How the Fed Makes Unemployment a Good Thing

This article was originally published at on December 3, 2013.

Imagine a world where unemployment is good—where fewer people working means more prosperity. Both time and resources would be infinitely abundant. Consumer goods would invent themselves. The standard of living would improve most swiftly when human beings stay out of the way.

This world, of course, is a fantasy. Until someone invents a self-improving robot fueled by human indolence, unemployment only hampers economic growth.

That is, until November 2013.

If history is any guide, the Labor Department’s announcement earlier this month that the U.S. economy added 204,000 jobs in October—twice what most economists expected—should have sparked excitement across Wall Street and the nation. But while markets did gain on the day, early-morning futures turned quickly negative after gaining before the report’s release. The talk of the town was anything but positive.

Explanations for this twist of events were quick and forthright: Indications of economic progress sparked fear that the Federal Reserve would taper its bond-buying program.

Since 2009, the Federal Reserve has created money to funnel into the economy via bond-buying and bailouts (a.k.a. “quantitative easing”). This policy was designed to lower interest rates, create credit, and stimulate demand with the ultimate goal of lowering unemployment. The result has been significant growth in stock prices and apparent economic recovery evidenced by a slow and steady drop in unemployment.

Understandably, investors have come to love quantitative easing. Though many voice concerns about the long-term effects of this policy, few deny that quantitative easing mitigated the immediate effects of the 2008 financial crisis. Even fewer would deny that quantitative easing is now vital to the health of many major financial institutions.

But of course, such a policy cannot continue forever. Quantitative easing must eventually come to an end—a fact even Fed officials often note. It is this ominous thought that sparked last month’s scare. Lower unemployment signals economic recovery. Economic recovery signals a sooner end to the Fed’s bond-buying and bailouts.

A similar episode occurred earlier this year when Federal Reserve Chairman Ben Bernanke hinted that quantitative easing may taper off if inflation remains steady and unemployment continues to drop. The stock market lost 4.3 percent over the three trading days following his comments.

U.S. Treasury Securities

This last episode was different, though, because no announcement was needed. The strong jobs report alone was enough to spook investors even before the Fed could announce changes to quantitative easing. What is good news at almost any other time and in any other place is bad news on Wall Street today.

This spells disaster for the American economy. The same quantitative easing policy designed to decrease unemployment is itself the cause of investors’ fear of strong jobs reports and other positive economic news in general. The fact that lower unemployment hurts the stock market means the Fed has created a lose-lose situation whereby lowering unemployment creates a simultaneous collapse in stock prices. They have kept up their money-printing too long. The Fed has become its own worst enemy.

But even worse, the Federal Reserve has pitted Wall Street against the American people by inadvertently linking lower unemployment with lower stock prices. Big banks now have reason to want high unemployment in order to extend the life of quantitative easing. While bankers themselves do not make economic policy, they do control the flow of money into and out of their vaults. They can tighten and expand credit. Conspiracy theories aside, banks do have considerable power over the rate of economic growth, and knowing that investors at-large fear a slow-down to quantitative easing does anything but encourage them to help speed up the recovery process.

While high unemployment will never be good news for the real economy, that doesn’t mean that financial institutions and the economic powers that be will always feel the same crunch. When economic stimulus is directly linked to the unemployment rate, like the Fed has done with quantitative easing, those depending on stimulus for their profits should only be expected to react negatively to news of job growth.

Placing Blame Where Blame is Due

This article was originally published at on November 29, 2013.

In his book “Life at the Bottom,” Dr. Theodore Dalrymple describes the common behaviors that he observes in many of his lower-class patients. Among the most apparent of these is an attitude of “dishonest fatalism”—a consistent unwillingness to accept blame.

“The knife went in,” said one patient awaiting his trial for first-degree murder. Another blamed his thieving ways on an insatiable addiction to the thrill of stealing—an addiction he expects the doctor to treat. A third insists his “head just went,” to explain away his assaulting a companion.

While Dalrymple beats me in time spent with lower-class criminals, I know just the attitude he describes. I see it all the time, and not just among the poor.

It goes like this: As human beings find themselves in dire financial, medical, social or emotional circumstances, they often cope with guilt by shifting blame from themselves to others, or even to objects. Whether the discomfort is or is not their own fault, they explain their situation in terms of how their environment is responsible for it. Unemployment is caused by greedy managers; obesity by the availability of fatty foods; divorce by unreasonable spouses; laziness by clinical depression. Whatever the problem, its cause (and solution, for that matter) is fate—someone or something beyond the victim’s control.

Dalrymple is hardly alone in noting the implications of this attitude on poverty and working-class crime. In fact, entire studies exist on the psychology of the lower class as it pertains to control over their financial future and their motivation to escape the poverty cycle.

But fatalistic thinking is not unique to the poor. In some way or another, we all pass the blame for our problems to avoid the pain of recognizing our own deficiencies. And in our era of big government, politicians are the most common scapegoat. Whether to explain unemployment, failing schools and even obesity, liberals and conservatives alike target bad policy as the prime mover behind the nation’s biggest economic and social problems.

Of course, much of this blame is deserved. Governments at every level are generally poorly-managed and financially insolvent. Officials are often short-sighted—motivated by special interests more than by their constituents’ well-being.

But blaming government can also be dangerous, as it often masks underlying personal deficiencies that only contribute to the problem at hand.

Take, for example, America’s student loan crisis. According to the Federal Reserve, Americans now own more than $1.2 trillion of student loan debt, prompting some economists to call the program “unsustainable.” Only 40 percent of student loan borrowers make their scheduled payments, and almost 10 percent of all loans in repayment are delinquent.

Without a doubt, government policy has only exacerbated this problem. For decades, politicians wooed young voters with lenient, low-interest student loan policies, enticing young adults to take on massive debt long before they have any stable income. Now, some even propose laws that make student loan forgiveness easier for struggling borrowers, further encouraging young adults to finance their education with borrowed cash.

But the decision to borrow money is not made by government agents, admissions counselors or the increasingly competitive job market. Yes, college tuition can be prohibitively expensive and many jobs require a degree, but acquiring debt is the sole decision of the borrower. Inability to repay indicates poor financial decisions—ones from which borrowers should learn lessons to apply to their choices in the future.

Similar examples include debates about poverty, abortion and gun control. Even as concerned citizens, we too often forget our own role in encouraging unwise choices and instead blame politicians. Like Dalrymple’s patients, we are often blind to our own faults and quick to point out the problems with everything around us, and with government most of all.

Until we shuck this habit, consider any and all government policy ineffective. There is little politicians can do to counteract bad choices on the part of their constituents. Likewise, there is always something we can do to improve our own lives, no matter how difficult the current environment.

Bad laws make life harder, but so do vanity, sloth and even a poor diet. Taking the blame when it’s yours to take is the easy first step toward improving poor circumstances—economic, political and personal alike.

Material Problems Have Moral Solutions

This article was originally published at on April 18, 2013.

Is material prosperity the key to moral improvement?

For Marxists, the answer is yes (as explained in my last post). In fact, according to Marx’s narrative, the moral and social ills of society are directly attributable to material poverty. The only way to improve moral life, then, is to first improve economic conditions.

But history tells a different story.

In his book “Economics as Religion,” economist Robert Nelson tells the story of Zambia in the late twentieth century. As one of Africa’s poorest nations, Zambia was, for many years, the number one recipient of foreign aid. Hoping to improve the economic life of the Zambian people, nations around the world poured millions into Zambia in an attempt to spur investment and economic growth. But after three decades of aid, Zambia’s economy actually worsened—its GNP was smaller than when the aid first began.

Needless to say, economic factors alone are not enough to improve the moral life of poor people. In fact, causation is precisely the other way around.

The Zambian story shows clearly that without strong moral foundations—especially with regard to theft and property rights—economic growth is almost impossible. Wealthier nations could pour all the capital they wanted into the Zambian economy, but as long as officials failed to respect the rights and lives of their countrymen, it would never make a difference.

In the early twentieth century, famed economist Frank Knight argued a similar thesis in response to progressives and socialists who sought to use government economic programs as a means to eradicate societal ills. He wrote in 1939:

The idea that the social problem is essentially or primarily economic, in the sense that social action may be concentrated on the economic aspect and other aspects left to take care of themselves, is a fallacy, and to outgrow this fallacy is one of the conditions of progress toward a real solution of the social problem as a whole, including the economic aspect itself.

According to Knight, then, social progress occurs not when public officials realize that all social problems have economic causes, but rather, when they understand that this idea is a fallacy. Instead of reforming economic policy, then, to try and improve social conditions, human beings everywhere ought to remember that the source of social ills is not necessarily economic, and that even economic problems may not have economic causes.

For example, consider poverty. Of course, many people around the world are born in to poverty and never escape it. Others are the unfortunate victims of fraud, disease or natural disasters that have taken a permanent toll on their economic life.

But it’s no secret that many economic problems have their cause in moral or familial breakdown. The children of married parents, for example, have more economic resources, more parenting from their fathers, and face less risk of psychologically traumatizing parental break-up. According to the US Census Bureau, children of divorce are more likely to be in poverty, diminishing their prospects of paying for a college education. Additionally, even the poor themselves are extremely likely to name drug abuse as the number one cause of poverty.

Material prosperity is important for societal health. It facilitates saving and investment that drive the engine of economic progress. But material deprivation alone is not the cause of societal breakdown.

Helping the poor, then, is often more a matter of moral support than an issue of economic policy.

A Beginner’s Guide to Late-Night Debates

This article was originally published by Relevant U on April 4, 2013.

We live in a land of opinions. Whether it be gay marriage, Hamlet’s delay or the East-West schism of 1054, university halls, Facebook comment threads and coffeeshops are full of people eager to express their new-found beliefs about every controversial topic imaginable.

On the surface, this is a great thing. Debates and controversies force us to examine their beliefs about important things in unique and revealing ways. But this is not always the case. When people are more interested in winning than discovering the truth, intellectual disputes devolve into dead-end mind games that do little more than frustrate everyone involved.

This is only natural. In fact, studies have repeatedly shown that human beings would rather continue defending bad ideas than admit intellectual defeat. But this doesn’t make pointless arguing any more forgivable. So here are three tips to make this year’s intellectual debates more fruitful.

Ask Questions

Studies have repeatedly shown that human beings would rather continue defending bad ideas than admit intellectual defeat.

Unfortunately, most arguments are started for the wrong reasons. Whether due to some intellectual defect, survival instinct or ancient fall from grace, most of us argue to vindicate our own preconceived beliefs—not to discover truth.

Knowing that, why continue to pit yourself against the illogical barricades of your opponent?

Instead, use your discussions to ask questions. Find out what your opponent really believes. Who are his influences? Where did she come to adopt these ideas? What can you do to better understand their positions?

You’ll find that such questions build bridges toward mutual understanding that no argument ever will. Not only are your opponents forced to more seriously examine their beliefs, but they will understand that you are serious about discovering truth and might actually return the favor.

Respect Others’ Opinions

Though it may be hard to believe, most people form their opinions with the best intentions in mind. Whether Republican or Democrat, atheist or theist, optimist or pessimist, people around the world hold opinions because they believe they are correct and will make the world a better place. Only crazy people hold an opinion because they believe it is wrong, dangerous or destructive.

So, instead of snubbing your intellectual opponent, remember that his or her opinion likely comes from the same longing for truth that gives rise to your own beliefs. Pitch your ideas as a solution, not an argument. Look for areas of common ground. Be sure they understand that your beliefs come from the same desire for peace, truth and justice that underlies their opinions. In no time, your opponent will begin to take you much more seriously.

Use Your Resources

Like it or not, no one is going to change a long-held opinion because of your thirty-second lunchtime monologue.

Like it or not, no one is going to change a long-held opinion because of your thirty-second lunchtime monologue. Even if your opponent is proved totally wrong, they would probably rather continue arguing than embarrassingly admit defeat (wouldn’t you?)

Instead of trying to change someone’s mind over the course of one conversation, recognize that learning is a life-long process. Recommend books and other resources that address the topic at hand. Find discussions of the topic at hand to help organize your debate. Remember that anything you say has probably been said more eloquently before.

Know When You’re Beat

You’re no more likely than anyone else to enjoy the prospect of admitting you’re wrong, but being willing to do so actually makes you a better debater who enters into conversations willing to learn, to surrender long-held positions and concede points. Even if any given debate doesn’t completely change your mind, debates are opportunities to publicize your views and bring balance to your understanding. Approach your debates as a student–not a boxer–and you’ll be better for it.

The Material and Moral: What Marxism Misconstrues

This article was originally published at on March 21, 2013.

Few economists take Karl Marx seriously. His economics, they say, is riddled with basic fallacies, and his political philosophy is more religious than scientific—the product of irrational conviction more than impartial observation.

But despite this general distaste for Marxist economics, his belief in prosperity as a cure for social and psychological problems has become a central tenet of American public opinion.

In 1859, Marx wrote:

The mode of production of material life determines the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.

In short, Marx believed material deprivation is the source of social, political and intellectual conflict. Instead of viewing a strong moral consciousness as the source of economic prosperity, he blamed the lack of prosperity for moral decline.

In the early twentieth century, the progressive movement gained widespread popularity for advancing a similar belief: They viewed in economic engineering—material enrichment—as a means to engender a more civil society. “To permit the moral ideas to percolate through continually lower strata of the population,” progressive economist Edwin Seligman wrote, “we must have an economic basis to render it possible.”

As the twentieth century progressed, this idea spread—especially among the elite political classes. By finding the source of moral and social ills in material causes, politicians could justify power grabs that gave them more control over the economy.

Such sentiments are even seen in the philosophy of President Obama. Speaking at a fundraiser in 2008, he blamed small-town Americans’ apparent frustration with immigrants and their “clinging to guns or religion” on economic factors—namely, high unemployment. Material causes, he implies, are the underlying source of moral and social decay.

Of course, such beliefs are rarely applied on a micro-scale. For example, when witnessing a robbery at a convenience store, no one immediately blames the poor economy for the crime. The fault lies with the perpetrator, as it would with any other crime in any other place.

But jump to a diagnosis of society as a whole, and such analysis is frequently applied on a macro-scale, in ways that marginalize the importance of good morals and personal responsibility. If only poor people were better off, politicians say, problems of theft, drug use and unplanned pregnancy would simply go away. The proposed solutions are material, but the behavior is a question of morality.

How should we think about this issue? Are economic forces really to blame for moral decay? Of course, poverty can make people desperate. Hunger can make things like theft or deceit seem like reasonable options. But to what extent is material deprivation the source of societal problems?

I’ll explore that question in my next post. In the meantime, I welcome your thoughts and comments.

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Solving Problems Apart from the Law

This article was originally published by on March 7, 2013.

Last year alone, more than 40,000 new laws took effect across the United States. Regulating everything from immigration to happy hours to golf cart traffic, the force of law is quickly becoming Americans’ favorite way to resolve conflicts. And while there are social issues that we should address, even California Gov. Jerry Brown realizes that “Not every human problem deserves a law.”

Of course, some laws—like those forbidding murder and theft—are necessary. But many are the result of frustrated citizens trying to change the behavior of those with whom they disagree. Take the current gun control debate, for example. While there are many market-based solutions to gun violence that everyone should agree with—like boycotting irresponsible sellers, condemning violent films and volunteering with at-risk youth—many Americans simply resort to calling for government to ban guns. By incriminating their ideological enemies, gun-control advocates give up on the notion of peaceful negotiation in favor of locking up those who disagree with them.

The same trends exist with regard to almost any societal problem. Poor educational outcomes? Increase school funding. Rampant drug use? Lock up drug users. High interest rates? Print more money. Name the issue, and chances are that most Americans advocate a government solution. As Isaac Morehouse has written, it is a fiction that changing the law is the solution to social problems.

But why is it that Americans are so quick to abandon peaceful compromise and use the force of law to achieve their ends?

The answer: Big government. For decades, the federal government has intervened into almost every aspect of Americans’ private lives. Whether it be the food we eat, the medicines we take or the cars we buy, bureaucrats in Washington are quick to propose rules and regulations that increase their power over every aspect of the economy.

One cost associated with government’s growth is the American people’s diminished ability to solve problems on their own—without the aid of government. Most Americans today cannot conceive of a world where things like education, food safety and road-building are left to the free market. Instead, they have come to associate societal problems with government failures. Instead of seeking voluntary, peaceful solutions, most believe that the right government policy is the only way to alleviate undesirable features of American life.

But throughout history, the most innovative solutions to societal and economic problems have come not from government, but from entrepreneurial individuals using their skills to meet the needs of those around them. When Henry Ford saw that cars were too expensive, he made the assembly line. When the Wright brothers saw that long-distance travel was expensive and difficult, they made an airplane. When Jim Casey saw that his neighbors had no way to cheaply ship packages, he created UPS.

Of course, these entrepreneurs could have used the force of law to solve these problems. Instead of innovating, they could have lobbied for more money and regulation to meet the needs they saw—price controls on automobiles, government-funded airplane research, and subsidized parcel post. But this would have left their fellow Americans no better off than before. No new products, technology or means of solving problems would be available to forge a better future.

Luckily for us, however, they chose to condemn violent force as a means to solve problems. They sought peaceful, market-based solutions that, while difficult to implement, had lasting benefits for many generations. Their refusal to engage in the battle for power and government influence made winners out of everyone—both them and their customers.

It’s unlikely that today’s trend of big government will reverse any time soon. Americans have become too accustomed to a government big enough to address any problem imaginable. But that only makes the task of those committed to the free market all the more important: Reject government force as a means to solve problems, and embrace the entrepreneurial spirit that creates powerful and lasting change.

Minimum Wage: Good Intentions, Bad Policy

This article was originally published by on February 15, 2013.

Minimum wage is supposed to help poor people. That’s why two out of three Americans support raising it to $10 an hour. And that’s probably why President Obama, during his State of the Union Address last Tuesday, called for raising it by more than 20 percent.

But as any logician knows, public support for an idea doesn’t make it true.

Minimum wage has always had public support. When the first federal minimum wage legislation—the Fair Labor Standards Act—was passed in 1938, it was thought to be a major victory for the working class. The idea of protecting workers from the profit-motives of their employers was thought to be humane. But the slightest bit of economic investigation tells a more complex story.

Henry Payne cartoon

Cartoon by Henry Payne

Wages are the price for labor. They are the compensation workers require for their time and efforts. As with any price, regulatory controls—whether a price ceiling or a price floor—distort the market, creating either a shortage or a surplus. If the price of milk is capped at $1 per gallon, grocers will soon run out, as customers buy more than they need while prices are low. If the price of bread is not allowed to fall below $10 per loaf, grocers won’t be able to sell their stock as consumers will wait until prices drop to buy bread.

In the same way, minimum wage—a price floor on labor—creates a surplus of workers. At a price of $7.25 per hour, workers who are willing to sell their labor outnumber business-owners willing to hire them. There is only so much money to go around, and—like the grocery store’s customers—businesses cannot spend more on wages than they earn in revenue. And of course, not every type of labor is the same—some jobs simply aren’t worth paying someone $7.25 an hour to complete.

The result: Fewer jobs and permanent unemployment for those unable to produce more than $7.25 worth of goods for their employers. Hardly a means to help the working class.

Now in real terms, $7.25 an hour is a low wage. In fact, workers earning minimum wage today earn less than those did in the 1950s—before the age of quantitative easing and rapid monetary inflation. But that doesn’t make a minimum wage hike any more justifiable.

Despite the good intentions of its modern-day propagators, minimum wage is a questionable policy that should raise eyebrows for anyone concerned with the plight of the poor. At the very least, think twice before supporting a minimum wage hike. History suggests it might not have Mr. Obama’s intended effect.

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Waging War on Work

This article was originally published at on February 11, 2013.

Employment law is a mainstay of state economic policy. Few question its efficacy as a means to correct “market failures”—like unlivable wages for meaningful work—that would leave society in shambles. In fact, no serious debate exists among American policymakers about the benefits of such laws. Their utility is simply assumed.

But laws that restrict or stipulate the terms of voluntary employment contracts stifle economic progress and make life harder for everyone—even those for whom the laws were designed to aid.

Minimum wage is the most basic example of such a law. By outlawing employment below a certain wage-rate, the state ensures that no one works for less than what its officials consider a “living wage.” The first federal minimum wage legislation was the Fair Labor Standards Act.[1] Since its passage in 1938, the bill has been amended many times—usually to adjust the minimum wage to account for inflation. Today, the federal minimum wage is $7.25 per hour.

In the act, Congress determines that “the existence … of labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers” causes inequity, burdens commerce and “the free flow of goods in commerce,” and leads to labor disputes that further hamper free commerce.[2] Minimum wage is their solution to this problem.

But what Congress did not know (or chose to ignore) was that employers cannot pay an employee more than that employee’s discounted marginal revenue product—their contribution to the employer’s firm’s revenues. For example, if an employee generates $10 of revenue for their employer every hour, their employer will not pay them more than $10 per hour. Otherwise, their contributions to the firm would amount to net loss. Employers cannot simply raise every employee’s wages without regard for the employee’s marginal revenue product.

The unseen effect of minimum wage is now made clear: all workers who are unable to generate more revenue per hour for their employer than the legal minimum hourly wage are laid off. As Murray Rothbard writes,

If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to dis-employ, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be dis-employed and devastated by this prohibition will be precisely the ‘marginal’ (lowest wage) workers … the very workers whom the advocates of the minimum wage are claiming to foster and protect.

The “marginal” workers Rothbard describes often include inexperienced teenagers, immigrants, and the disabled. For these people, employment is legally impossible under a minimum wage law. They are permanently dis-employed. To deny this effect, according to Ludwig von Mises, is “tantamount to a complete disavowal of any regularity in the sequence and interconnectedness of market phenomena.”

Why, then, do so many continue to advocate minimum wage as a means to subsidize the working class?

The fact is, many such advocates choose to ignore economic reality in favor of more “nuanced” arguments. Consider attorney and writer Carolyn Rosenblatt. In a column published last winter advocating minimum wage for home care workers, she writes,

For anyone who might think [extending minimum wage to home care workers] is not a good idea or that it puts too much burden on the small business employer who has to pay more now to the worker, think about this: would you want your aging loved one to stay in his or her home as long as possible? Are you willing to do all the physical chores of care-giving yourself?

For Rosenblatt, economic law, small business, and market forces are not important. What matters for her (and her intellectual allies) is cognitive resonance—feeling like home care workers are paid as much as she thinks they deserve, all the while refusing to acknowledge that wages are market prices determined by supply and demand.

Arguments like this are all too common among proponents of the minimum wage. They acknowledge the economic problems with their ideas yet advocate them anyway. There is no other explanation. While Rosenblatt and those like her may have the best of intentions, their willful ignorance of economic reality is blatant and hardly forgivable.

Of course, not all advocates of minimum wage are ignorant. Unions, for example, have a strong interest in supporting minimum wage. By doing so, they eliminate competition from those willing to do their work for less. Racists and prejudiced people also benefit from minimum wage. If employers must pay a minimum wage to whomever they hire, they can disregard the wage-demands of potential employees and simply ignore applications from those they hate. This was the reasoning behind the predominantly white Mine Workers’ Union of South Africa when they wrote regarding the application of minimum wage equally to both whites and blacks,

The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.

Minimum wage, then, is hardly the innocent idea its supporters suspect it to be. Like all other forms of market intervention, it is hijacked by those with evil intent—those who seek to use the violence of the law to serve their own ends.

Needless to say, the harms of minimum wage are hardly a mystery to economists—especially those of the Austrian bent. So why bring this up now?

Because despite the liberty movement’s success in undermining the intellectual foundations of state interventionism, the most basic economic truths have yet to be absorbed into public opinion. In fact, just two years ago the Public Religion Research Institute found that two-thirds of Americans support raising the minimum wage to $10 per hour. Among these supporters are 41 percent of self-described Tea Partiers and 43 percent of “Americans who most trust Fox News”—those who claim to be advocates of economic liberty.

No doubt, libertarians have come a long way. Austrian economics is more popular now than ever. Even on Capitol Hill, the ideas of sound money, financial austerity, and economic liberty have become impossible to ignore. But if two-thirds of the American people maintain support for the flawed idea of minimum wage, libertarians still have a long way to go.

Self-Interest: A Powerful Force for Good and Evil

This article was originally published at on February 7, 2013.

Economists are confusing. They often disagree about the most basic of ideas. But one thing no serious economist rejects is the important role of self-interest in promoting economic growth.

In fact, this idea has been a mainstay of economic theory for centuries. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” wrote Adam Smith in 1776, “but from their regard for their own interest.”

Today, the importance of self-interest is all but taken for granted. Schools use grades to encourage students to learn. Employers offer bonuses for high-performing employees. Governments offer tax credit for environmentally friendly choices. Today, doubting self-interest’s role as a catalyst for economic growth is almost unheard of.

But unfortunately, pursuing self-interest can go too far.

In the introduction to his book “Economics as Religion,” Robert H. Nelson defines two types of self-interest. “Legitimate” self-interest, he says, is expressed through market processes: as people seek their own benefit, they produce and exchange in conjunction with others in order to build wealth. This is the same kind of self-interest Adam Smith described.

“Illegitimate” self-interest, on the other hand, is expressed in the form of deceit, coercion and violence—seeking their own benefit, people enrich themselves at the expense of those around them. This type of self-interest is usually condemned, and often illegal.

But while illegitimate self-interest may be rare in the United States on a large scale, this is not the case in many parts of the world. Political violence is common in east Africa. Government transparency is deficient in communist China. Police corruption is rampant in places like Sudan, Mexico and Afghanistan.

Americans often analyze these disadvantaged nations and blame certain public figures or features of regional economies like the presence of oil, drugs or famines. But what we often forget is that the same drive for success that fuels our own economic success creates economic disaster when unaccompanied by strong moral values.

This is because self-interest is the most powerful force in the world. It fuels profit-making and charitable enterprises alike. It drives technological progress and entrepreneurial innovation. Yet without strong social pressure to restrain self-interest, economic mayhem results—regardless of financial conditions. As Nelson shows, the nation of Zambia was for years one of the largest recipients of foreign aid in Africa, yet the Zambian economy actually worsened during this same period. Much of this aid, he argues, went straight into the hands of oppressive political rulers who used it to serve their own ends without regard for the rights of their countrymen.

What Zambia lacked was a social system that upheld the values required for economic growth—values that encourage self-interest in the market yet condemn it as a way to harm others. Until these values exist, no amount of investment or aid will do any good. Self-interest will rule, as it always does, but only through the violence of those whose self-interest overcomes their respect for the rights of those around them.

Self-interest is the fount of economic growth. It is the catalyst for innovation and production. But it can also be the prime mover behind violence and corruption. Needless to say, values and capitalism go hand in hand. If either is left without the other, the economic blessings of self-interest will never be known.

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The Young and the Economically Illiterate

Occupy_London_banner[1]This article was originally published at on January 23, 2013.

Earlier this month, the Higher Education Research Institute reported that today’s young people are more narcissistic than ever. Our drive to succeed surpasses that of our parents. We expect a great future for our generation. Our intellectual, leadership and social self-confidence are at all-time highs.

Exciting, right? Doesn’t personal ambition drive innovation and progress? Isn’t self-interest the fount of the invisible hand’s innumerable blessings?

Under the right circumstances, yes—unwillingness to settle for one’s current state of affairs is a healthy incentive for entrepreneurial innovation. “The mark of the creative mind,” economist Ludwig von Mises wrote, “is that it defies a part of what it has learned or, at least, adds something new to it.”

But considering the economic beliefs of the average American young person, this news couldn’t be worse.

The fact is, most of today’s young people are economically illiterate. Most don’t understand how the economy works, or what drives economic progress. Most have no commitment to the notion of earned success. This was demonstrated by a recent paper by University of Pennsylvania economists Bhattacharjee, Dana and Baron in a 2010 paper. Citing multiple surveys of consumers’ opinions regarding profit and social value, they write:

We find a strong negative correlation between perceived profit and social value across both industries and specific firms. People report little faith in the power of markets to create and reward value, neglecting the incentive properties of profit and focusing instead on the perceived intentions of firms.

Holding profit and social value to be at odds defies even the most cursory understanding of economics. Profits, of course, do not detract from a firm’s social value, but are simply the reward for efficiently satisfying consumer demand. High profits are earned by those who most deftly meet the needs of their fellow human beings. A rejection of the notion that profit correlates with social value, then, reveals a deep ignorance of any and all economic theories.

But scientific surveys are hardly needed to uncover the economic illiteracy of the Millennial generation. It was my generation, indeed, who assured the eight-year presidency of progressive Barack Obama. It was this generation who hailed Obamacare’s victory over the largely unwilling elderly population. And it is the Millennial generation who overwhelmingly support mandated forgiveness for their unforgivably high levels of college loan debt.

Ironically, this same generation is the most educated in all of human history. Never before has public education been so readily available to every single child, and a university education as easy as a single FAFSA application. Even further, the Internet has made information freely available to anyone with access to a public library.

In that light, the economic ignorance of today’s young people is truly sobering.

But the dangers of ignorance itself stand pale in comparison to the hazards created by ignorance accompanied by a drive to succeed—the very combination possessed by young people today. In fact, the more “educated” an economically illiterate individual, the more likely he or she will advance ideas wholly antithetical to economic progress and human flourishing.

This happens all the time. Well-meaning individuals seeking to benefit their fellow men unknowingly plot the world’s economic demise with various welfare, entitlement and regulatory schemes they wrongly think to be steps toward equality and social harmony. The more educated these individuals are, the less likely they will be persuaded of their mistake. As Isabel Paterson wrote:

Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends … when millions are slaughtered, when torture is practiced, starvation enforced, oppression made a policy, as at present over a large part of the world, and as it has often been in the past, it must be at the behest of very many good people, and even by their direct action, for what they consider a worthy object.

Unless young people recognize the unwavering power of economic law and accept the insights of praxeological science, my generation’s entrepreneurial energies will be spent in vain. Their arrogant attempts to conjure wealth, avoid fiscal austerity and thwart unstoppable market forces will crash and burn.

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What if Money Was No Object?

Money_closeupThis article was originally published at on January 10, 2013.

“What would you like to do if money was no object?”

This is the question asked in a trending Youtube video narrated by the late philosopher Alan Watts. It encourages young people to live and dream as if money didn’t matter—as if money was no object.

Inspiring, to say the least. The notion of dreaming and living without regard for financial reality can open the imagination to entire worlds that money had rendered unrealistic.

But profound narrative, dizzying imagery and hypnotic music aside, this video reveals an attitude about money that is hostile to economic prosperity and, more importantly, living a moral life. For despite what Alan Watts, Hollywood and Occupy Wall Street might say, money is a vitally important feature of the social world that we simply cannot do without, and using it is a moral issue.

First, money is simply a medium of exchange, and recognizing its usefulness is a good practice.

Whereas some activists might cite money as the root of evil and social injustice, that is simply not true. As every student learns in Economics 101, money is purchasing power. It represents the ability to acquire material ends. Those who most efficiently supply the needs of their fellow human beings will earn the most money.

For example, consider money’s origins. In the ancient world, barter trade was man’s primary means of exchange. If John wanted apples but produced only oranges, he traded oranges for apples. If, however, no one with apples wanted his oranges, he was out of luck. But instead of simply going without, John would trade his oranges for something the apple-growers wanted—like grapes—and then trade those grapes for apples.

After a while, others caught on to this means of barter, and different media of exchange arose. All members of John’s society began to accept gold coins in exchange for their goods, knowing that these coins could then be exchanged for anything. Gold became money.

Money, then, is both a media of exchange and a means of calculation. It allows individuals to acquire things they want and to more precisely determine the value of their goods and services.

In that light, why ignore money? Why pretend like money doesn’t exist when choosing a career? Yes, money restricts options and makes some dreams impossible. But without money, there would be very few dreams whatsoever.

While pursuing a life in which money doesn’t matter may be exciting, it is a total fantasy.

Second, God has much to say about money, and none of it involves pretending it doesn’t exist.

Both the Old and New Testaments are littered with hundreds of verses about money. Common to all of these verses is the idea that the creation and use of money is a moral exercise. Whether it is God’s command to “use honest scales and honest weights” (Leviticus 19:36), His rejection of “diverse weights” and “false balances” (Proverbs 20:23) or his lament that Israel’s “silver has become dross” (Isaiah 1:22), it is clear that money is significant to God’s law and human life.

One particularly revealing issue is debt. Unfortunately, debt is all-too-common among American young people. According to the Federal Reserve, 37 million young people have outstanding student loans. What is not so common, however, is seriousness about making debt payments. According to arecent uSamp survey, the vast majority of those who have not paid off their student loans want those loans forgiven. While those answering the survey may never consider the ethical issues involved, repaying debt is a moral imperative.

In Romans 13, Paul writes that Christians should “Owe nothing to anyone—except for your obligation to love one another.” David writes in Psalm 37,”The wicked borrows and does not repay.” In short, the importance of repaying loans cannot be more explicit. If one contracts to borrow money from another, that contract should be upheld. Defaulters should be penalized.

Undeniably, money matters to God. Debts should be repaid. Budgets should be kept. Forced loan forgiveness and dishonest inflation should be rejected and condemned. These are moral imperatives. To live as if “money was no object” is a dereliction of moral duty.

Finally, while living as if money doesn’t matter may be exciting, such a life is available only to those with money to spare.

Try telling a single mother of two that money doesn’t matter—that her career path shouldn’t be determined her ability to provide for her family. Or consider an unemployed graduate with no means to finance his college debt payments. For them, of course, money matters.

But perhaps the absence of want is why today’s young people are so repulsed by money. Generation Y is the most materially blessed generation in recorded history. When it’s a given that there will be food on the table every day of the year, it is easy to forget the importance of money as a necessary means to sustain life and cultivate a healthy society. But that doesn’t change the fact that money is important.

Like it or not, money is dinner. Money is education. Money is life-saving medical technology. Of course, there are more important things in the world than being rich. But the existence of money is an unavoidable feature of social life that everyone should consider—especially when making career decisions.

For further reading on this issue, see my article Where Money Meets Morality.

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Three Ways to Defend the Free Market

Lucky number threeThis article was originally published at on January 4, 2013.

Each year, almost 50 percent of Americans make New Year’s Resolutions. Most often, these include things like losing weight, working harder or spending less. Whatever they may be, the common thread among them is that they involve things we deeply care about—things we think deserve more of our time and effort.

In that light, it only makes sense that the free market should, in some form, be among our New Year’s Resolutions. And if this year is anything like last year, the free market will need all the support it can get. As critics of the free market grow stronger, it is up to liberty’s advocates to counter those attacks.

So this year, make defending the free market one of your resolutions. Commit yourself to discuss the ideas of liberty with friends and neighbors. Here are three tips to help you get started:

1. Raising questions is always better than giving answers.

Capitalism defends itself. It is logical, coherent and well-supported. The last thing it needs is your careless, back-of-the-napkin arguments that can sometimes do more harm than good.

Instead of arguing defensively with your friends, try raising some interesting questions. Ask them about their beliefs. Why do they think like they do? What do they think about our economic future? How do they propose the government deal with things like inflation, student loan debt and gun control?

If you’re like me, you’ll quickly find that questions build bridges and create mutual understanding. If you’re lucky, your friends will begin to seriously consider their own opinions, and will become more open to listening to alternative points of view. Helping others come to their own opinions will create more lasting change than asking them to adopt yours.

2. Everyone deserves respect, no matter how mistaken they may be (yes, even your crazy socialist uncle).

Granted, respecting your opponent can be difficult. How can someone be so educated, you might wonder—and yet wrong? How can that friend of yours be so blind to the harms of government debt when they have experienced the pains of bankruptcy in their own life? What makes your unemployed neighbor believe that investing more in the same government policies will help her get a job?

But the fact is, many people who are “hopelessly wrong” have the best of intentions in mind. Socialists believe their policies will bring economic fairness. Occupy Wall Streeters believe big banks harm the poorest of the poor. Progressives believe that more deficit spending will alleviate, not intensify, the current unemployment crisis. Only crazy people support ideas because they want to bring destruction and poverty to their fellow human beings.

So instead of snubbing your intellectual opponents, draw upon their good intentions for your noble purposes. Show them the free market is the solution they are looking for—not an oppressive, evil monster. Make sure they understand that you support the free market because you think it is fair, moral and wealth-generating—not because you are greedy and selfish. Most importantly, help them know that you are as concerned as they are about the plight of the poor, disadvantaged and unemployed—you simply believe the free market is the best solution.

In little to no time, you’ll find that your friends and neighbors will start to be more attentive to what you have to say. As in all areas of life, your respect for others will translate into their respect for you.

3. Use your resources.

Like it or not, no one is going to change their worldview because of a 30-second coffee break conversation. Even if they are proven totally wrong, most of us would rather continue to argue bad ideas than embarrassingly admit defeat.

So instead of arguing, point your friends to some of the thousands of liberty-related resources available in print and online. Email them an article and ask them to respond. Send them a book about an issue you know they care about.

In fact, this is precisely why organizations like the American Enterprise Institute exist. Their scholars have studied these issues for decades and have prepared arguments that—like it or not—are stronger than yours may ever be. Whether Ludwig von Mises on socialismCharles Murray on welfare policy or Arthur Brooks on the morality of capitalism, scholars throughout the ages have advanced and defended the very arguments you are trying to make. Use them!

The ideas of liberty have been growing and evolving for centuries. You have no reason to fight the battle alone.

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