Is Laissez-Faire too Radical for Brazilians? - Bruno Gonçalves Rosi (Mises Daily)

Is Laissez-Faire too Radical for Brazilians?
by Bruno Gonçalves Rosi
Mises Daily, April 19, 2016
http://mises.us1.list-manage.com/track/click?u=bf16b152ccc444bdbbcc229e4&id=09c46afd35&e=bbc3f0dda2

Following some months of political indecision, it seems impossible to reverse the movement toward the impeachment of Brazilian president Dilma Rousseff. Despite expected criticism from her political support group, the impeachment process goes according to Brazilian law and Dilma’s position becomes ever more indefensible as new evidences of corruption surrounding her and her government arise. But as I wrote some months ago, it is not clear that removing the president can lead the country to really pro-market policies. Many of the politicians who voted Rousseff out in the House of Representatives are themselves accused of corruption. This in no way casts doubt on the legality of the impeachment process (as Dilma’s supporters claim), but shows the difficulties Brazil will still have, even without Rousseff in office.

Rousseff and her mentor, Lula da Silva, are the first left-wing presidents in Brazilian history. As Ludwig von Mises noticed long ago (and as empirical evidence has confirmed), interventionist governments cannot help but to grow the state continually. And with a bigger state, the greater are the chances of corruption.

One possible mistake in analyzing the present scenario would be to assume that removing Dilma from office can solve all Brazilian political problems, or even to believe that Dilma and Lula in their political ideology are greatly different from much of Brazilian political history.

Brazil’s Long History of Interventionism
Since its independence from Portugal, Brazil’s tendency has been toward big government. The country’s first head of state (and government), Dom Pedro I, was himself Portuguese and an heir to statist policies implemented in Portugal since the late eighteenth century. Although a liberal in outlook, Dom Pedro I disfavored the more libertarian wing of Brazilian politics at the time and allied with the statists. Brazilian politics in the nineteenth century were mostly dominated by the Conservative Party, which despite its name, was not conservative in a Burkean sense, but mostly statist.

Brazilian politics in the republic (corresponding roughly to most of the twentieth century) were also mostly statist. Until 1930, politics were dominated by a coalition of coffee farmers in São Paulo and Minas Gerais that used the state for economic gain. After that, and until 1945, the country faced the dictatorship of Getúlio Vargas. Vargas and his legacy would still play a major role until 1964, when the country entered a period of military government that lasted until 1985. The new republic that arose from this period showed indecision between continuing the tradition of government interventionism or following the Washington Consensus.

Libertarians Are the Revolutionaries
Conventional politics in Brazil has long opposed groups considered to be either revolutionary or conservative. One might even claim that Lula and Dilma could pass as a great novelty in Brazilian politics, with their proclaimed (revolutionary) democratic socialism. But Lula and Dilma aren’t really all that different form what’s been tried before. Although their socialist approach does have peculiarities that are worth considering, much of the statism in it was already present in the Conservative Party of the empire, the oligarchies of early twentieth century, Varguistas from the 1930s to the 1960s and many of the military governments in the 1960s, 1970s, and 1980s. And most important today, this statism is also present in the opposition to Rousseff that is managing to impeach her.

The true radicals and revolutionaries in Brazil today are the libertarians who are attempting to move Brazil away from its traditional managed economy that always benefited certain elites. Indeed, libertarians in Brazil have suffered politically from being considered too radical.

A Fear of Leaving People Alone
From the 1820s to this day, one thing is constant: the fear of “anarchy.” In the late eighteenth century Adam Smith popularized the concept of “the invisible hand” which was considered too radical for Brazilian ruling elites. They feared that if the country had the level of individual freedom observed in the US, the result would be anarchy. Therefore, more state control was called for. F.A. Hayek later updated the concept as “spontaneous order” and “fatal conceit.” Even more, Rothbard defended market anarchism under a Misean framework. Brazil, on the other hand, pursued “third way” populist developmentalism.  

Many of the opponents voting Rousseff out of office justify their vote saying that she failed to implement policies to control the economy and give welfare to the poor. Although vice-president (and heir apparent) Michel Temer is talking about a (sort of) liberal (i.e., libertarian) political agenda, it is unclear that there is room for truly libertarian policies at this moment.

Bancos Centrais afundando a economia mundial - Mises Daily

Parece que o mundo está sucumbindo aos "moedeiros falsos", que se bem me lembro era um romance de Anatole France, mais ou menos da mesma época em que Carl Menger, e depois Ludwig von Mises alertavam para a criação artificial de moeda por "banqueiros centrais", atuando em conluio com políticos.
Como vocês sabem, o político é aquele sujeito que adora gastar o seu dinheiro sem lhe consultar.
A coisa fica perigosa quando emissores monopolistas de papel pintado, de circulação e uso compulsório pelo poder político, passam a satisfazer o desejo desses manipuladores dos recursos alheiros e passam a emitir quantidades insustentáveis de dinheiro, em total contradição com a dinâmica econômica, e com a real criação de riqueza pelos empreendedores e pelos trabalhadores.
O Mises Daily trata dessa questão.
Não acredito que vamos chegar numa catástrofe similar à de cem anos atrás, mas a destruição de riqueza vem sendo feita de forma insidiosa e constante.
Para ler todas as matérias linkadas na mensagem original, clique aqui:
https://mises.org/library/week-review-february-27-2016
Paulo Roberto de Almeida
The Week in Review: February 27, 2016
FEBRUARY 27, 2016 — Mises Institute

Dissatisfaction with the Federal Reserve appears to have gone mainstream with presidential candidates Trump, Sanders, Cruz, and Rubio all expressing a need for reform of the central bank.

An understanding of how central banks work has become more important than ever as central banks across the world, have been putting their faith in increasingly radical forms of monetary policy, which now includes negative interest rates and paying interest on reserves.

As always, a solid understanding of sound economics remains at the center of the fight against statism.

Earlier this week we celebrated the birthday of Carl Menger, founder of the Austrian school. Ludwig von Mises, who credited Menger’s Principles of Economics for making him an economist, recalled that not only was Menger a revolutionary thinker, but a prophet for the devastating wars that engulfed Europe in the first half of the twentieth century.

Unfortunately it is easy to look at the world today and see the same troubling trends that Menger saw in the early 1910s. Be it governments weaponizing the financial sector at the expense of innocent people, or the dangerous consolidation of industries due to legislation named after obnoxious politicians — far too many people with influence continue to fail to learn the lessons of history. It is no surprise that populism seems to be sweeping the globe.

This time on Mises Weekends, Jeff Deist recaps his recent talk in Houston entitled "Socialist Left vs. alt-Right: What it Means for Liberty" — a talk which generated plenty of comments from libertarians, progressives, and the alt-Right. Jeff discusses why we should celebrate the death of supposed "democratic consensus," why the progressive left doesn't care about winning votes, how the alt-Right turns identity politics against social justice warriors, and what libertarians should learn from populism and even demagoguery.

In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:

Bernie Sanders Criticizes the Fed for the Wrong Reasons by C. Jay Engel
Where Negative Interest Rates Will Lead Us by Patrick Barron
Democracy Has Been Weaponized by Ralph Raico
Central Banks Should Stop Paying Interest on Reserves by Brendan Brown
The Economics of "Free Stuff" by Jonathan Newman
Negative Interest Rates (and Fear) Mean We'll Save More, not Less by Charles Hugh Smith
Rothbard and the Importance of Freedom in Education by Ryan McMaken
Carl Menger: Founder of the Austrian School by Jörg Guido Hülsmann
Europe Continues to Splinter: A British Exit Looms Large as Schengen Dies by Ryan McMaken
The Dodd-Frank Oligopoly by Mark Thornton
Legal Marijuana Businesses Must Pay 70% Tax by Ryan McMaken
Will Donald Trump Reform the Fed? by Ryan McMaken
The Us Banking System as an Arm of US Foreign Policy by Paul-Martin Foss

Tratados de "livre comercio" sao inuteis; basta o Livre Comercio - Mises Daily

Concordo com os autores: tratados supostamente de livre comércio são uma aberração. Eles na verdade são de comércio administrado.
Se os países querem de fato livre comércio, basta declarar o livre comércio universal, e se desarmarem, unilateralmente.
Quem for liberal que me siga, gritaria o mais ousado deles. O resto vai atrás...
Isso vai acontecer?
Não acredito, mas não custa sonhar...
Paulo Roberto de Almeida

No More "Free Trade" Treaties: It's Time for Genuine Free Trade
Ferghane Azihari & Louis Rouanet
Mises Daily, OCTOBER 7, 201

It is erroneous to believe that free traders have been historically in favor of free trade agreements between governments. Paradoxically, the opposite is true. Curiously, many laissez-faire advocates fall into the government-made trap by supporting “free-trade” treaties. However, as Vilfredo Pareto stated in the article “Traités de commerce of the Nouveau Dictionnaire d’Economie Politique” (1901):

If we accept free trade, treatises of commerce have no reason to exist as a goal. There is no need to have them since what they are meant to fix does not exist anymore, each nation letting come and go freely any commodity at its borders. This was the doctrine of J.B. Say and of all the French economic school until Michel Chevalier. It is the exact model Léon Say recently adopted. It was also the doctrine of the English economic school until Cobden. Cobden, by taking the responsibility of the 1860 treaty between France and England, moved closer to the revival of the odious policy of the treaties of reciprocity, and came close to forgetting the doctrine of political economy for which he had been, in the first part of his life, the intransigent advocate.

In 1859, the French liberal economist Michel Chevalier went to see Richard Cobden to propose a free trade treaty between France and England. For sure, this treaty, enacted in 1860, was a temporary success for free traders. What is less known however, is that at first, Cobden, in accordance with the free trade doctrine, refused to negotiate or sign any “free trade” treaty. His argument was that free trade should be unilateral, that it consists not in treaties but in complete freedom in international trade, regardless of where products come from.

Chevalier eventually succeeded in obtaining Cobden’s support. But Cobden was puzzled by the complete secrecy surrounding the negotiations and, in a letter to Lord Palmerston, he attributed this secrecy to the “lack of courage” of the French government. Similarly, today, the lack of transparency concerning free trade negotiations is problematic and it is often hard to know what the content of a treaty will be.

Today, while some of these treaties are currently being negotiated, there are already examples of similar agreements enforced. One could refer to the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or more regional agreements like the North American Free Trade Agreement (NAFTA) or the European Economic Area (EEA).

But why would protectionist governments who spend their time hampering markets by giving monopolies and other kinds of privileges at national level, open markets at the international level? The very fact that governments are negotiating in the name of free trade should be suspicious for any libertarian or true advocate of free trade.

Intergovernmental Agreements Enhance Government Power

Murray Rothbard opposed NAFTA and showed that what the Orwellians were calling a “free trade” agreement was in reality a means to cartelize and increase government control over the economy. Several clues lead us to the conclusion that protectionist policies often hide behind free trade agreements, for as Rothbard said, “genuine free trade doesn’t require a treaty.”

The first clue is the intergovernmental and top down approach. Intergovernmentalism is nothing more than a process governments use to mutualize their respective sovereignties in order to complete tasks they are not able to accomplish alone. Nation-states are entities which rarely give up power. When they finalize agreements, it is to strengthen their power, not to weaken it. On the contrary, free trade requires a decline of governments’ regulatory power.

Also, free trade does not require interstate cooperation. On the contrary, free trade can be and has to be done unilaterally. As freedom of speech does not need international cooperation, freedom to trade with foreigners does not need governments and treaties. Similarly, our government should not rob their population with corporatist and protectionist policies just because others do. Anyone who believes in free trade does not fear unilateralism. The simple fact that bureaucrats and politicians do not conceive of the international economy outside of a legal frame settled by intergovernmental agreements is sufficient to show the mistrust they express toward individual freedom. This reinforces the conviction that these agreements are driven by mercantilist preoccupations rather than genuine free trade goals.

Extending Regulatory Control Beyond Your Own Borders

The second clue concerns the intense conflicts between governments on these agreements characterized by a high degree of technicality. History shows that multilateralism leads toward deadlock. The failure of the Doha Round is the cause of the proliferation of bilateral and regional initiatives. The contentious relations between governments come from the will of some states to dictate their norms to other countries’ producers through an international harmonization process. But this is the exact opposite of free trade. As economic theory shows us, exchange and the division of labor is not based on equality and harmonization but rather on differences and inequality. Furthermore, the technicality and secrecy surrounding free-trade agreements favor mercantilism and protectionism to the extent that technical regulations are used to favor producers who are politically well connected.

The Trans Pacific Partnership (TPP) is a good illustration of this balance of power. It was at first an agreement between four countries (Brunei, New-Zealand, Singapore, and Chile.) which tried to resist some neighbors’ commercial influence, especially China. Then the United States came and convinced more countries (Australia, Malaysia, Peru, Vietnam, Canada, Mexico, and Japan) to join the negotiations. Let’s also notice that most of the countries invited are already bound by regional or bilateral agreements with the United States. China remains excluded from the process. This governmental drive toward regulatory hegemony is obviously the complete opposite of free trade. Indeed, free trade supposes letting consumers peacefully choose what products they want to promote rather than determining what is available through bureaucratic coercion.

Consolidation of Monopolies

The third clue concerns the vigor with which governments have tried over several decades to impose at the international level a more constraining legal framework for so-called “intellectual property.” The first initiatives appear in 1883 and 1886 with the Paris Convention for the Protection of Industrial Property and the Bern Convention for the Protection of Literary and Artistic Works. Amended several times during the twentieth century, the initiatives embrace, respectively, 176 and 168 states. These conventions are placed under the auspices of the World Intellectual Property Organization (WIPO), an international bureaucracy which joined the United Nations system in 1974. A turning point came in 1994 with the signature of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) administrated by the World Trade Organization (WTO). It is now incorporated as an essential part of the administration of international commerce and benefits from the WTO’s sanction mechanisms.

In 2012 we endured a fresh attempt by our governments to reduce our freedom to create and share intellectual works with the Anti-Counterfeiting Trade Agreement (ACTA). And, if we look at the negotiations mandates of these trade agreements, we can see they all include a chapter on the reinforcement of “intellectual property” rights. Intellectual property has become a key concept of the international economy. But this must not hide its illegitimacy.

As Vilfredo Pareto remarked, “From the point of view of the protectionist, treaties of commerce are … what is most important for a country’s economic future.” Each time a new “free trade” treaty is enacted, what is seen is the attenuation of tariff barriers, but what is not seen is the sneaky proliferation and harmonization of non-tariff barriers impeding free enterprise and creating monopolies at an international scale at the expense of the consumer. It’s time for genuine free trade.

In Brazil, Free-Market Ideas Rise as the Economy Falls - Antony P. Mueller (Mises Daily)

In Brazil, Free-Market Ideas Rise as the Economy Falls
Antony P. Mueller
Mises Daily, October 5, 2015
 
The Mises Institute spoke with Associated Scholar Antony Mueller last week about recent economic and ideological trends in Brazil. Prof. Mueller teaches economics at Federal University of Sergipe (UFS) in Brazil.

Mises Institute: For those of us not in Brazil, it is hard to interpret the commentary on Brazil’s economy right now. Brazil’s debt was recently reduced to junk status, and we can see that Brazil’s economy is not doing well. But how severe is the crisis?

Antony Mueller: Part of the explanation is that for a large part of the population and for the government itself, the crisis came as a shock. At first, the Brazilian government ignored the coming of the crisis and when it arrived, the government ignored its existence.

Imagine Brazil like a family with a lot of inherited wealth that spends as if there were no tomorrow. Yet someday this family wakes up to the fact that its wealth has been squandered and its financial accounts are in the red. The government did not recognize that the boom would be temporary. The Brazilian economy began to sputter as commodity prices fell and the demand from China decreased. Yet in order to adapt to the new situation and cut expenditures, the Brazilian government spent even more.

Incumbent President Dilma Rousseff from the Workers Party, which has been in power since 2003, won a second term in 2014 with a campaign that deceived the population about the true state of the economy. The government implemented a series of cheap financial tricks such as delaying the rise of the prices for fuel and electricity and of other items in the large list of administered prices.

After the election, hell broke loose and the true state of the economy became visible for the broad public. The popularity of the president began to fall to single-digit approval ratings. The crisis is serious in itself, yet its psychological impact becomes more severe because of the shock of disillusion. In part, this shock also applies to foreign observers and investors who bought into government propaganda or based their outlook on the projections of the International Monetary Fund whose prognosis in 2013 said that Brazil would maintain economic growth rates of at least over 4 percent for each of the years to come up to 2018.

MI: Ambrose Evans-Pritchard is writing off Brazil as if it’s a total disaster area, and he quotes one observer who says “things will get much worse before they get better.” Is this true, and if so, what are the obstacles to improvement?

AM: Evans-Pritchard’s remarks reflect the consensus among foreign observers and there is indeed little doubt that the crisis will deteriorate before it gets better. Even worse, the recuperation could take much longer than is generally assumed. The reason for a pessimistic outlook comes from the fact that the crisis is not only economic, but also political in character. Not only members of the present government, but also figures of the opposition parties are under investigation about massive corruption linked to the major Brazilian oil company Petrobras. There is much frustration in the country because there is no promising alternative in sight.

MI: Assuming we are looking at real declines in standards of living, how long will it take the country to get back to where it was at the height of the boom?

AM: This is a difficult question for a specific answer. So let me answer in a more fundamental way. Brazil’s economic development has been on a roller coaster ride for centuries. Phases of extraordinary booms were followed by long periods of busts and stagnation.

In the second half of the twentieth century, the boom of the 1950s, with the promise that Brazil would achieve growth and development of “fifty years in five years” ended in economic disaster and the military dictatorship that lasted from 1964 to 1985, which in turn ended with Brazil’s catastrophic foreign debt crisis. It took a “lost decade” for the country to recuperate.

The 1990s saw a series of reforms that put the country back on the track. In 2003, when the newly elected president, Luiz Inácio “Lula” da Silva from the Workers Party took over the government, the economy was already on a growth path. Then came the commodity boom with a seemingly insatiable appetite for Brazilian natural and agricultural products. Yet, instead of using the good times that filled the coffers of the Brazilian treasury to carry out highly necessary reforms, the Labor government pursued a populist policy of generous social spending, particularly for the poor parts of the population.

Now, these achievements of reducing poverty and inequality have come under threat because of the lack of financial funds. This means that Brazil must face not only an economic and a political crisis, but also a social crisis. The confluence of such a triple crisis increases the risks that any one of them gets worse because each individual crisis affects negatively the other crises. The consequential chain from the economic to the political and from there to the social crisis then goes into reverse and the social crisis worsens the outlook to get out of the political and the economic crisis.

MI: Brazil was a big part of the BRICS effort to create a group of up-and-coming economies that could rival the big economies like the US and Germany. Is that idea totally dead, or is the demise of BRICS overstated?

AM: The BRICS never managed to operate as a coherent group. Now, that not only Brazil is in crisis, but also Russia, and that China is in troubled waters, the outlook for the BRICS as a group of playing a major role in global affairs has diminished even more.

It is similar with MERCOSUL, the common market project in South America. Instead of achieving free exchange, trade conflicts are on the rise and not a single supranational institution has become effective. From my observations of Latin America and of Brazil in particular, I conclude that there are still vast mental and ideological barriers in place that work against sustained prosperity. The ideological dominance of statism, socialism, and interventionism is present in every layer of the Brazilian society — not only in politics or academia, but also in the business community itself.

Bureaucracy is a nightmare without end. Taxation is high and brings little return. The public educational system is in shambles. The legal system is unable to cope with an enormous backlog of unresolved cases, while at the same time, judges and other legal authorities enjoy grandiose privileges. Salaries in the judiciary are astronomical compared to what the average person or the poorer parts of the Brazilian society earn.

The public sector in general is extremely inefficient and is an El Dorado of rent-seekers. I do not expect that any of these obstacles will be resolved in the coming years. I fear that it is not much different in some other BRICS countries. They are all stuck in the “middle income trap,” as they are apparently unable to change from a statist to a free market system. There are many vested interests in place, in both politics and in established business, preventing change from state capitalism to an entrepreneurial capitalism. Only based on a fundamental change of ideology in favor of markets and individual and entrepreneurial liberty, will countries like Brazil gain long-term prosperity. I would also say that the same holds for China and the other members of the BRICS and emerging markets in general.

MI: Ideologically, is there any hope of a shift in Brazilian ideology? Some in the US media have featured libertarian free market groups in Brazil and suggested there is a change going on. Do you see any of that?

AM: Well, there is hope, yet it is a long way down the road. The Brazilian libertarian movement is gaining strength, particularly among students and young people in general. In fact, the spread of libertarian ideas among young Brazilians is amazing. The Brazilian Mises Institute is overwhelmed by visits to its site and the Institute’s events are grandiose. There is much good will, high hopes, a lot of serious dedication and extreme diligence at work in the libertarian movement of Brazil. If this trend continues, the walls that surround the established ideology will finally crumble. Anybody with an alert mind must see that statism has failed; that the ideas of socialism and interventionism are sterile and that they produce mainly frustration, stagnation, and crises. The libertarian movement in Brazil is the new avant-garde; its members are the true “progressives.”

The modern electronic media help to accelerate their ascendancy to influence and recognition. The current crisis will be a further wake-up call for young people to recognize that it is their future which is at stake if Brazil should continue in its old ways. With ever more young people joining the libertarian movement, I am sure that sometime in the future a critical mass will be reached and things will change.

China: o castelo de areia das miragens economicas - Mises Institute

The Reality Behind the Numbers in China’s Boom-Bust Economy
Yonathan Amselem
Mises Daily, OCTOBER 2, 2015

Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them — a classic sign of prosperity. At the same time, the Shanghai Stock Exchange Composite more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the United States had in the entire twentieth century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe. China’s state-led “red capitalism” was a model to be admired and even emulated.

Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation.

But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

China’s Real Estate Bubble
Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.

GDP and Other Crude Economic Metrics are Misleading
GDP is meant to represent the collective value of all transactions within a certain boundary. This metric provides very little useful or accurate information about the actual quality of life in a country. GDP is artificially inflated by imputations such as the added “value” of a house owner not having to pay rent. GDP also includes government spending — such as when a government department purchases new computers. This transaction merely redirected labor and raw materials that would have otherwise been used to directly satisfy consumer demands with better or additional products. Government spending is not just “neutral,” it is actively destructive. Government purchases and sales do not operate with the same rules that other actors in the market are subject to. Thus when we look at GDP numbers from a country drunk on spending newly printed money on projects completely devoid of market signals, we should not place too much faith in them.

The IMF report and those who took it seriously relied heavily on GDP calculations when arriving at their astounding conclusions about China’s growth. To compare the Chinese and American economies using a crude metric like GDP is like trying to gauge the athleticism of an individual by how much sweat comes out of his pores. When one economy can produce companies like Google, Boeing, Costco, and General Electric while another builds empty homes, what meaningful information could an unsophisticated metric like GDP tell us? Much to the chagrin of Keynesians, not all spending is created equal.

Not long ago, we were haunted, not by the specter of this “red capitalism,” but by the communism of the Soviet Union. Some fifty years ago, mainstream economists blabbered tirelessly about the rising Soviet powerhouse. According to popular wisdom, the managed Soviet economy did not have the inefficiency and economic drag inherent in the “random” and “chaotic” American capitalist economy that sent some into mansions and others into bankruptcy. The widely-read Economics: An Introductory Analysis by Nobel-prize winning economist, Paul Samuelson predicted that Soviet GDP was nearly half that of the United States, but by 1984 (and surely by 1997), the strength of the Soviet economy would surpass that of the United States.

The Soviet Union crumbled. When experts rely on crude metrics we should not be surprised when experts are wrong.

The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates and has resumed doing so once again. Entrepreneurs operating under faulty market signals created by the Federal Reserve malinvested hundreds of billions of dollars into capital intensive projects primarily in the housing sector. We paid for our boom with millions of destroyed jobs, wasted labor, and wasted resources. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment. They will reap the same rewards.

Mises Daily: a falacia do jogo de soma zero em economia - Matt Palumbo

A verdade simples é esta: "inequality, contrary to popular belief, actually promotes growth".

As pessoas não gostam de admitir, ou melhor, elas recusam essa simples realidade, mas é um fato. Igualdade, como já nos provaram os países socialistas, leva à estagnação e ao declínio.

Que o diga a China...

Paulo Roberto de Almeida   

Why Larry Summers Doesn’t Understand Economic Inequality

• 

Mises Daily, May 5, 2015

 Matt Palumbo

A good chunk of the debate over inequality today centers around what Milton Friedman identified as “the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”
This fallacy is one that any student of economics is familiar with, but the layman may not be: the fixed pie fallacy.
The fixed pie fallacy is synonymous with the zero-sum fallacy in economics: that anyone’s benefit comes at someone else’s expense.
In other words, if one person earns a dollar, someone else is worse off by a dollar.
We know the logic behind the fallacy is faulty because if it were true, no transactions would take place. People aren’t so misinformed that they would remain blind to coming out the loser in half the transactions they take part in.
Well, maybe I’ve spoken too soon in saying that only the layman would be unfamiliar with this fallacy. Weighing in on the income inequality debate in a piece at the Financial Times, former Harvard President Larry Summers attempted to quantify how much better off most Americans would be had inequality remained at 1979 levels. “If the US had the same income distribution it had in 1979, the bottom 80 per cent of the population would have $1tn — or $11,000 per family — more. The top 1 per cent $1tn — or $750,000 — less,” writes Summers.
Quoctrung Bui of NPR reported on Summers’s argument and broke it down even further, estimating the benefits by income quintile. Under the 1979 income distribution, the bottom 20 percent would be earning $3,282 more, the next 20 percent $6,928 more, the middle 20 percent $8,752 more, and the next 19 percent would be earning $17,311 more. This only leaves the demonized top 1 percent, which would be earning $824,844 less.
Bui was intellectually honest enough in his reporting of Summers’s argument that he included this comment: “Of course, this is a purely theoretical exercise. It combines two different worlds: an economy as big as today's, but with 1979 levels of inequality. Some economists would argue that this could never exist, because economic growth has been driven by forces, such as globalization and technological change, that have also driven up inequality.” A question that must be answered is whether or not the economic pie would be smaller, the same size, or larger had inequality not risen by the same extent since the late 70s. The consensus among rich countries is the last option: that inequality, contrary to popular belief, actually promotes growth. Quoting Harvard economist Robert Barro in the Journal of Economic Growth, “higher inequality tends to retard growth in poor countries and encourage growth in richer places.” Even Jared Bernstein in a report for the liberal Center for American Progress stated “there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.”
Since we know that rising inequality has promoted growth above what it has otherwise been, we can’t simply look at economic output today and figure out how much each quintile would be earning had the income distribution remained at its 1979 levels. A good exercise would be to compare current levels of output and earnings distribution against the counterfactual: a smaller economy with 1979 levels of distribution.
In a recent debate hosted by Intelligence Squared U.S., Scott Winship of the Brookings Institution did what I outline. In his opening remarks, he argued:

So, essentially if you enlarge the pie enough, the economic pie enough, then the poor and middle class actually can get more pie even if their slice becomes skinnier.
If you claim that absent rising inequality, the middle class would have had thousands of dollars more than they did, as you sometimes hear, there are a couple of really big assumptions hidden behind that. One is that if we had capped the incomes at the top, that the economic pie would have become just as big as it actually did. The second assumption is that if we had capped those incomes, then essentially the proceeds would be equally distributed across the population. Now, in actuality, if we somehow managed to cap the incomes of the top 1 percent, what would likely happen is we'd be shifting incomes to knowledge workers and professionals who are in the upper middle class or in the rest of the top 10 percent.
To see how important these assumptions actually are, consider one possible outcome if we had successfully held the top 1 percent’s income share in 2007 to their 1979 level, okay? So assume, for sake of argument, that, that would have reduced economic growth, not by a lot, say, by 8 percent. And assume that the middle 20 percent, instead of receiving 20 percent of the proceeds from this redistribution, got 13 percent of the proceeds. Well, I've done the math, and what it works out to is that in this scenario the middle class actually would be no better off for having limited the increases at the top.

So, when we take into account the effects that inequality has on economic growth into the equation, Summers’s purely theoretical exercise becomes just that, a purely theoretical exercise. Quintiles at different levels of income distribution would not be thousands of dollars better off had inequality remained the same as it had in 1979 for the past thirty years, because the economy would not have grown by the same amount. We don’t even know if they would be any better off at all. The fixed pie fallacy may make for good politics, but it has no place in economic analysis.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Book Review: Capital in the Twenty-first Century - Lewis Hunter (Mises Daily)

O Capital no Século XXI, do economista francês Thomas Piketty, vem fazendo sucesso em diversos meios, especialmente naqueles jamais convencidos de que o sistema capitalista, com todas as suas desigualdades e injustiças de que ele é (involuntariamente) capaz, é, de longe, o melhor sistema para criar E DISTRIBUIR riquezas, ao contrário de todos os demais inventados pelos homens e sociedades, que nada mais são do que receitas mal concebidas para a ineficiência e a baixa produtividade.
Nesta resenha crítica, Hunter Lewis (do Mises Daily) demonstra como os dados improváveis do livro destroem as teses principais de Piketty, e que elas na verdade contradizem seus principais argumentos.
Ou seja, mesmo aqueles que achavam que os dados eram fiáveis, ainda que as prescrições de correção das "desigualdades" fossem totalmente políticas, e não econômicas, podem ter agora certeza de que o livro não merece todos os elogios que tem recebido.
Ele é, mal comparando, o refúgio mais recente de todos aqueles que pretendem ainda descobrir uma fórmula mágica para escapar das duras realidades da vida cotidiana, e que ficam buscando algum embasamento empírico para contradizer os supostos benefícios do capitalismo, que podem não ser do agrado dos órfãos do socialismo, mas são os que existem de mais concreto em nossa civilização, acima, além e em descrédito dos sonhos e utopias.
Certamente haverá mais resenhas do livro, mas o que se necessita, na verdade, é a análise dos dados, como se faz com todos os experimentos científicos de qualidade.
As pessoas elogiam Piketty porque se impressionam com a quantidade de dados e não se aventuram na busca de seu embasamento empírico, segundo o alinhamento preferido pelo autor, e se intimidam com gráficos e tabelas.
Economistas sérios devem desmentir suas teses principais, e sobretudo a inconsistência de suas prescrições políticas, ou morais, que tem pouco a ver com a realidade.
Paulo Roberto de Almeida

Thomas Piketty’s Improbable Data

by Hunter Lewis on May 2, 2014

Keynes’s keynote book, The General Theory, is loaded with economic theory. There are only two pages of data in that book, and Keynes dismisses the scant data he cites as “improbable.” By contrast, Piketty’s new book, Capital in the Twenty-first Century, is stuffed with data. Indeed Piketty considers himself a successor to the economist whose data Keynes dismissed, Simon Kuznets. Almost everyone admits that Piketty’s theoretical case is weak — but, his supporters say, look at all this data. You can’t argue with this mass of historical evidence!

Piketty’s primary argument is that wealth (which tends to be concentrated in few hands) grows faster than the economy, so that those with a lot of wealth keep getting richer relative to everyone else. This is supposed to be an inescapable feature of capitalism. (If this sounds familiar, it should be. It echoes both Marx and Keynes, although we should remember that Keynes mocked most of what Marx said as “hocus-pocus.”)

So what then is the evidence that wealth has grown faster than the economy?

Let’s look at the chart below, adapted from Piketty’s book. The top line is return on capital and the bottom line is the economic growth rate. The top line is supposed to be how the rich are faring and the bottom line how the average person is faring. Note that the lines on the far right are just a projection of Piketty’s, and not actual history.

This chart is astonishing for many reasons. First of all, it suggests that capital earned a 4.5 percent or higher return for the years 0-1800 C.E. This is a crazy number. If the human race had started out with only $10 in year 1 and compounded it at 4.5 percent a year for any series of 1,800 years, by now we would have much, much more than a trillion times the entire world’s wealth today, which is estimated at $241 trillion by Credit Suisse.

The 4.5 percent or higher number is also crazy because Piketty is right that there was negligible economic growth prior to the industrial revolution, and such high returns for the rich are just not consistent with so little growth. The truth is that rich people for most of those years were interested in spending or hiding their wealth, not in investing it, because wealth out in the open was likely to be stolen, if not by bandits, then by government.

If you look closely at the more modern part of the chart and ignore the projection into an unknown future, you will see that the lines do not support Piketty’s thesis. His idea that the rich will always necessarily get richer relative to everyone else under capitalism is not supported by the data he presents.

The next chart shows the share of wealth of the 10 percent richest in Europe over time (dark-blue, top line), the share of wealth of the 10 percent richest Americans (the light-green, second line from top), the share of wealth of the top 1 percent Europeans (the light-blue, third line from top), and the share of wealth of the top 1 percent Americans (the dark-green, fourth line from top). This chart doesn’t support Piketty’s thesis either. Yes the share of the rich has grown since 1970, but only after falling previously.

The next chart is one that I have commented on in an earlier article. It shows the income of the top 10 percent in the US over time as a percent of all income. Income in this case includes capital gains which arguably are not true income, but rather the exchange of one asset for another, and excludes government transfer payments which make a considerable difference to the results. Even so, once again we do not see an inexorable rise in the income of higher earners over time, far from it.

What we actually see is two peaks for high earners, right before the crash of 1929 and again before the crash of 2008. These are the two great bubble eras in which government printed too much new money, which led to a false and unsustainable prosperity. These were also crony capitalist eras, as rich people with government connections used the new money to become even richer or benefited from other government favors.

Unfortunately world central banks have blown up yet another bubble in capital markets following the crash of 2008, which has again brought the high earners share back to 50 percent in 2012, based on data that became available after the book’s publication. This newest bubble too will eventually burst and bring the share back toward the 40 percent level of 1910, the start of the chart.

Perhaps the most astonishing claim in Piketty’s book is that government bureaucracies need to be reformed so that they can make most efficient use of all the new income and wealth taxes that are recommended. The assumption is that almost complete government control of the economy would be best, but that     the machinery needs some fine tuning.

Economist Ludwig von Mises demonstrated almost 100 years ago that a state managed economy will simply not work, because among other problems it cannot set workable prices. Only a consumer run economy can do that. Socialists have been trying to disprove Mises’s thesis ever since, but have never succeeded. Piketty should at least read Mises.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
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Argentina: no caminho da Venezuela - Nicolás Cachanosky

Economies are Not Destroyed in a Day
by Nicolás Cachanosky

Mises Daily, October 25, 2013

Earlier this month, Argentina's leading conservative paper, La Naciónpublished an unsigned editorialcomparing the economies of Argentina and Venezuela. The editorial concluded that as economic freedom declines in Argentina, and as Argentina adopts more of what Chavez called “twenty-first century socialism,” it is becoming increasingly similar to Venezuela. Is this true? Will Argentina suffer the same fate as Venezuela where poverty is increasing and toilet paper can be a luxury?
The similarities of regulations and economic problems facing both countries are indeed striking in spite of obvious differences in the two countries. Yet, when people are confronted with the similarities, it is common to hear replies like “but Argentina is not Venezuela, we have more infrastructure and resources.”
Institutional changes, however, define the long-run destiny of a country, not its short-run prosperity.
Imagine that Cuba and North Korea became, overnight, the two most free-market, limited-government countries in the world. The two countries would have immediately gained civil liberties and economic freedom, but they would still have to accumulate wealth and to develop their economies. The institutional change affects the political situation immediately, but a new economy requires time to take shape. For example, as China opened parts of its economy to international markets, the country started to grow, and we are now seeing the effects of decades of relative economic liberalization. It is true that many areas in China continue to lack significant freedoms, but it would be a much different China today had it refused to change its institutions decades ago.
The same occurs if one of the wealthiest and developed countries in the world were to adopt Cuban or North Korean institutions overnight. The wealth and capital does not vanish in 24 hours. The country would shift from capital accumulation to capital consumption and it might take years or even decades to drain the coffers of previous accumulated wealth. In the meantime, the government has the resources to play the game of Bolivarian (i.e., Venezuelan) populist socialism and enjoy the wealth, highways, electrical infrastructure, and communication networks that were the result of the more free-market institutional realities of the past.
Eventually, though, highways start to deteriorate from the lack of maintenance (or trains crash in the station killing dozens of passengers), the energy sector starts to waver, energy imports become unavoidable, and the communication network becomes obsolete. In other words, economic populism is financed with resources accumulated by non-populist institutions.
According to the Fraser Institute’s Economic Freedom of the World project, Argentina ranked 34th-best in the year 2000. By 2011, however, Argentina fell to 137, next to countries like Ecuador, Mali, China, Nepal, Gabon, and Mozambique. There is no doubt that Argentina enjoys a higher rate of development and wealth than those other countries. But, can we still be sure that this will be the situation 20 or 30 years from now? The Argentinean president is known for having said that she would like Argentina to be a country like Germany, but the path to becoming like Switzerland or Germany involves adopting Swiss and German-type institutions, which Argentina is not doing.
The adoption of Venezuelan institutions in Argentina, came along with high growth rates. These growth rates, however, are misleading:
First, economic growth, properly speaking, is not an increase in “production,” but an increase in “production capacity.” The growth in observed GDP after a big crisis is economic recovery, not economic growth properly understood.
Second, you can increase your production capacity by investing in the wrong economic activities. Heavy price regulation, as takes place in Argentina (now accompanied by high rates of inflation), misdirects resource allocation by affecting relative prices. We might be able to see and even touch the new investment, but such capital is the result of a monetary illusion. The economic concept of capital does not depend on the tangibility or size of the investment (i.e, on its physical properties), but on its economic value. When the time comes for relative prices to adjust to reflect real consumer preferences, and the market value of capital goods drops, capital is consumed or destroyed in economic terms even if the physical qualities of capital goods remains unchanged.
Third, production can increase not because investment increases, but because people are consuming invested capital, as is the case when there is an increase in the rate that machinery and infrastructure wear out.
I’m not saying that there is no genuine growth in Argentina, but it remains a fact that a nontrivial share of the Argentinean GDP growth can be explained by: (1) recovery, (2) misdirection of investment, and (3) capital consumption. If that weren’t the case, employment creation wouldn’t have stagnated and the country’s infrastructure should be shining rather than falling into pieces.
Most economists and policy analysts seem to have a superficial reading of economic variables. If an economy is healthy, then economic variables look good, GDP grows, and inflation is low. But the fact that we observe good economic indicators does not imply that the economy is healthy. There’s a reason why a doctor asks for tests from a patient that appears well. Feeling well doesn’t mean there might not be a disease that shows no obvious symptoms at the moment. The economist who refuses to have a closer look and see why GDP grows is like a doctor who refuses to have a closer look at his patient. The Argentinian patient has caught the Bolivarian disease, but the most painful symptoms have yet to surface.

NOTE: This is a translated and expanded version of an original piece published in Economía Para Todos (Economics for Everyone).
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

Ron Paul: contra o monopolio estatal na educacao - Mises Daily

The State’s Education Monopoly Increases Prices and Destroys Choice
by Ron Paul 

Mises Daily, on October 14, 2013

Editor's Note: This selection is taken from Chapter 5 of Ron Paul's new book The School Revolution: A New Answer for Our Broken Education System.

The free-market principle of open entry is challenged by governmental restrictions on access to consumer markets. There are many official justifications for these restrictions, but the main one is this: “Customers do not know what is good for them.” They do not know what products to buy, what prices to pay, or what arrangements to negotiate with respect to return and replacement. Customers are in fact woefully ignorant of what they really need, so the state enters the marketplace to restrict what customers are legally allowed to purchase. The idea here is that state officials know what customers really need as distinguished from what customers are willing to pay for.
One of the justifications for this is that advertising deludes customers. This means that customers are considered not able to sort out fact from fiction when they read or see an advertisement. It is interesting that the same advertising agencies hired by businesses to sell products are also hired by politicians to produce advertisements in election years. In other words, advertising is accepted as a legitimate way to motivate people to take action during election years, but is placed under suspicion when it comes to advertising products and services. People in their capacity as voters are supposedly perfectly capable of making accurate decisions based on advertising. On the other hand, those same people in their capacity as customers supposedly are incapable of making accurate decisions based on advertising. This is utterly illogical, but it is basic to understanding all modern governments in the West ...
Whenever the state intervenes in a market to restrict entry by sellers, it results in higher prices. Customers are not able to buy the kinds of goods and services they want, at a price they are willing to pay. So the producers who would otherwise have entered the market are forced to enter other markets. These markets are less profitable than the restricted markets. Customers in the regulated markets are worse off, and so are marginal suppliers who leave those markets.
We can see this principle at work in the market for education. The supply of education is limited by government restrictions on academic certification. Teachers must go through a specified regimen at the college level in order to be eligible to teach in the nation’s tax-funded school systems. This reduces the supply of teachers who can legally be hired by local school districts. Furthermore, restrictions on school construction by private entrepreneurs limit the amount of competition tax-funded schools face.
So, parents are compelled to send their children to school, but the state restricts the number of schools available to parents. This creates a near monopoly of education, kindergarten through twelfth grade, for the state. The state uses tax funding to build schools, and it uses the regulatory system to restrict the creation of rival schools. This is the classic mark of a monopoly.
The free-market solution is open entry and competition. Competition may be in the form of quality. Some parents want very-high-quality education for their children, and are willing to pay a great deal of money to purchase it. They would not have to pay as much money if there were open entry into the local market for schools. Other parents cannot afford the best education for their children, because they do not have enough money. So, they want price-competitive education. This is also made available by entrepreneurs in the field of private education. These entrepreneurs can decide which programs are affordable for which parents, and which programs will meet the demands of specific parents. As more schools come onstream, the range of choice for parents increases. This is the standard definition of what constitutes economic growth. Economic growth takes place when customers can buy more goods and services than they were able to buy prior to the increase in economic growth ...
Bureaucrats in the field of education, which is almost exclusively nonprofit education, have a bias against price-competitive academic programs. They assume that these programs are of low quality. They think it is a good idea to close the market to sellers of any kinds of curriculum not certified by educational bureaucrats. They have greater control over the content and structure of education when they can restrict entry into the marketplace. In the name of helping children, these promoters of self-interested restrictions on entry conceal the fact that they are able to exercise greater power over education and then charge more for the privilege of doing so.

$18.95

This is why libertarians believe that there should be open entry into the field of education. They do not trust state bureaucrats to act on behalf of parents, especially parents who have a particular view of the best methodology and content for the education of their children. The bureaucrats operate in their own self-interest, which is to expand their power and income.
This raises the issue of government regulation of schools. First, the government requires compulsory attendance. Second, in order to keep control over the content of the curriculum, governments establish rules and regulations governing those schools. Parents are not allowed to send their children to schools that do not meet these qualifications. The qualifications are set very high, so that not many schools can be established to compete against the public school system. This increases the power of the public school system, and the power of the bureaucrats who run the system.
An example of this kind of regulation can be seen in the requirement that private high schools have libraries of at least 1,500 books. States around America had this requirement or something similar to it in the 1990s. But a student in the early 1990s was able to carry a CD-ROM with 5,000 books on it: the Library of the Future. No matter. A CD-ROM and computer stations did not count as meeting the 1,500-book requirement. The books had to be physical, so tax money had to go toward that. Today students have access to hundreds of thousands of books by means of the cell phones in their pockets. But accredited high schools must still have physical libraries. These libraries must be run by someone with a degree in library science. Conclusion: The library requirement has nothing to do with the number of books in the library. It has everything to do with increasing the cost of building a facility that qualifies as a school that meets the government’s regulations.
The goal of academic regulation is to limit the supply of schools that compete against public schools. This is done in the name of guaranteeing the educational quality of the school, thereby protecting the students. Yet the academic performance of the public schools continues to decline, and has done so since the early 1960s. The scores on the SAT and ACT exams continue to fall. The high point was in the early 1960s. So, regulation has not been successful in guaranteeing the quality of education. But it has been quite successful in restricting entry into the field of education.
In the 1980s there was a great battle over homeschooling. States around the nation passed laws prohibiting parents from substituting homeschooling for schooling in either a tax-funded school or a private school. The private schools were so expensive that only a handful of parents could afford them. This meant that parents would simply have to send their children to the public schools. The appearance of homeschooling in the 1970s and ’80s represented a threat to this strategy of restricting the supply of competing educational programs. States prosecuted parents for teaching their children at home.
A major case was tried in Texas in 1985, Leeper v. Arlington, in which a coalition of homeschool advocates brought a class-action suit against the state. The state lost the case in the state supreme court in 1994. The court required school districts to compensate the parents of the children who brought the suit. This case sent a clear message to local school districts in Texas. Overnight, they removed most of the restrictions against homeschooling. The state of Texas became very friendly toward homeschooling. But it took a court case to achieve this goal ...
There should not be anything resembling a government monopoly of education. Standards that govern the public school system locally should not be imposed on parents who decide to remove their children from that system. Without freedom of parental choice in education, the state will pursue a policy of extending its monopoly over education. Tenured, state-funded bureaucrats will then use this monopoly to screen out ideas that call into question the legitimacy of government interference in many areas of life, including education. The government does not have to burn books in order to persuade the next generation of voters of ideas that favor the government. The government need only screen out books and materials that are hostile to the expansion of the state.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
Dr. Ron Paul is a former member of Congress and a Distinguished Counselor to the Mises Institute. See Ron Paul's article archives.

A imoralidade economica do keynesianismo - Hunter Lewis

Two Sides of the Same Debased Coin
by Hunter Lewis
Mises Daily, on May 2, 2013
[This article originally appeared in the January 2013 edition of The Free Market.]

In the beginning of The General Theory, John Maynard Keynes says that his ideas will no doubt be rejected because they are so novel and revolutionary. Toward the end of the same book, he seems to have forgotten this because now he says he is reviving the same centuries-old ideas that he had once dismissed as the most absurd fallacies. At least he acknowledges that he is changing his position, although he does not explain how his ideas can be new, revolutionary, and also centuries old.

This is of a piece with his describing himself as a member of “the brave army of rebels and heretics down through the ages” even as he recommends policies that appeal to the basest and most self-serving instincts of politicians — and even as he enjoys all the immense privileges that accrue from being at the top of the existing financial and political establishment.

Although it may be true, as the art historian Kenneth Clark said, that Keynes “never dimmed his headlights,” it cannot be said that he knew how to drive on a single side of the road. Keynes, would become the principal apologist for “crony capitalism,” which is perhaps the best term to describe our current system. As you probably know, much of Keynes’s writing is intentionally obscure, although the threads can be unraveled and rebutted, as Henry Hazlitt so brilliantly proved in The Failure of “The New Economics.”

What is the very essence of Keynesianism? Can we describe it in the briefest and simplest terms, so that anyone can understand what is wrong with it, and thus strip away the intellectual fog that surrounds and protects crony capitalism?

At first glance, it might seem that the essence of Keynesianism is simply the endless self-contradiction to which I have already alluded. He was never in one place, intellectually or otherwise, for long.

For example, he railed at the love of money. He called it “the worm ... gnawing at the insides of modern civilization.” But he also desperately wanted to be rich. He railed against investment speculation, but avidly speculated himself. At one point, he was completely wiped out, and had to turn to his father, a teacher, for rescue. Two more times, he could have been wiped out, one of them 1929, which he did not anticipate, the other 1937, which he did not anticipate either.

Keynes’s relationship with gold is a good example of his continual self-contradiction. In 1922, he wrote in The Manchester Guardian: “If the gold standard could be reintroduced ... we all believe that the reform would promote trade and production like nothing else.” A little later he described gold as the “barbarous relic.” Yet even when he called gold the “barbarous relic” he privately continued to recommend it as an investment diversifier.

When we turn to Keynes’s economics, perhaps the most fantastic self-contradiction was that an alleged savings glut, too much supposed idle cash, could be cured by flooding the economy with more cash, newly printed by the government. Perhaps even more bizarrely, Keynes says that we should call this new cash “savings” because it represents “savings” just as genuine as “traditional savings.” That is, the money rolling off the government printing presses is in no way different from the money we earn and choose not to spend.

All this new “savings” enters the economy through the mechanism of low interest rates. At this point, Keynes further confounds his forerunners and elders by arguing that it is not high interest rates, as always thought, but rather low interest rates, that increase savings, even though we started by positing too much savings in the first place.

Keynes’s followers echo this even today. Greenspan, Bernanke, and Krugman have all written about a savings glut which is supposed to be at the root of our troubles, and have proposed more money and lower interest rates as a remedy, although they no longer call the new money “genuine savings.” They prefer quantitative easing and similar obscure euphemisms.

Keynesian Gregory Mankiw, one of two chief economic advisors named by Mitt Romney, has even proposed ramping up CPI inflation to create deeply negative interest rates, perhaps as negative as -6 percent. In other words, increase inflation to around 6 percent but keep interest rates repressed to near zero by buying bonds with whatever money has to be printed.

This latest proposal of deeply negative interest rates outdoes even Keynes. The General Theory does argue that interest rates could and should be brought to a zero level permanently (that’s pages 220–21 and 336). This idea of permanent zero interest rates appears first in Proudhon, although Keynes does not acknowledge or perhaps know that, and seems absurd on its face. Lending money at no interest is equivalent to giving it away, and it is hard to understand how anything can have value that is given away.

Nevertheless, Keynes said that it would be reasonable to get to zero interest rates (and zero level dividends) within a generation. By that standard, we have evidently failed him because we should have reached this utopia by 1966.

But note that even Keynes didn’t suggest negative interest rates. The idea of engineered negative interest rates reminds me of a Yiddish phrase which I am told is translated roughly as: “Smart, smart, stupid.” It takes very smart people to think it up but that doesn’t mean it isn’t stupid. And it is worrying that this is coming not just from President Bush or President Obama. One couldn’t be surprised at anything coming from those quarters.

President Bush said that “I have abandoned free-market principles to save the free-market system.” His successor, President Obama, said in his first budget message that he was taking us from “an era of borrow and spend” to an era of “save and invest.” Then we had Mitt Romney not only relying on a retread Bush advisor, but even a proponent of deep negative interest rates. A very nice man, I might add, but not someone we need in Washington again.

These Romney advisors also, of course, believed in the fairy tale of borrow-and-spend stimulus. It is usually forgotten that Keynes assured us that each dollar of such stimulus would produce as much as twelve dollars of growth and not less than four dollars. Even the most ardent Keynesians have, of course, been unable to demonstrate as much as one dollar. How did Keynes know that you would get four dollars at least? He didn’t. He told the governor of the Bank of England, Norman Montague, that his ideas were “a mathematical certainty” but that was just a crude bluff.

What is empirically verifiable is that all debt, private or public, has been generating less and less growth for decades. In the ten years following 1959, the official figures say that you got 73 cents in growth for each dollar borrowed. By the time of the Crash of ’08, that was down to 19 cents. And I expect it was really negative by then and is deeply negative now.

Rather than follow Keynes and his followers down all these rabbit holes, let’s ask ourselves: is there a common theme to this nonsense? And there is a common theme. The common theme is that market prices don’t matter. In a system replete with paradoxes, this is the ultimate paradox: “In order to fix the price and profit system, we must subvert it. No free price or profit relationship must be left alone. The price/profit system must be poked, pushed, pulled apart, only to be left in a complete shambles.” The assault on interest rates and currency rates is particularly destructive, but all of this madcap tinkering with prices is destructive.

Is this, then, the essence of Keynesianism, its blind destruction of the price mechanism on which any economy depends, as Mises demonstrated? Yes. But there may be an even deeper essence.

When we think of Keynes’s headline ideas, they have a kind of formulaic quality. You take a long established observation, for example, that over-spending and debt are the road to bankruptcy and ruin, and turn it on its head. No, spending and debt are the road to wealth.

For the Victorians, spending within your means and avoiding debt were not just financial principles. They were moral principles. Keynes, who was consciously rebelling against these same Victorians, described their “copybook morality” as “medieval [and] barbarous.” He told his own inner circle that “I remain, and always will remain an immoralist.”

You will recall Mr. Micawber’s famous admonition in Charles Dickens’s nineteenth-century novel David Copperfield: “Annual income twenty pounds, annual expenditure nineteen, nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Keynes certainly subverted that idea. In particular, he insinuated the very odd, but now very prevalent idea, that old-fashioned wisdom and morality is out of date, even a bit retarded, and odder still, in conflict with science. This is all such nonsense, but it permeates our culture. And the very people who preach honesty and sustainability outside of economics, for example in our treatment of the environment, entirely fail to understand that Keynes is preaching dishonesty and unsustainability in economics.

So, in conclusion, when we strip down Keynesianism to its essence, the relationship to crony capitalism becomes even clearer. Crony capitalism represents both a corruption of capitalism and a corruption of morals. Keynesianism also represents both a corruption of economics and a corruption of morals. Crony capitalism and Keynesianism are just two sides of the same debased coin.

Hunter Lewis is cofounder of Against Crony Capitalism. He is the former CEO of Cambridge Associates and the author of six books. His most recent book is Where Keynes Went Wrong. He has served on boards and committees of 15 not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank. See Hunter Lewis's article archives.

Os donos do dinheiro: como quebrar o mundo, sem ter a intencao de faze-lo...

Eu li o livro em questão, Lords of Finance, que no Brasil se chamou, creio, Os Donos do Dinheiro...
Instrutivo, saber como poucos homens, podem decidir a sorte de milhões de outros, com suas decisões baseadas, por vezes, em sólida economia, muitas vezes em preconceitos e equívocos...
Paulo Roberto de Almeida

Lords of Finance: The Backroom World of Central Banking
by Dan O'Connor
Mises Daily, February 19, 2013

Lords of Finance: The Bankers Who Broke the World
Liaquat Ahamed
 Penguin Books, 2009

The Pulitzer Prize-winning book Lords of Finance: The Bankers Who Broke the World reveals the destructive, surreptitious, incestuous, and highly corrupt nature of central banking. Although the author, Liaquat Ahamed, exposes the current financial system for all of its evils, this book is by no means a critique of central banking. Ahamed’s views are very much representative of status-quo economists of the past 100 years. He references John Maynard Keynes frequently without mentioning Nobel Prize-winner F.A. Hayek once, even though Hayek was Keynes’s greatest intellectual opponent during this period. Despite its mainstream focus the book is interesting and well-written. One of the jewels here is the rare look into the lives of the powerful men, the “lords of finance,” who were behind the solidification of modern central banking in the US and Europe during the years 1910 to 1935.

Ahamed writes,
Central banks are mysterious institutions, the full details of their inner workings so arcane that very few outsiders, even economists, fully understand them. Boiled down to its essentials, a central bank is a bank that has been granted monopoly over the issuance of currency.… Despite their role as national institutions determining credit policy for their entire countries, in 1914 most central banks were still privately owned. They therefore occupied a strange hybrid zone, accountable primarily to their directors, who were mainly bankers paying dividends to their shareholders, but given extraordinary powers for entirely nonprofit purposes. (p. 11)

Since these banks exert such a tremendous amount of influence over the economy and the government, they require a greater level of exposure.

Hidden Influence
Central banks have existed for hundreds of years and still very few people understand their inner-workings. Americans resisted central banking until 1913, when, with the creation of the Federal Reserve, the responsibility of the nation’s finances (budget, taxes, and debt) shifted away from Congress—with its 535 elected representatives—into the hands of the central bankers.

With the central-banking lords firmly in control in the US and England, they helped to finance World War II via central bank inflation. Then at the end of the war, these same bankers advised the politicians on who to send to the Paris Peace Conference as negotiators. Out of this conference came the harsh penalties against Germany that would bring enormous hardship to the German people for the next generation.

In the interwar period, Congress set up commissions to deal with the aftermath of the war, debt negotiations, and to oversee the banking system. However, the central bankers such as Benjamin Strong, George Harrison, Eugene Meyer, and Andrew Mellon, were successful at blocking attempts at congressional oversight.

Central banks across Europe shared a very similar aversion to public oversight. Montagu Norman, Governor of the Bank of England, was considered “the most eminent banker in the world” and at the same time he
... was generally wary of the press and was infamous for the lengths which he would go to escape prying reporters—traveling under false identity; skipping off trains; even once, slipping over the side of an ocean vessel by way of a rope ladder in rough seas. (p. 1)
Norman had a reputation for remaining cool and collected. Then late in 1929 the British government created a committee to investigate the workings of the Bank of England. “That he and the Bank were now to be subject to the spotlight of public scrutiny filled him with dread.… [T]wo days before he was due to testify, he predictably collapsed.” The secret motto of the Bank of England was “Never explain, never apologize” (p. 371).

This elusiveness is characteristic not only of Norman and the high-ranking governors, but is shared by those private bankers who have always been closely associated with central banks. Even prior to the formation of the US Federal Reserve, operations of the bank’s key creators were deliberately kept hidden from the public, and all meetings were held behind closed doors.

The most significant of these closed-door meetings took place over a ten-day period in November 1910, at Jeykll Island, Georgia. The agenda for this meeting was the planning of the Federal Reserve System.
Henry Davidson (J.P. Morgan’s partner) was worried, and for good reason, that any plan put together by a group from Wall St. would immediately be suspect as the misbegotten product of a bankers’ cabal. He therefore chose to hold the meeting in secret on a small private island off the coast of Georgia—in effect creating the very bankers’ cabal that would have aroused so much public suspicion. The preparations were elaborate. Each guest was told to go to Hoboken Station in New Jersey on November 22 and board Senator Aldridge’s private railroad car, which they would find hitched with its blinds drawn to the Florida train. They were not to dine together, nor meet up beforehand, but to come aboard singly and as unobtrusively as possible, all under cover of going duck hunting. As an added precaution, they were to use only their first names. Strong was to be Mr. Benjamin, Warburg Mr. Paul. Davison and Vanderlip went a step further and adopted the ringingly obvious pseudonyms Wilbur and Orville. Later in life, the group used to refer to themselves as the “First Name Club.” (pp. 54–55)

Not one attendee of the Jekyll Island meeting spoke publicly about it for 20 years.

The legislation for creating the Federal Reserve passed Congress shortly before Christmas 1913, when many representatives had already left to go home for the holidays.

There are examples throughout the book of the heads of the world's largest banks conducting clandestine meetings with their respective national treasury and central bank chiefs, immediately prior to, or following, a financial crisis. In these instances, the banking heads maneuvered to not only save their banks, but to obtain more special favors, often in the form of “bailouts.” The bailouts associated with America’s 2007–2008 financial crisis should come readily to mind.

For example, in late 1929, a large group of bankers and George Harrison of the New York Fed,

...gathered at the library of Jack Morgan's house at Madison Avenue and Thirty-fifth Street, the scene of his father's legendary rescue of the New York banking system in 1907.

In an operation made possible by Harrison's promise to "provide all the reserve funds that may be needed"...
Over the next few days…New York City banks took over $1 billion in brokers’ loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a banking crisis. Though the crash of October 1929 was by one count the eleventh panic to grip the stock market since the Black Friday of 1869…it was the first to occur without a major bank or business failure. (p 360)

Prior to the Fed’s establishment, businesses big and small went bankrupt during panics. Under the Fed, well-connected businesses were propped up at the expense of small businesses and taxpayers.
Secret meetings between elite private bankers and the heads of the central banks had become a common phenomenon by the 1930s.

On Friday, May 8 [1931], the Credit Anstalt, based in Vienna and founded in 1855 by the Rothschilds, with total assets of $250 million and 50 percent of the Austrian bank deposits, informed the government that it had been forced to book a loss of $20 million in its 1930 accounts, wiping out most of its equity. Not only was it Austria’s biggest bank, it was the most reputable—its board, presided over by Baron Louis de Rothschild of the Vienna branch of the family, included representatives of the Bank of England, the Guaranty Trust Company of New York (J.P. Morgan), and M.M. Warburg and Co. of Hamburg. After a frantic weekend of secret meetings, the government made public on Monday, May 11, at the same time announcing a rescue package of $15 million, which it would borrow through the BIS [the Bank of International Settlements]. (p. 404)

Credit Anstalt later went on to absorb other failing financial institutions across Austria. In America, J.P. Morgan Chase, America’s largest bank, did the same thing during the 2007 financial crisis when it acquired Bear Stearns, Washington Mutual, and others.

Another theme of the book is the highly incestuous nature of central banking. If central bankers were not consorting with political leaders, they were most often found in the company of top private bankers, especially those of the Warburg, Morgan, and Rothschild families. These private bankers benefited from the business cycles caused by their political and banker friends, profiting both during the booms and the busts (thanks to bailouts), while most businesses profited during the booms and suffered during the busts.

Late in 1930, fear arose on Wall Street that one of New York’s largest banks, the Bank of the United States (or BUS, which, despite its name was a private bank with no official status), was going to collapse, because it was insolvent and runs had already begun in the city.

On the evening after the run began on December 10, all of the familiar Wall Street barons—George Harrison of the New York Fed, Thomas Lamont of J.P. Morgan, Albert Wiggin of Chase, Charles Mitchell of National City ( modern-day Citibank) and half dozen of the city’s top bankers—gathered on the 12th floor of the New York Fed to try to put together a rescue package. (p. 387)

Bankers who are not part of the elite lords of finance ambit, traditionally go bankrupt or get acquired during, or immediately prior to, panics (i.e., Lehman Brothers, Wachovia, and Merrill Lynch). BUS did not have close enough ties and was allowed to collapse shortly after the private meeting at the Fed, sparking runs on banks across the country.

Cronyism, on a large-scale, continued as Franklin D. Roosevelt took office. On the first day of his presidency, FDR stepped in to help the banks by closing them in order to stem the tide of bank runs. Roosevelt’s closest advisers were from the elite banker’s ambit, people who encouraged him to ban the export of gold and to confiscate gold from the American people. This was done so that gold would remain in the vaults of the large banks, while the Fed pumped paper money into the marketplace. George Harrison, Bernard Baruch, and Paul Warburg essentially determined Roosevelt’s early banking policies as “Roosevelt did not even pretend to fully grasp the subtleties of international finance” (p. 458). Even though FDR himself did not understand banking practices, policies were implemented in his name that targeted saving banks and providing deposit insurance for the banking industry, while most other industries across the country were rapidly collapsing.

Public Criticism
By the 1930s, political criticism was emerging, in the US and Europe, over the secretive machinations of these powerful “lords of finance.” This surge of criticism primarily came from politicians looking for a scapegoat upon which to blame the deteriorating economic conditions.

Bankers and financiers, the heroes of the previous decade, now became the whipping boys. No one provided a better target than Andrew Mellon.… Mellon found himself accused of corruption, of granting illegal tax refunds to companies in which he had an interest, of favoring his own banks and aluminum conglomerate in Treasury decisions.… During the ensuing investigations, it turned out that he had used Treasury tax experts to help him find ways to reduce his personal tax bill and that he had made liberal use of fictitious gifts as a tax-dodging device. Being a member of the Federal Reserve Board, he had been required to divest his holdings of bank stock, with which he had duly complied—except that he had transferred the stock to his brother (pp. 439–440)

The Senate Banking committee also learned,
... that Albert Wiggins, president of Chase, had sold the stock of his bank short at the height of the bubble and collected $4 million in profits when it collapsed during the crash; that Charles Mitchell, old “Sunshine Charlie,” of the National City Bank had lent $2.4 million to bank officers without any collateral to help them carry their stock after the crash, only 5 percent of which was repaid; that Mitchell himself, despite earning $1 million a year, had avoided all federal income tax by selling his bank stock to members of his family at a loss and then paying it back; that J.P. Morgan had not paid a cent of income taxes in the three years from 1929 to 1931. (pp. 440–441)

Modern Relevance
The names have changed but the modern-day lords of finance do their forebearers proud. Presidents continue to surround themselves with top Wall Street insiders. Some could argue that Goldman Sachs executives best understand our financial system and are a logical choice to advise these presidents and influence Federal Reserve policy. What is also clear is that these same bankers have deliberately maneuvered themselves into close proximity of the Fed and the Federal government in order to influence and benefit from its policies. Since the Fed’s creation in 1913, the top bankers have consistently maintained close relationships with the Fed.

Mainstream academic economics has long been dominated by economists close to the lords of finance. In the book Lords of Finance, Lord Keynes, himself an academic economist, is surrounded by and consorted with the most influential bankers and politicians of his era. He was even granted a position on the board of the Bank of England. In late 1929, the British government created a committee to investigate the highly criticized banking system, half of the 14 members were bankers and the other half were businessmen and inflationist economists such as Lord Keynes. In the 21st century, the lords continue to promote inflationist economists such as Paul Krugman and Larry Summers, who in turn promote their agenda of greater power for central banks, more bailouts, and continued interventionist policies that benefit the banks.

Mainstream economists today continuously place blame everywhere except on the inflationist policies of the central banks for the economic devastation wrought over the past 100 years. The megalomaniacs (p. 149) within and surrounding the central banks seldom admit to their mistakes, often because their decisions are politically driven, leaving them no choice but to inflate the currency. In the early 1920s, Von Havenstein (head of the Reichsbank), like Bernanke today, did not admit that his policies were inflationary. He blamed everyone but himself, and just before the hyperinflation set in ...
He began arguing that the inflation had nothing to do with him, that he was a passive bystander to the whole process, that his task was simply to make enough money available to grease the wheels of commerce, and if business was required a trillion more marks, then it was his job to make sure they were run off the presses and efficiently distributed around the country. (p 126)

Conclusion
Liaquat Ahamed is an excellent writer and deserves praise for giving this story light. The names were known but little else about the lives of these lords of finance, these men that have so affected our lives through their furtive manipulations. The story is all the more impressive because of the author’s high regard for the banking establishment and those who control it. Ahamed asserts that during our recent financial crisis (which was caused by the Federal Reserve’s artificially low interest rates), a catastrophe was averted. Perhaps he believes that ‘bank failures’ are a catastrophe. However, Austrian economists can demonstrate that bank failures are beneficial to an economy overall, as this helps to quickly facilitate the process of liquidating malinvestments.

Although Ahamed acknowledges that artificially low interest rates encouraged the bubble of the 1920s, he fails to recognize its central role. Although he acknowledges the secretive nature of our banking system and the way in which powerful bankers benefit from the system, he glosses over these facts as though they are indelible components of “capitalism,” not realizing that central banking is in fact antithetical to a free market system.

Ahamed notes that in 1923,
few people could be convinced to entrust the management of national moneys and currency values to the discretion of treasury mandarins, politicians, or central bankers. (p. 168)

Why is it then that so many people are willing to do just that today? I submit that if more citizens were aware of the power of central bankers and the destructive and corrupt nature of the system, the public would demand a change. The first step toward a real change is more widespread exposure of the system and its scandalous history. We therefore need more books like Lords of Finance.
Dan O'Connor spent almost 6 years in Asia, living in major cities. He speaks fluent Mandarin and a professional level of Cantonese. Before returning to the US, he worked for a free-market think tank in the world's freest economy, Hong Kong. He recently ended a campaign for U.S. Congress in representing NYC and his neighborhood of Chinatown. Visit his campaign website. Send him mail. See Dan O'Connor's article archives.

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