s experience with legal-tender laws goes back to the colonial days, when the colonies issued paper money then known as “bills of credit.” The first issue was by the Massachusetts Colony in 1690, during King William’s War, when the English colonists of Massachusetts thought to outfit an expedition to take Quebec, then a French colony. The bills were inscribed, “This indented bill of Five Shillings … shall be in value equal to Money.”

Soon after this war came Queen Anne’s War and another issue of bills of credit. Then came another war whose name escapes me just now, and then yet another. Each time, more bills of credit. And, of course, accompanying all these Bills of Credit was inflation.[1]

During mid-century, the English limited the ability of the American colonies to issue bills of credit, and the inflation was ended. Later in the 18th century, the American colonies chafed under the burden of this British constraint on issuing paper money. This constraint was among the grievances referred to in the Declaration of Independence. According to Benjamin Franklin, it was the primary one. And so they had a revolution.

Freed of the outside constraint on issuing paper money, guess what? As is obvious to everyone who does not prostrate himself before the throne of big government, there was inflation. And to compel acceptance of the paper money, guess what? Those not accepting the paper money being issued by each of the self-proclaimed independent states or by their Continental Congress were to be treated as Loyalists and have their property seized.

So, in view of the inflation that burst out during the Revolution and Confederation periods, there was called a convention for the purpose of drawing up a new agreement among the states. This agreement, among other things, limited the ability of the state governments to issue paper money and did not grant such a power to the federal government. What is remarkable about the constitution that they drew up is not that it only restrained the issue of paper money for a certain number of years (until the United States got into the cycle of war, deficit spending, inflation, corruption, and decay), but that it restrained the issue of paper money for as long as it did.

So let us, with the same cruel humor, make fun of our condition as Americans the same way Aristophanes did of the condition of Athenians. Let us send a delegation to Hades to resurrect Ludwig von Mises, Thomas Jefferson, John Locke, and Aristotle to replace the corrupt, debased politicians we now have.

Clifford F. Thies is the Eldon R. Lindsay Chair of Free Enterprise at Shenandoah University in Winchester, VA.

Notes

[1] During one of these wars (does it really matter which?) came yet another first in the history of money: the first use of a price index to try to deal with inflation. By contemporary standards, it was a crude index. Only the prices of four commodities were involved.

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One Major Source of Our Problems

Posted At : December 7, 2009 9:09 AM | Posted By : name
Related Categories: Economics Errors

An economist friend of mine, who is a Salesian Brother, recently gave a lecture at Oxford University reminding us of one major problem that is neglected by many economists and by papal writings on economic things. Yet this just might be the biggest problem that we are facing. All attacks on the free market by Catholics saying that it fosters greed, etc., have been shown to be nonsense, and that greed resides in the human heart. I learned this many years ago in the philosophy courses I took at a good Catholic university as an undergraduate. You would think that our clergy would also have learned it as well. Both the rich and the poor can be just as greedy.

But the “morality” industry, that is, those who make their living, so to speak, arguing that the cause of our financial problems is the lack of morality inherent in the free market, have missed the major point made by my Brother colleague: the problem of “rent seeking.” Famous economists Robert B. Ekelund and Robert D. Tollison define rent seeking as: “The behavior associated with the use of scarce resources in the pursuit of monopoly profits created by government action; the process of using scarce resources in an effort to obtain rents or a transfer of wealth.”[1] A rent is the payment to a factor of production such as land, labor, capital and/or entrepreneur skill in excess of its opportunity costs.[2] Basically a rent is profit. What the lay person calls rent, as in apartment rent paid to a landlord, is just one type of rent. And the rent paid becomes a rent only when the money paid for the apartment exceeds the cost of maintaining it and repaying the money loaned to build it. (This is one of the problems of rent control—government rent ceilings are usually too low to maintain the building so the owner has to abandon it and chalk it up a loss. The result is a slum.)

Notice that the definition given above includes government. How this works is that in exchange for financial and other support in future elections,[3] government leaders have an open door for those in business or unions who seek monopoly privileges. The privileges must be licensed by government, or the goods or services of the rent-seeking company will be open to competition, which will allow competition to drive down the prices charged for a similar product or force the rent-seeking company to improve the quality. Take the example of General Electric, oddly the company for which Ronald Reagan used to be a spokesman. GE is a failing company, but it also owns NBC. It appears that GE president Jeffrey Immelt got a lump of money from the government TARP funds, which was only intended to go to banks. It was given to GE’s financial arm, but since GE is not a bank, none of the strings attached to the TARP money banks received were applied to General Electric. GE CEO Jeffrey Immelt is a frequent visitor to the White House, and I am sure they have a coffee cup with his name on it. You can see the rent seeking here as NBC and MSNBC, owned by GE, were almost news outlets for the Obama campaign and now for his administration, bitterly attacking Obama’s critics. In addition, GE is a big supporter of the cap in trade (cap and tax) bill. One of the reasons behind its support is that it would stand to manage billions of in cap and trade contracts if the deal goes through. Not coincidently, Mr. Immelt is on the Board of Directors of the New York Federal Reserve Bank, which is the most powerful of the Fed banks.

I am not picking on GE, but I am attacking the notion that the government has a role in managing the economy, because this opens the door to groups and companies looking to get a hand on government monopoly privileges and your tax money, instead of earning it the hard way. Take the current “Jobs Summit” now being held in the White House. All of the Obama cronies are there: big unions, some big corporations, all looking for handouts or privileges. Noticeably missing was the US Chamber of Commerce, a public critic of Obama’s economic policies, and other representatives of small business owners—small business which employs most American workers. It was reported that when one person at the conference told the President that if he wants to help the growth of jobs, do not pass the health care plan, Obama replied that “we” are going to pass it whether you like it or not.

All this is rent seeking, and government is the middleman in the process. If the government were strictly prohibited for touching business or labor in the country, these folks could not get anything from it. Sadly, Catholics are among the biggest supporters of government’s running of the economy; therefore, Catholics are big supporters of rent seeking to the detriment of the economy and the common good.

[1]Robert B. Ekelund and Robert D. Tollison, Microeconomics, 3^rd edition (New York: Harper-Collins, 1991), 676, my italics.

[2]Ibid.

[3]In other countries, outright bribery.

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Where Is Pope Benedict Coming From?

Posted At : November 5, 2009 4:26 PM | Posted By : name
Related Categories: Church Teaching on Economics

It is interesting that we have been presented with a gift of sorts. This writer stated in another place that Popes do not reveal their sources. In the case of Pope Benedict XVI, we have an indication from what intellectual tradition he approaches economic problems. In 1985, in a symposium in Rome entitled, “Church and Economy in Dialogue,” Cardinal Ratzinger (at the time) gave a talk, “Market Economy and Ethics.”[1] Looking at this document gives many insights into the approach he takes in Caritas et Veritatis.

Ratzinger begins his talk by describing the economic state of the world in the same way as Pope Pius XI described the world in Quadragesimo Anno. To Ratzinger, the world is in terrible economic shape, especially when you consider the differences between the northern and southern hemispheres. He says that this situation poses such a threat “no less real than that “proceeding from the weapons arsenals with which the East and West oppose one another.” He states that all methods used to remedy the situation have been ineffective. In fact, according to the Cardinal, “the misery in the world has increased in shocking measure over the last thirty years.”[2] This is much too general a statement to make much of, but some checking of data leads us to question this assertion. Speaking of the southern hemisphere, in Latin America for the period to which he refers, the trend has generally been upward economically, despite some dips in some countries, and stalling in Haiti.[3] Africa, on the other hand, is illustrative. Northern Africa is developing well, but sub-Saharan Africa does poorly. But this is no mystery, and many economists have the solutions for this state of affairs, but hardly anyone listens.[4] The main point here is that the world was not doing as bad as Cardinal Ratzinger supposes. Some keys to his point of view come from the rest of the article and his admitted source.

Ratzinger says that following Vatican II, it was held that the separate disciplines had their own autonomy and should be allowed to operate according to their own laws. He seems to be saying that this idea was not developed by the official Church, but came from outside official channels. The problem with this notion is that Vatican II actually states this in a number of places.[5] And it is also true. Etienne Gilson once said that if you want to use chemistry for God’s sake, you must learn if for its own sake. But the Cardinal criticizes this. He takes the case of Adam Smith who, he says, believed that the market operates on its own and “moral considerations imposed on it from without.” The Cardinal says that according to Smith, “this position holds that the market is incompatible with ethics because voluntary ‘moral’ actions contradict market rules and drive the moralizing entrepreneur out of the game.” But Smith holds no such thing. Adam Smith was a professor of moral philosophy, and prior to writing The Causes and Consequences of the Wealth of Nations, he wrote The Theory of Moral Sentiments. In the latter book, we see Smith on the cutting edge of a phenomenological idea of morality based on empathy.[6] Empathy can only take place between human beings because we share a common nature. In addition, Smith obviously assumes moral behavior on the part of the actors. The whole free market economy is based on trust, and it very short-sighted to ignore this obvious fact. Moral actions do not contradict market rules, they are the foundation of successful market functioning. When people are immoral in their actions, the market gets skewed. No one in their right mind, economists included, thinks that Bernie Madoff is the ideal market participant. Law itself, going way back to English common law, has prohibitions against fraud, outright deception and coercion. It is said by business experts that on average a customer who does not get treated well in a store will tell over 40 people about the experience. Those folks will tell others, and on and on. Why? Top of the list is moral outrage in not being treated according to the dignity that one deserves. After this comes the desire of the offended person to warn others about the offending place of business. In both these cases, both morality and the laws of economics operate as a check on the entrepreneur, who is punished but shrinking sales. It is very likely, unless the merchant in question was just having a bad day, he has treated others like this, or presented them with faulty merchandise or bad service and the like. This means that the reputation of the place of business will be blackened.

But let us take this one step further. Cardinal Ratzinger reveals his source of this thinking—Peter Koslowski. Peter Koslowski is a philosopher who is primarily interested in propagating the discredited German Historical or Romantic School[7] of economics. Most of the references in Cardinal Ratzinger’s speech are from works by Koslowski. He quotes Koslowski: “The economy is governed not only be economic laws, but is also determined by men . . . .” Not only is this statement so obvious it is laughable, but it also reveals an ignorance of economics which is astounding. Ratzinger sees free market economists as picturing the market in a purely mechanical way: “[I]t is deterministic in its core. It presupposes that the free play of market forces can operate in one direction only, given the constitution of man and the world, namely, toward the self-regulation of supply and demand and toward economic efficiency and progress . . . . man is completely controlled by the binding laws of the market.” He also asserts that these economists hold that the forces of the market always work for the good, despite the morals of the individual participants.

Nothing can be further from the truth. What Cardinal Ratzinger probably has in mind is the methodology of the neo-classical economists, whose use of mathematics creates more of an engineering-like economics rather real world economics. Some years ago this writer heard a lecture by an Austrian school economist who quoted a neo-classical economist who admitted that the neo-classical economists were more in love with their mathematical models than with economics to the extent that they frequently do not care if the models reflect reality. Even so, economics is a science because there are regularities the behaviors of the vast majority of human beings such that we can with some accuracy gauge what the individual person will do under some specific conditions, ceteris paribus. The reason that economics is a separate science is that it studies human action, especially in the fields of exchange (but not always).[8] People generally do what they think betters their conditions, and will act accordingly. Ethics is a separate science from economics because it deals with a different aspect of man. It is a science of the acts of the deliberative will of man as they are ordered to his ultimate end—happiness. Aristotle tells us that all men choose the good, meaning that no one intentionally chooses an evil as evil. Men go wrong when they choose an apparent good rather than a real good. It is the job of moral science to direct man to choices that bring him closer to that ultimate end. It is the job of the science of economics to tell us what men do, not what they should do, and to show what actions and choices will bring us a better material conclusion. Ultimately, both sciences, moral and economic, focus on the human person. Both are part of the practical reason. Moral science tells the person which actions bring him closer to his end, economic science has the more modest end to showing him how the world works so that the can take of his material needs, so that he can move on to better and higher things, like education and charitable acts. Man is not a disembodied spirit, but acts with his whole being, thus the necessity of acting in the world that exists, but never unethically. Economists never say that a person is allowed to act unethically in the real world. They do say that people do act unethically. They also show that sometimes those unethical actions have deleterious repercussions in the world of business.

Studies have shown that the two most religious type of persons in the United States are, aside from clergy, military personnel and business executives. Is it likely that the percentage of unscrupulous persons in business is higher than in other fields, such as medicine, sports, law or the clergy? Not likely, if you believe with St. Thomas that we share a common nature. If you are a German Historical School economist, you have nominalist tendencies[9] and do not believe in a common human nature, and believe that everything is historically and culturally conditioned. Hence, like Rousseau, you believe that evil is caused by external, societal forces. Therefore, the tendency of these German thinkers to blame the free market system for the evil actions of men in the system, and the economic decline that the west is currently experiencing.

Such thinking is not defensible from the Catholic or the scholastic point of view. All persons are obliged to develop the cardinal virtues, prudence, justice, fortitude and temperance in whatever situation they find themselves in. Moral failures are not caused by the system; immorality resides in the human heart.[10]

[1]This talk appears in http://www.acton.org/publications/occasionalpapers/publicat_occasionalpapers_ratzinger.php?view=print. All quotations are taken from this version.

[2] Italics are the present author’s.

[3] See, http://oxlad.qeh.ox.ac.uk/results.php, accessed 10/29/09.

[4] See, James A. Dorn, Steve H. Hanke, and Alan A. Walters, The Revolution in Development Economics (Washington, D. C.: Cato Institute, 1998, and the very full bibliographies at the end of each chapter; and Edward L. Hudgens and Bryan T. Johnson, “Why Asia Grows and Africa Doesn’t,” http://www.heritage.org/Research/AsiaandthePacific/lg756.cfm, accessed 10/29/09.

[5] See, for example, Apostolicam Actuositatem, #7; Gaudiam et Spes, # 34 and #36.

[6] Compare with Edith Stein, The Problem of Empathy, trans. by Waltraut Stein (Washington, D. C.: ICS Publications, 1989).

[7]For a full discussion of the German Historical School and its romantic roots, see William R. Luckey, “Romanticism: The Ultimate Source of Misguided Views on Economics.” Unpublished manuscript. See, also, Peter Koslowski, ed., The Theory of the Ethical Economy in the Historical School: Wilhelm Roscher, Lorenz von Stein, Gustav Schmoller, Wilhelm Dilthey and Contemporary Theory (Berlin: Springer-Verlag, 1995), andPeter Koslowski, ed., The Theory of Capitalism in the German Economic Tradition: Historicism, Ordo-Liberalism, Critical Theory Solidarism (Berlin: Springer-Verlag, 2000).

[8]See, Ludwid von Mises, Human Action: A Treatise on Economics Third revised edition (Chicago: Henry Regnery Company, 1963), Introduction and chaps, I-VI.

[9][9]William R. Luckey, “The Intellectual Origins of Modern Catholic Social Teaching on Economics: An Extension of a Theme of Jesús Huarta De Soto” Austrian Scholars Conference, Auburn University, March 23-25, 2000.

[10]Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church (Washington, D. C.:United States Conference of Catholic Bishops, 2005), sect. 117.

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Some Suggestions for an Austrian Theory of Organizational Behavior

Posted At : October 15, 2009 9:46 PM | Posted By : name
Related Categories: Economics Errors

Introduction

The purpose of this paper is to suggest ways in which the insights of the Austrian school of economics can be applied to the understanding of exactly how institutions behave. While this question has been probed somewhat by political scientists and scholars in the field of management, the results are far from adequate. Firstly, the political scientists have been afflicted with the same positivistic plague that has infected economics. This “physics envy” has them reducing everything to statistics and graphs that are just as vague and generic as those of the neo-classical economists. Just as the economic models assume full knowledge and a single product, the political scientist presumes that all governmental officials and persons working in organizations want power. All attempts to discuss the behaviors of actors by using a version of the Austrian “mind construct” methodology are termed “journalistic,” and not taken seriously. This prevents any methodological breakthroughs. Even so, this method of analysis is still fraught with the presumption that power is almost the only value of persons in their organizational roles, and it seems to pan out in the form of a revealed preferences theory.^{^[1]}

By contrast, management scholars have made more headway in examining the behavior of individuals in organizations.^{^[2]} The reason for this is that the management scholars deal in real case studies, and have more empirical evidence at their disposal. Nevertheless, their studies are hampered by the fact that they have no interest in developing an overall theory of behavior in organizations, if, in fact, this is possible.

A Common Error in Organizational Theory

The first problem that appears in the formulation of a theory of organizations is the tendency to see an organization as a monolith. Hayek rightly criticizes the tendency of our culture to see everything as a product of design. In point of fact, the activities of an organization are the outcome of the actions of the many individuals which compose it. While there is certainly some (even much) design in the formation of the organization and its operations, routines, and outcomes, the actual, factual activities of the organizations can never be completely predicted. This is true, not only of organizations working in the market selling a product or service, but also of the not-for-profit organizations such as churches, schools, Project Hope, etc. It may be even more true for these latter organizations simply because they are not beholden to the vicissitudes of the market.

Some Applications of Austrian Theory to the Understanding of Organizations

The first insight that Austrian theory suggests is that organizations must be seen as semi-closed systems. While organizations deal with the public at various levels, how they do that is very much a product of the internal machinations of the people in the organizations who have varying levels of the influence on policy.

Secondly, the reason for the above is very well stated by Menger himself. In the Principles, he points out that all goods can be classified either as material goods or useful human actions.^{^[3]} The very reason that these are called goods is because they are useful to the satisfaction of human needs.^{^[4]} People, will, then, pursue goods (in the Menger sense, and not in the limited neo-classical sense of “consumer goods”) in whatever they do. While these goods can be power, more often than not they are many other things. Abraham Maslow, for instances, argues that there is a hierarchy of needs that can be arranged in ascending order from physiological needs (such as pay), to safety and security needs (such as benefits and job security), then love and belonging-ness (such as being invited to picnics, or being asked to be on a team or committee), esteem needs (grants of autonomy, increasing responsibility, pay raises as a sign of esteem), and lastly, self-actualization and growth needs (job challenge and increasing autonomy). While pay is part of many of these levels, it is only an integral part of the lowest level. In all of these levels, the lowest unsatisfied need becomes the most powerful and significant need.^{^[5]} The realization that there are a variety of needs that each person tries to fulfill nullifies much of the previous thinking regarding the behavior of persons in organizations.

How each employee or member of an organizations will satisfy his or her needs and what level each is on at the time are questions that lead us to the next, or third, application of Austrian insights into the theory of organizations—subjectivism. Without knowing each member of an organization intimately, it is impossible to tell what are the real goals each is seeking at any one time. The closest we can come is the use of “pattern analysis” which assumes a certain amount of regularity about certain types of employees, and that there are parameters outside of which non-psychotic employees will not venture.

Fourthly, time and ignorance have a role to play in the internal workings of an organizations. Time is important for the same reason it is in the market economy. People’s perceptions and tastes, and even family life, change with time. The age of an employee or the length of service affect his world-view. In addition, organization members have problems finding out what others are planning or doing, or how their division is seen by the higher levels of management. They way these persons carry out their tasks is determined in large part by their guesses about these subjects. A wrong guess could be disastrous or providential in the fulfilling the needs spoken of in the last section.

What about the entrepreneurism inside an organization? Actually, in the face of a more competitive market, firms that want to survive must encourage entrepreneurial behavior. This allowance for experimentation within a firm is called “intrapreneurism,” and it takes place outside of the R & D channels. To be successful, it must be allowed without reprisals for failure.^{^[6]} Neo-classical economics have generally ignored this kind of internal change overtaking many companies today in favor of the “black box” version of firms. Here the method by which decisions are made in real companies and organizations (not to mention the government) is ignored in favor of the old assumptions. This approach is not only of no help in understanding organizations, but is actually misleading.

Lastly, what about the application of Austrian insights to the behavior of government. While this is the subject of another paper, a quick perusal of the above subtopics provides some insight into the seemingly irrational action of government actors aside from the socialist calculation ideology so effectively defeated by Mises and Hayek.^{^[7]}

Finally, it could be said that within the level of formal verifiable constraints set by policy makers in organization, an organization is a spontaneous order just as market economy is. The reason for this is that, as Mises shows, Economics is really a universal science of human action—praxeology, and can no longer concentrate merely on the mere catalatic aspects of that science^{^[8]}. Hence, it can be used to analyze the macrocosm of the society at large, or the microcosm of the organization.

^{^[1]}See, for example, the analysis by Evens and Novak, The Reagan Revolution: An Inside Look at the Transformation of the U.S. Government (New York: E.P. Dutton, 1981).

^{^[2]}See, for example, Judith Gordon, A Diagnostic Approach to Organizational Behavior, 4^th ed. (Boston: Allyn and Bacon, 1993).

^{^[3]}Carl Menger, Principles of Economics, trans. by James Dingwall and Bert F. Hoselitz (Grove City, Pennsylvania: Libertarian Press, 1994), 55.

^{^[4]}Ibid., 52.

^{^[5]}Abraham H. Maslow, Motivation and Personality 3^rd. Ed. (New York: Harper and Row, 1987).

^{^[6]}See, G.F. Pinchot, III, Intrapreneuring (New York: Harper and Row, 1985). For an extreme version of entrepreneurship inside firms see, Tom Peters, Thriving on Chaos: Handbook for a Management Revolution (New York: Harper Perennial, 1988).

^{^[7]}An interesting foray into this area probably not realization that he is using a loose Austrian methodology is Harold Seidman, Politics, Position and Power (New York: Oxford University Press, 1975).

^{^[8]}Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Regnery, 1966), 3.

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John Paul II: On the Cutting Edge of Catholic Social Teaching on Economics

Posted At : October 9, 2009 7:43 AM | Posted By : name
Related Categories: Church Teaching on Economics,Issues in Social Teachings

Some people treat Catholic Social Teachings in the same way that the Church treats revealed dogma—as mostly unchanging, but that there can be some expansion to our understanding of those revealed dogmas, but no change in Social Teaching. But Catholic Social Teaching has three aspects. The first is eternal principles. Catholic teaching of any kind has to be founded on eternal principles, or else there would be no solid foundation at all. In point of fact, beyond those eternal principles, especially justice, prudence and charity, the Church applies those eternal principles to changing circumstances, which means that the teaching changes. There is no such thing, for example, as pure justice. Justice must be applied to an actual circumstance. In addition, the Church, as Church, has no particular expertise or divine commission in the particular, non-theological sciences. This means that it accepts the opinions of scholars of the sciences prevalent at the time of the writing of an encyclical. Of interest to us is economics. As I have shown in many papers, for many years the Church accepted the conclusions of the German Historical School of Economics as its paradigm for understanding economic reality. That School is totally discredited, and slowly, but surely, popes have backed away from its worldview, despite the fact that many Catholics tend to quote past encyclicals like Protestants quoting “proof-texts” from the Bible to prove their anti-Catholic views.

There is no space here to go into the teachings of the German Historical School but here I would just like to demonstrate briefly the case for development with a few quotations.

Gaudiam et Spes of Vatican II:

“It is necessary that the voluntary initiatives of individuals and of free groups should be integrated with state enterprises and organized in a suitable and harmonious way.”

This reflects Pius XI’s corporatist suggestions, originally propounded by the German Historical School. Indeed, Pius saw competition as an evil:

[T]he right ordering of economic life cannot be left to a free competition of forces. From this source . . . have originated and spread all the errors of individualist economic teaching. Destroying through forgetfulness or ignorance the social or moral character of economic life, it held that economic life must be considered and treated as altogether free from and independent of public authority . . . free competition, while justified and useful provided it be kept within certain limits certainly direct economic life—a truth which the outcome of this application in practice of the tenets of this evil individualistic spirit has more than sufficiently demonstrated.” (Quadragesimo Anno)

But John Paul II shows the developing view of capitalism even during his own papacy:

In Laborem Exercens, he agrees with the Marxist and German Historical School’s understanding of Capitalism in saying that any system in which primary attention is paid to the “objective dimension of work,” where man’s status as “the effective subject of work and its true maker and creator” is not recognized, is capitalist.

In other words, any system in which the person is trivialized is capitalistic. Here, men are seen as mere means of production. Of course, this applies both to an approach to a free market and to socialism and communism as well.

But more recently, he says new forms of capitalism have developed. Workers rights have been recognized, and where more worker control over aspects of productivity and aspects of the business have been recognized.

In Solicitudo Rei Socialis, he recognizes the right of economic initiative and says that this right is not only important to individuals but for the common good. The attempt to limit this right in favor of so-called equality suppresses or destroys the spirit of initiative or “the creative subjectivity of the citizen.”

In Centesimus Annus, the Holy Father points to the complexity of the subject. Asking the reader if capitalism should be the goal of the countries recently freed from Communist domination, he writes:

If by “capitalism” is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative even though it would perhaps be more appropriate to speak of a “business economy,” “market economy” or simply “free economy.” But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom and its totality and sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative.

Pope John Paul II is right is expressing reservations here, but his reservations are not about the free market but the social context in which that market, or, quite frankly, anything else, operates. Everything in society functions in an environment of ethical/religious, political/juridical and economic reality. For the free market to work, there needs to be a moral society, backed up by revealed religion, and a system of just law, respected by the people and enforced justly by the courts. Economists have created a whole body of literature on the effect of institutions on economic life. If there is a problem with how the market operates, the first place to look is the society and the government. Obviously Pope John Paul II realized this. Now if only other Catholics would be as informed.

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Back to Nature

Posted At : September 25, 2009 8:14 AM | Posted By : name
Related Categories: Economics Errors

There are a number of Catholics, thankfully not too many, who believe that it would be more pleasing to God if we all gave up our highly technical lives, or money, vacations, etc., and lived on a subsistence level. These same folks are always championing “Western Civilization.” They never ask what made Western civilization possible. The existence of great writers and thinkers does not make a civilization. A civilization is made up of all those people who have learned and accepted the values of the great thinkers of that civilization, and in the West, the teaching and contribution of the Catholic Church, not all of which is doctrinal, but intellectual as well. Notice that it is not just the teachings of the Church that made up Western civilization, but the accumulated wisdom of that whole civilization. Even the Church in its theological debates uses philosophical language and concepts developed by the great, and frequently pagan, thinkers.

But how did this wisdom get around? It got around because some folks had excess wealth to finance the development of schools to educate thinkers. The early Church Fathers were very educated men. The money of dedicated people sponsored schools which they attended. Think about it: one cannot spend time getting the required learning if one has to put food on the table. Learning requires leisure. Leisure is purchased for the student by someone else. That someone else gives that money to the student or the school, or both, so that the student and teachers do not have to spend their time putting food on the table by farming, or working in an asphalt plant (as yours truly once did) and the like. This means that someone in the society has to have discretionary funds. If we all lived in a subsistence mode, there would be no discretionary funds, and there would be no learning, no churches, no artists.

Nor is that all. The reader might notice that the life expectancy of people in the West has taken tremendous leaps since the 1800s. Why? Because in the West the free market system has discovered ways to create wealth. Much of that created wealth goes into the paychecks of households and is spent on medical care. But where did the medical care come from (“Take out two pints!”—Theodoric of York, Medieval Barber)? It comes from the fact that some people and the “evil” corporations take their discretionary income and save it. This money is then used to develop diagnostic medical equipment, medicines, and surgical equipment, and support medical schools which train practitioners who are able to use these great things for the health of every patient. The households pay these practitioners to keep them healthy. It is nice for the healthy 20-year-old to talk about living on a subsistence farm or owning a small shop, like you see in the movies—until he contracts cancer, or gets hit by a car. He does not run (or crawl) to old Theodoric (above), but he goes to the oncology department of a good hospital, or the trauma center of the same hospital, none of which would exist if these “back to nature” folks had their way.

Those people who think “small is beautiful” need to think how much of a disservice they are doing to the rest of us because of their fantasies disguised as Catholicism. If it was up to them, we would all die at 25 years of age. We would have little sanitation, little medical care, no education, and the creativity of mankind would be stifled, or limited to painting pictures on cave walls.

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Martyrdom?...What?

Posted At : September 10, 2009 8:47 PM | Posted By : name
Related Categories: Observations

To many Catholics a martyr is one who dies for the Faith, usually by open persecution. We think of the Apostles, St. Stephen, St. Peter of Verona, and St. Teresa Benedicta of the Cross, among so many others. Few, however, know the origin and nature of the term “martyr,” and hence, the multifaceted aspects of martyrdom.

The word “martyr” means witness (martus) who gives testimony about something he witnesses (martyrian). The apostles were witnesses to Christ’s life, suffering, and resurrection. They died because they gave witness before the enemies of Christ. It is not the dying that made them martyrs, but the witnesses. It was only later in the history of the Church that the term was applied exclusively to those who died for this witness. When you read the Fathers of the Church, you see that anyone who suffered for his witness of the Truth is a martyr, even if they were not put to death because of it.

Wait, you say, because I am relatively safe in the more civilized West, the chances of my dying for the Faith are relatively low. While that might be true, all of us are called to be witnesses to the truth, and, as St. Thomas says, all truth, no matter who says it, comes from God. When we stand up for the truth, even in non-religious matters, we are being witnesses—and the world does not like the truth. In Plato’s Republic, Socrates asked his interlocutors what justice is. One of them replied that justice is always in the interest of the stronger. This meant that there was no objective measure of justice. The one who pays the piper calls the tune, as the old expression goes. Socrates tries to show that there is an objective nature of justice, no matter who has the power. It is the same with truth. Truth exists and can be discerned by reason and revelation no matter who has the power. But the people in power hate the objective truth and objective justice, especially because it threatens a concrete interest of theirs. (Refer to my article “What a Character” in the blog.) This is why we must be witnesses to the truth, and in doing so, we bring suffering on ourselves. We should say the truth with prudence, realizing that a baby cannot have solid food, and we should witness with love and kindness. But witness we must.

We also must witness in every area of life. The Vatican II Decree on the Apostolate of the Laity says that the laity witness primarily in their families and in the marketplace. So this means that we are first called to be a witness by living an upright life, to be honest, concerned for the welfare of others, and actually do what is in our power to do, and love our families and raise our children to be true children of God. We witness to the doctrine of the Church when it is appropriate to discuss such things. We witness to truth and justice in political life by voting, getting involved, writing our representatives, and learning the truths of economics as the science has discovered them.

Doing these things is wonderful, but it will attract persecution. This is where the suffering comes in. So many good persons have been vilified because they support the truth in economics against the current administration’s intended policies. They have been labeled as not caring for the poor, as being paid by insurance companies, being liars and lunatics. It is a disgrace, all in the name of keeping political power and installing a more socialist and statist regime. Catholics even attack other Catholics because the first group has no knowledge of either Catholic Social Teaching or economics, and labels the second group as heretics, or, and one person has said and written about yours truly, “Dr. Luckey has single-handedly destroyed Catholic Social Teaching.”

When I was younger, I read somewhere that all those who go to heaven are called to be either wet or dry martyrs. Standing up for the truth may not get us killed, but it can make life miserable. As Jesus told us, even members of our own household may become our enemies.

It is the same thing with sin. Our catechisms, when we were young, assuming that we had a good religious training, told us about sin, but the sins written of were basic sins that anyone can be prone to: taking an orange from a grocery store, hitting someone, gossip, impure thoughts and desires, missing Mass when attendance is required, etc. Never do these catechisms tells us about the sin of respect of persons, whereby we become unjust by not judging objectively but according to the status of the person before us. But politicians do this all the time. They ask, especially on the margins, where does my support come from, both financial and in terms of votes, and formulate their positions on issues accordingly. Even principled politicians will, when push comes to shove, abandon their principles for the most part if their jobs are threatened.

We Catholics have to examine our consciences, all of us, even officeholders, and ask, firstly, are we saying the truth all the time, always with kindness and prudence; but, maybe more importantly, are we willing to be martyrs for it? Even when we commit less grievous sins (excluding words that might just slip out of our lips and the like), is it not because we are not willing to suffer to do what is right? It feels better to get our anger off our chest, so we act with uncharitableness toward someone who irritates us. Gossip is always so satisfying because we know something juicy that someone else does not know. Gossip is especially great if it is about a person for whom we do not particularly care. And then there is (unlawful) sex, where some people think they are actually going to die if they do not have it, although that would be a first in the history of medicine.

We are all called to be martyrs one way or the other. Many of us are called to be martyrs for the truth of the common good. Then let us resolve every day that we will not give in; that we will suffer, by and with God’s grace, whatever he allows for standing up for truth in our speech, and in our actions, whether in public or in private lives; whether in the religious or political/economic spheres. Do you want a better world? It has to start with you and me, here and now.

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Population-Control Weirdos

Posted At : September 5, 2009 11:28 AM | Posted By : name
Related Categories: Economics Errors,Current Events

The population-control weirdos believe that people are a blight on the planet. (I am not being harsh calling them weirdos—wait until you see my argument). They think that all people do is use up resources, and eventually the planet will be void. In fact, as the late, great economist Julian Simon pointed out, national income accounting counts the birth of a calf as an increase in capital, but the birth of a baby as a decrease in capital. Those economists who worship mathematical methods divide amount of capital by population. So, if you have $1,000,000 in capital and you have 1,000,000 people, you have one dollar of capital for every person. But if you have $1,000,000 of capital and then give birth to 10 babies, you get $1,000,000/1,000,010, or .9999 cents of capital per person, clearly a decline. One thing that these folks never seemed to learn in Economics 101 is that everybody, except the most handicapped or the most lazy people, produce more than they consume. This is true even in less-developed countries.

These characters also believe that the amount of natural resources in the earth has already reached its limits due to population growth. For example, Paul Ehrlich, a professor of biology specializing in butterflies, wrote the book The Population Bomb in 1968, in the middle of the hippie revolution. In that book, he predicted that in the 1970s there would be worldwide famines and resources would run out despite any emergency programs that would be put into place. To show the nonsense of this, in 1970, Dr. Julian Simon, late economics professor at University of Maryland, bet Ehrlich that the prices of any ten natural resources Ehrlich chose would be lower in 1980. The bet was for $10,000. Simon won; the prices were lower. Why? The resources were more abundant, not less. Ehrlich’s theory of worldwide shortages was an Armageddon fantasy. Simon offered the bet again in 1980 to anyone, but no one took him up on it. Why was that? They knew they would lose, which meant Simon was right, but also they had too much invested in this fantasy. One needs character to admit that one is incompetent, didn’t do his homework, and sold a profitable book on a fraud.

But today the racket continues. It is said that we must cut down on population, especially in developing countries, so they do not have so many mouths to feed. But economists know better, and the studies are there to prove it.

In a very well-researched book, The Mystery of Capital, Latin American economist Hernando de Soto shows that there are two main (among many others, none of which is population) causes of poverty in developing countries. The first is bureaucracy. The charts in his book show that sometimes it can take 20 or 30 years to get a permit to run a business due to all the offices which one must visit and to which one must submit paperwork. This would and does discourage many people from becoming entrepreneurs. The other reason is a caste system. Many people in developing countries are not allowed to own property. Despite this handicap, they run businesses anyway, with the fear that the government would ask for a property title which they could not produce, and thus lose the property and thus the business operated out of it. Notice that this has nothing to do with population.

But the population weirdos will not go away. In 1977, when Paul Ehrlich was watching the prices fall on the resources he picked in the bet with Julian Simon, Paul and Anne Ehrlich wrote another great tome with a man whose name is John Holdren entitled Ecoscience. In this book, the three authors continued Ehrlich’s apocalyptic scenarios of death and destruction due to population burgeoning. They recommended required abortions, dumping infertility drugs in the water supply, and forcibly taking babies from teen and single mothers and giving them to couples to raise. But the big question is (drum roll), who is John Holdren? He is Barack Obama’s science czar! Despite all that has been studied by economists, not to mention the morality and constitutionality of this kind of thing, these people never go away. Would you give a position of trust to someone who was dead wrong and never apologized for it?

This is what we are facing, and this is only the tip of the iceberg. If these folks who surround the president succeed in getting their plans into law, we will all be in danger, and by all, I do not mean just those now living, but the future generation as well, who may never exist.

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There’s a Bridge…

Posted At : August 27, 2009 10:28 PM | Posted By : name
Related Categories: Economics Errors,Current Events

“Cash For Clunkers.” This, as everybody knows, was the administration’s plan to get environmentally unsound cars off the road. The idea was that if somebody had a car that had been around too long, the piston rings were probably so worn down that you could drive a car through them, burning oil was spewing through the atmosphere, they were gas hogs, and were bought before the current environmental regulations on autos were imposed. If you turned your clunker in, you got $4500 in cash from the government which could be used to purchased a NEW car, which would be less harmful to the environment. The car you traded in would be destroyed so that it could not be resold and put back on the road.

Now, let me get this straight, and maybe put it in more truthful terms. If you were driving a real clunker, could it be that you could not afford a new car to begin with? Now you are to bring the ol’ jalopy in, and for $4500 in cash, go into debt for a new car costing, say, $25,000? While it is true that a clunker would not bring in much exchange value, so that this program would up the return, would you bring in your old car in for $4500 if you were not already going to sell it and buy a new one anyway? Just take my own experience. I drive a 2000 Buick. I bought it used, and it is a great car. I have no intention to sell it, but even IF I wanted to trade it in for a new one, and IF I could have gotten $4500 dollars for it, I still could not afford a new car. Would the promise of $4500 make me go into debt to buy a car I could not afford to make the payments on? Absolutely not. Forget the fact that I am a trained economist. My dog would not do that either.

Take another aspect. In my experience, real clunkers are driven by poorer people anyway. They can’t afford a new car either—hence they drive the clunker until it can drive no more. What do they do then? Buy another clunker from the used car market.

But, in fact, many people did trade in their cars. As mentioned above, some of those were going to trade them in anyway and buy new ones; they just got more on the trade in than they expected. What about the rest? Were these folks lured into the trade-in by the promise of government cash who never should have bought new cars? Is not this the same thing as the Community Reinvestment Act, which tried to persuade people to buy houses they could not afford? And what happened? Many lost their houses because the Act encouraged people to buy houses they could not make the payments on and subsequently they lost their houses. Don’t you think the same thing will happen to many people who foolishly brought in their old cars for brand new ones? I believe the repossession statistics will bear this out in a few months.

Maybe, despite the sucker ploy that this cash for clunkers program stimulated, the worst thing is that the country is in a recession. Just today, the Federal Reserve Bank of Atlanta said that the real unemployment rate is now 16%! Do families need more debt? If they can’t make the payments on their new car, they lose the car. If they do not live in a big city where there is lots of public transportation, how will they get to work? Did Obama do anybody any favors?

Then there is the used car market. Poor people live by the used car market. When their car dies, they cannot afford a new car, so they get a used car. But the cash for clunkers program has cut back on the used cars available. Assuming the demand is relatively stable, there are fewer cars to go around, so the price per car is higher. For all the rhetoric from Obama about helping the poor, and the Catholics who support him because he claims to be helping the poor, how did this plan help the poor?

Lastly, as we know, the plan ran out of money and had to be refunded and finally was recently stopped. What does this tell you? Coupled with the gigantic government debt, it says that government always underestimates the cost of programs. Social Security, Medicare, even wars are all underestimated in the beginning and always need massive injections of funds after that.

So, what does this have to do with a bridge? Well, a lot. If you thought that the cash for clunkers program was a good idea, there is a very nice bridge in Brooklyn, built in the late 1800s, beautiful style, and I will let you have it at a deep discount!

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What a Character!

Posted At : August 20, 2009 4:36 PM | Posted By : name
Related Categories: Current Events

A thorough reading of the Old Testament will show that the worst, and the most persistent, sin that the Chosen People committed was that of idolatry. They did it time and time again. This, and God’s punishments that followed, were actually predicted in Deuteronomy 29, 30, and 32. The people of the Northern Kingdom, Israel, were captured by the Assyrians, never to return, and the Assyrians populated their land with other pagan peoples. The Southern Kingdom, Judah and Benjamin, were captured by the Babylonians and taken to Babylon for about 45 years. When the Persians defeated the Babylonians, the Judeans and Benjaminites were allowed to return to Jerusalem and rebuild the city wall and the Temple, which the Babylonians had destroyed.

What does this have to do with anything? Plenty. We are all sinners. But when we commit a sin, we need to go to confession, if it is a serious sin, and “fess up” before God in the person of the priest. If not a serious sin, we still need to admit our sin to God. Now many, if not most, have skeletons in their closet. If you opened my closet, the skeletons would hit you on the head. These skeletons are generally between you and God, and anyone else who took part in the skeleton formation process. They are no one else’s business—unless they are publicly discovered. But if it is made public, we need publicly to own up to the fault, as painful as it is. Lying is a sin, too. Assuming that this horrendous act is actually true and someone finds out about it, we need admit it and not try to lie our way around it. This applies especially to public figures, upon whom the public trust reposes.

The case I wish to bring up is former Senator John Edwards. In the last campaign leading up to the nominations for president, Edwards tried to take the high road, coming across as the defender of the poor, pushing his point to the verge of, I believe, class warfare. Despite the fact that he was loaded with cash (which he seemed not to wish to share with the poor), had a gigantic house, and made his money as an ambulance chaser, he still came across as the candidate who really cared. Then, a newspaper caught him with his hand in the “nookie jar.” Not only did he have a long-time mistress, but he even fathered a child through her. What was his first and continuing reaction? Denial. Only recently did he announce he would have a press conference and own up to his skeleton.

Why did it take so long to admit his actions? I submit that it was a form of idolatry. The most important thing to Edwards, and of course I am not judging his subjective guilt, and maybe he does not even realize it, is his status in the world. That is his real god! Once a person is caught and it is verified that he or she really did and is doing these things, they not only need to repent, but reject further sin, by avoiding outright lying. People need to take responsibility for ALL their actions and the consequences of those actions. It was only when the Chosen People admitted their sin, and repented, not half-heartedly but fully, did God smile on them and restore them.

All through the opening chapters of the book of Genesis, God seeks to get Adam and Eve and Cain to admit their sin. None of them did. Adam even blamed Eve and God in the same breath, saying that the woman God gave him tricked him. Do we not do the same things? Is this a good thing? Obviously not, and we need to work on this.

Please do not accuse me of picking on a liberal Democrat. The governor of South Carolina is in a similar boat, and by the way, the now former governor of New York State. And then there are the governors of Illinois, Gary Hart and President Nixon, and on and on. This is a question of character. We are all weak, and any of us can make these moral blunders. Frequently, we get the “holier-than-thou” bug, but this usually happens when God tries to teach us some humility by allowing us to fall. It is not for nothing that there is the old saying, which is from St. Paul, I believe, “Pride cometh before a fall.”

If the United States, or the West for that matter, is to rejuvenate itself in economic matters, the people need to get some character and begin, not only to try not to abuse money, power, and other people (Bernie Madoff comes to mind as the triple threat) but admit it like adults when they fall; first to God, with a firm purpose of amendment, but even to the public when necessary. If you make a god of your social status, political job, or anything else, you will bring down on yourself and many others the punishments just like the Chosen People did, in God’s attempt to call his child into repentance.

I have pointed out in previous articles that our profligacy has brought on the current economic crisis. This is not something that fell from space one day; we collectively did it. We need to own up to it, and repent.

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