Monthly Archives: March 2013

Gresham’s Law and Coin Clipping

Champions of the government’s coinage monopoly have claimed that money is different from all other commodities, because “Gresham’s Law” proves that “bad money drives out good” from circulation. Hence, the free market cannot be trusted to serve the public in supplying good money. But this formulation rests on a misinterpretation of Gresham’s famous law. The law really says that “money overvalued artificially by government will drive out of circulation artificially undervalued money.” – Murray N. Rothbard, What Has the Government Done to Our Money?, p. 24

Rothbard goes on to give an example of this occurring, which I’ll state in my own words here (I was annoyed earlier because I couldn’t explain this myself). Centuries ago, before the rise of fiat (paper) currencies and money substitutes, governments had to find alternative ways of inflating their money supplies and profiting. Since coins were often in use, governments would try to establish monopolies on the supply of money and “clip” the coins, removing some amount out of their base value. For example, if one ounce gold coins were the norm, the government, after getting some of the supply in its hands, would clip 1/10 of the gold off of the coins. The coins would then have 9/10 of its previous value, and governments could use the extra metal to create new coins. Through this method, they could achieve profits.

What does this have to do with Gresham’s Law? If the government mandated that all coins were equal, that the 9/10 ounce gold coins must be treated the same as the full ounce gold coins, Gresham’s law would come into effect. People, realizing that the 9/10 ounce gold coins could be used in exchange the same way as the full ounce coins, would exchange all of the former coins away domestically. As for the latter, they would either hoard these (A) because they might perceive some chance of government removing this artificial price control in the future, in which case their full ounce coins would be worth more, or B) because they could attempt to use these metals to their full value in some other respect rather than exchange, such as melting them down) or trade these overseas (because other countries would not be so accepting of the “illegitimate” coins). Thus the “good coins” would be driven out of circulation, not because of the free market, but because of the government.

I’ll post examples of Gresham’s Law occurring with gold/silver coins and fiat currencies later.

Economics is About Human Action, not Mechanical Processes

 

It is misleading, furthermore, to say that money “circulates.” Like all metaphors taken from the physical sciences, it connotes some sort of mechanical process, independent of human will, which moves at a certain speed of flow, or “velocity.” – Murray N. Rothbard, What Has Government Done to Our Money?, pg. 33

This is one of the major problems with economics, as well as other social sciences today. By attempting to create mathematical formulas that describe human action, economists are sucked into the trap of assuming these “laws” will hold forever. Unfortunately, even if a formula describes a historical circumstance well, there is no certainty it will apply to future circumstances. Not only can expectations change, but humans can invent new ways to act or act differently due to different pieces of knowledge, different circumstances, and lastly of course, because they are completely different human beings.

Freedom: the Absence of All Obstacles or Only Interpersonal Ones?

The socialists must admit there cannot be any freedom under a socialist system. But they try to obliterate the difference between the servile state and economic freedom by denying that there is any freedom in the mutual exchange of commodities and services on the market. Every market exchange is, in the words of a school of pro-socialist lawyers, “a coercion over other people’s liberty.” There is, in their eyes, no difference worth mentioning between a man’s paying a tax or a fine imposed by a magistrate, or his buying a newspaper or admission to a movie. In each of these cases the man is subject to governing power. He’s not free, for, as professor Hale says, a man’s freedom means “the absence of any obstacle to his use of material goods.”[6] This means: I am not free, because a woman who has knitted a sweater, perhaps as a birthday present for her husband, puts an obstacle to my using it. I myself am restricting all other people’s freedom because I object to their using my toothbrush.

A generation ago all housewives prepared soup by proceeding in accordance with the recipes that they had got from their mothers or from a cookbook. Today many housewives prefer to buy a canned soup, to warm it and to serve it to their family. But, say our learned doctors, the canning corporation is in a position to restrict the housewife’s freedom because, in asking a price for the tin can, it puts an obstacle to her use of it. People who did not enjoy the privilege of being tutored by these eminent teachers, would say that the canned product was turned out by the cannery, and that the corporation in producing it removed the greatest obstacle to a consumer’s getting and using a can, viz., its nonexistence. The mere essence of a product cannot gratify anybody without its existence. But they are wrong, say the doctors. The corporation dominates the housewife, it destroys by its excessive concentrated power over her individual freedom, and it is the duty of the government to prevent such a gross offense.

Why does our housewife buy the canned product rather than cling to the methods of her mother and grandmother? No doubt because she thinks this way of acting is more advantageous for her than the traditional custom. (Ludwig von Mises, “Liberty and Property,” Sec. 5)

I had not thought of this line of argument against socialism before, but after reading it it seems very obvious. Of course, Mises was an expert at explicitly stating simple truths, as is evident from his discovery of the action axiom (the fact that persons act purposefully, using a means to achieve a chosen end).

Although Mises’ point serves as a way to vindicate capitalism even under the socialist definition of freedom, that certainly is no reason to accept such a definition. Human beings always have to deal with objective circumstances. Our environment, the non-human condition with which we live, is a fundamental part of our lives that we only have so much control over. Whether or not interpersonal freedom, the absence of coercion from other human beings, is part of our lives, objective circumstances will always exist. There is no way in principle to remove that. In fact, it is an absurdity to suggest that we could remove “all obstacles”; only God could achieve such an end. But there is a way in principle to remove interpersonal violence.

An Interesting Yet Obviously True Statement

We are healthier when we are born than when we die.

I think some people might make an objection such as the following: what if you are born with illness but die without illness? This objection brings us to the fundamental question: what is the meaning of health and what is the meaning of illness? If one regards health as the absence of illness or pain or rather the well-being of an individual, they might not agree with the statement I made. However, if an individual is about to die, how can we say truly say he is healthy? Shouldn’t death be the ultimate end, the cause of which is the absence of health? Since birth is the opposite of death, and health is the opposite of sickness, shouldn’t we formulate a definition of health and sickness based on this?

For clarification, I don’t think my statement means that you are necessarily less healthy after you are born than when you were born, though that is typically what we see.

I am curious about the logical status of this statement. Is it an observable fact? Or is it a reflective one? It seems like a reflective fact to me. We bring meaning to the statement by reflecting on it, not by simply observing the health of babies and that of old men and women and comparing.

Of course, maybe I am completely wrong about all of this. Let me know if you think I am.

“The Constitution Does Not Apply to American Citizens Overseas”

Krauthammer makes the claim.

Greenwald declares it a demonstrably false absurdity.

Let’s first look at what Charles Krauthammer said:

Now we’re talking about a larger, more controversial issue: the killing-by-drone in Yemen of al-Qaeda operative Anwar al-Awlaki. Outside American soil, the Constitution does not rule, no matter how much Paul would like it to.

Glenn Greenwald’s response can be summarized by the following:

1) First, look at how absurd the logical implications of this statement are. If the Constitution did not apply to citizens overseas, the government could simply wait for a journalist or individual it didn’t like to go visit another country and then assassinate him.

2) But maybe you agree with this ridiculous conclusion. Well, the Supreme Court has already ruled on this in Reid v. Covert (1957), saying “we reject the idea that, when the United States acts against citizens abroad, it can do so free of the Bill of Rights.”

3) Now, I’m not a big fan of the Supreme Court myself (this is my opinion, not necessarily Greenwald’s). It, being filled by humans, certainly is not infallible, even assuming proper intentions, which is a hard thing to assume when presidents play their partisan games in appointing judges (which is even scarier when you consider certain foreign policy issues have a bipartisan consensus, as explicitly stated by Krauthammer in his above piece). But let’s examine their reasoning here. They state:

The United States is entirely a creature of the Constitution. Its power and authority have no other source. It can only act in accordance with all the limitations imposed by the Constitution. When the Government reaches out to punish a citizen who is abroad, the shield which the Bill of Rights and other parts of the Constitution provide to protect his life and liberty should not be stripped away just because he happens to be in another land.”

In other words, since the federal government is the creation of the Constitution, our inclination should be to treat it in all circumstances as binded by the Constitution, unless explicitly stated otherwise. The Constitution itself would have to say “The Constitution does not bind the federal government in any way when acting on citizens overseas” for us to accept such a statement.

4) The Supreme Court cites other governments in history where this (the government had to give due process to citizens outside its territory) is the case. It certainly was not a new concept at the time of the founding of our country.

5) There is no reason to choose certain constraints on the government as fundamental and state that these fundamental constraints applying to the government overseas but other non-fundamental constraints being illegitimate overseas.

6) Even if we accepted that only certain fundamental constraints apply to the federal government overseas, the Court says

“Moreover, in view of our heritage and the history of the adoption of the Constitution and the Bill of Rights, it seems peculiarly anomalous to say that trial before a civilian judge and by an independent jury picked from the common citizenry is not a fundamental right. . . . Trial by jury in a court of law and in accordance with traditional modes of procedure after an indictment by grand jury has served and remains one of our most vital barriers to governmental arbitrariness. These elemental procedural safeguards were embedded in our Constitution to secure their inviolateness and sanctity against the passing demands of expediency or convenience.”

 

I’m not sure if I’ve done a post like this before, but the summary is mainly for my own benefit and not for that of others. I’d recommend you read both of the articles above to have a proper understanding of Greenwald’s case. If this summary is beneficial for you too though, then that’s fantastic.

Tampering with a Price Signal

One of the prime features of the free market is that you only have to know that the price does change, but not necessarily the reasons for it.

Money prices are the medium through which the communication of necessary information is made to coordinate effectively the actions of individual planners. As Hayek has pointed out, each particular decision maker does not need to know all the facts pertaining to the changes in resource usage. What is relevant to each is “how much more or less urgently wanted are the alternative things he produces or uses.” [15] The economic question is always a question of the relative importance of specific things available for the satisfaction of human wants. Each planner does not usually need to know why the relative importance of the things that he uses or produces has changed. What he does need is some indication of the extent to which its relative importance has been altered.

The coordinating function performed by the price system can be illustrated by assuming a sudden shortage of some resource. Those people who will eventually solve the problem of the shortage do not need to understand its cause. The price of a unit of the resource will be driven upward as those who employ it in the most important usages, i.e., use it for the generation of products promising the highest return, outbid those producers who plan to use it in less remunerative products. The shortage has meant that the marginal uses of the resources that could be supplied before the advent of the shortage cannot be provided for as long as the shortage persists. The higher price successfully causes the curtailment of the employment of the resource in its marginal uses. (Thomas C. Taylor, An Introduction to Austrian Economics, 35-36)

Hayek states:

…the marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction….I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. (F.A. Hayek, “The Use of Knowledge in Society,” p. 87)

When that occurs with credit expansion (the reason) changing the interest rate (the price change), knowledge of the reason would allow an entrepreneur to make proper investments. The fact that he does not know how much of the lowering in the interest rate is due to credit expansion and how much is due to real increased savings is the reason the business cycle must take place. An invaluable market signal tampered with by government intervention loses its prime quality as a signal.

We have just seen that there are two factors that tend to hold down the rate of interest below the level sufficient to allow for the related elements emerging on the market: (1) The implementation of the price premium lags behind the changes in purchasing power stemming from the inflation; and (2) the additional supply of money thrown onto the market has a dampening effect on the interest rate. Concerning the latter point, it must be realized that entrepreneur-producers are unable to differentiate between additional funds that have been artificially created and additional funds emanating from real savings. (Taylor, 93) [my emphasis]

To blame the entrepeneur for not being able to understand the signal misses the point and misunderstands the esteem Austrians hold entrepreneurs with.

Tom Woods sums up this type of thinking very eloquently:

“If the free market is so great, why can’t it operate without the free market?”