The Mises Institute monthly, free with membership
Volume 18, Number 5
FIFTEEN YEARS AGO, MURRAY N. Rothbard wrote a piece on the most prevalent economic errors of that time. What are the great economic errors alive today?
1. The Fed sets interest rates. The Fed can exercise huge influence over interest rates by setting its discount rate, manipulating the fed funds rate, and expanding the supply of credit. But the Fed is not the author of interest rates. Interest is an inherent feature of the capitalist economy. It represents the premium people place on consuming the same goods sooner rather than later, with present goods always commanding a higher price than the same goods later. Borrowers pay interest; savers earn interest: the market rate of interest reflects people's preferences.
What the Fed does do is distort rates. By artificially lowering rates, the Fed fools investors into thinking that investment today will pay off in future consumption (drawn out of savings). When that moment doesn't arrive, the Fed either has to keep the game going (thereby causing prices to rise) or curb the flow of credit by raising rates (thereby bringing about an economic downturn). The Fed tries to keep the system "liquid" for its member banks, but in doing so, it further distorts the rest of the economy. In either case, the interest rate is not set by the Fed but only maladjusted by the Fed.
2. The economy can heat up and spark inflation. Productivity doesn't cause prices to rise. All other things being equal, economic growth actually increases the purchasing power of money (reflected in lower nominal prices and wages). Neither is inflation "sparked" by other real economic factors, but by expansion of money and credit (which causes a decline in the purchasing power of money).
Whence comes the myth that productivity spurs inflation? It is an illusion caused by the usual course of the business cycle. New credit induces investment expansion, which in turn causes price increases. But let's keep the causation straight: capitalism doesn't cause inflation; inflation is a feature of the socialization of money and credit.
3. Politics and the Fed deserve credit for prosperity. Assuming that the economic recovery since 1992 is based in part on real factors, who deserves the credit? The widespread assumption is that some "policy" must be the reason. Hence, Democrats credit Clinton; Republicans credit Reagan; and the media cheer Greenspan. But this is absurd. Is a Greenspan-like figure all that stands between the third world and US-style prosperity? Does Haiti need Clinton and Bangladesh need a cold war? In fact, all of these forces reduce American prosperity below levels it would be without government intervention and credit manipulation. Prosperity is caused by entrepreneurs, savers, and workers exploiting every ounce of economic freedom available to them.
4. Social Security is investment. Everyone talks as if it is. Even those who want privatization surrender the case by complaining about the "rate of return," as if coercive redistribution can work like a mutual fund or insurance. Once you strip away the convoluted and deliberately confusing financial apparatus, Social Security is nothing but a welfare scheme to steal from the young to pay the old. The young complain until they get old and demand their money back. Looking at the whole of life's income stream, both young and old would be better off without this program. But let's not call an intergenerational tax-and-spend war an investment, much less insurance.
5. Technology makes economic law obsolete. History is punctuated by periods of rapid technological advance, in industry, communications, transportation, printing, medicine, and much else. The digital revolution is one such event, and there are huge efficiency gains that come along with it (as with the industrial revolution). But economic law-forces that define the limits and possibilities of human action in relation to available resources-applies regardless. A price-controlled computer chip will fare as badly as a price-controlled ball bearing. It is free markets that give full scope to entrepreneurs to innovate, organize efficient operations, and create wealth. There is no such thing as a New Economy, but only more free and less free sectors of the Economy. Recent experience only confirms that new technologies result from freedom and that innovation changes nothing about economic principles.
6. The WTO manages trade. There are many terrible things about the World Trade Organization: it creates pressure for regulation and actually helps preserve the most subtle forms of protection. But the worst effect is the intellectual confusion that comes from believing that a government agency deserves credit or blame for international trade. In fact, the international economy is so vast in scope that no treaty or organization can manage it, and thank goodness. What actually "manages" trade are the billions of decisions made every day by consumers and producers the world over.
7. The stock market is not risky. This myth is propagated by people who say that the Dow is going nowhere but up, on grounds that new financial instruments take the risk out of stock investments. Their predictions may or may not be correct in the long run, but that says nothing about the trip there, where fortunes can be made or broken. Why is that? Because uncertainty is a feature of the world that cannot be overcome by any means. Investment is always and everywhere a leap into a cloudy future, and no amount of number crunching or armchair theorizing will change that.
This fallacy is yet another example of the greatest and more common statistical error: the assumption that present trends will continue. If the market turns bearish, we can expect a best-selling book with the title, "Dow 1000." The bottom line of stock markets, like all capitalist investment and profit-making activities, is that they are always risky, which is as it should be.
8. Tax breaks are subsidies. You hear a lot about corporate welfare these days, but look closely at the details. Are we talking about tax breaks that give business relief from the revenue police, or transfer payments that actually put a company on the dole? The distinction is hardly ever made, yet it is the crucial one. It is the difference between being looted and looting others. When a company is permitted to engage in an activity without being taxed, it is not being subsidized; instead, all taxed activities are being punished. The difference is crucial.
9. Tax cuts are "expensive." The Clinton administration hit a homer when it started labeling tax-cut plans as "expensive" and "unaffordable." It permitted the Clintonites to tap into terms that suggest prudence in household management. But it is wholly illegitimate to use such language when dealing with government, which obtains its revenue by stealing it from others. Is it expensive for a criminal band to refrain from burglaries for the weekend? Perhaps for the burglars, but not for everyone else. So too with the state: tax cuts may or may not be expensive for the government, but why should anyone else care?
10. Markets irrationally discriminate. Hardly a day goes by when the news reports another class action suit which purports to discover an anti-black or anti-woman conspiracy. Most recently KB Toys was accused of discriminating against blacks because many stores don't take their checks. Are we really supposed to believe that a store-any store, anywhere-would consider a valid check from a black undesirable on grounds of race? It is absurd. Clearly, what's behind the store's practice is an attempt to curb fraud.
The KB Toys case reduces the issue to its essence. When you discover patterns of behavior that seem to be traceable to sex and race issues, look again. In every case, you will find there are concrete reasons why it appears that markets discriminate: because it is rational to do so. If it were not rational-and certainly capitalists make mistakes-competitive market forces work to correct the error. And yet even when irrational discrimination does occur, there is no reason for government to intervene. Isn't it time that the class-action lawsuit business admit what's really going on? A handful of lawyers are getting rich off private business via civil rights law.
That's ten errors out of a couple hundred.
LLEWELLYN H. ROCKWELL, JR., is president of the Mises Institute.