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Government the Destroyer
Llewellyn
H. Rockwell, Jr.
Monday January 28, 2008
This talk was delivered at the 2008 Mises Circle
in Houston.
The claim of the Austrian School that has scandalized members
of other schools for 150 years is the following. The propositions
of economics are universal. The principles apply in all times
and all places, because they derive from the structure of reality
and human action.
What brought about economic growth, inflation, or the business
cycle in China 300 BC are the same institutions that drive phenomena
in the United States in AD 2008. The circumstances of time and
place change, but the underlying economic reality is identical.
That claim has made other economists – to say nothing of
sociologists, historians, and politicians – scatter like
pigeons. The Historical School poured scorn on this idea, and
Carl Menger, the founder of the Austrian School, fought them tooth
and nail. The Chicago School of positivists found the claim preposterous,
and Mises and Hayek and Rothbard battled them. The Keynesians
have long been outraged, and the postwar Austrian generation reasserted
the truth. The socialists, who posit that rearranging property
titles will transform all of reality, say that the claim is absurd,
capitalistic nonsense.
But there it stands. No matter where or when, the essential prerequisite
for economic growth is capital accumulation in a framework of
freedom and sound money. The consequence of price control is shortage
and surplus. The effect of money expansion is inflation and the
business cycle. The effect of every form of intervention is to
make society less prosperous than it would otherwise be.
The list of universals is endless, which is why every age needs
good economists to explain and articulate the truth.
Well, I would like to add that there are universal fallacies
too.
(Article continues below)
Frédéric Bastiat pointed to one: the belief that
the destruction of wealth fuels its creation. He explains this
by means of an allegory that has come to be known as the story
of the broken window. Most famously it was retold as the opening
of Henry Hazlitt's Economics in One Lesson, which is probably
the bestselling economics book of all time.
A kid throws a rock at a window and breaks it, and everyone standing
around regrets the unfortunate state of affairs. But then up walks
a man who purports to be wise and all-knowing. He points out that
this is not a bad thing after all. The man fixing the window will
get money for doing so. This will then be spent on a new suit,
and the tailor too will get money. The tailor will spend money
on other items and the circle of rising prosperity will expand
without end.
What's wrong with this scenario? As Bastiat put it, "It
is not seen that as our shopkeeper has spent six francs upon one
thing, he cannot spend them upon another. It is not seen that
if he had not had a window to replace, he would, perhaps, have
replaced his old shoes, or added another book to his library.
In short, he would have employed his six francs in some way which
this accident has prevented."
You can see the absurdity of the position of the wise commentator
when you take it to absurd extremes. If the broken window really
produces wealth, why not break all windows up and down the whole
city block? Indeed, why not break doors and walls? Why not tear
down all houses so that they can be rebuilt? Why not bomb whole
cities so construction firms can get busy rebuilding?
It is not a good thing to destroy wealth. Bastiat puts it this
way. "Society loses the value of things which are uselessly
destroyed."
It sounds like an unexceptional claim. But herein rests the core
case against everything the government does. Perhaps, then, we
can see why the allegory is not better known. If we took it seriously,
we would dismantle the whole apparatus of American economic intervention.
If you are with me to this point, perhaps you have a hard time
believing that anyone really believes that wealth destruction
is actually a good thing. Let me try to show that the fallacy
is as pervasive as ever.
After every natural disaster, we at the Mises Institute start
what we call the Broken Window Watch.
After Hurricane Katrina, the Labor Secretary said: "What
will happen – and I have seen this in previous catastrophes
and hurricanes – there is a bright spot in that new jobs
do get created."
And The Economist said, "While big hurricanes like Katrina
destroy wealth, they often have a net positive effect on GDP growth,
as the temporary downturn immediately after the storm is more
than made up for by the burst of economic activity that takes
place when the rebuilding begins."
And the New York Times said: "Economists point out that
although Katrina has destroyed a lot of accumulated wealth, it
ultimately will probably have a positive effect on growth data
over the next few months as resources are channeled into rebuilding."
After last year's California fires, we heard this. "In the
odd nature of economic accounting, this will probably be a stimulus,"
said Alan Gin, a University of San Diego economist. "There
will be a huge amount of rebuilding in the next couple of years,
financed by insurance payments."
And CBS Marketwatch said: "Economists have noted the perverse
reality that in the wake of disasters, re-construction spending
helps the economy, even as people are still struggling to recover
from their personal losses."
Note that personal loss here is deemed rather irrelevant compared
with the beneficial macroeconomic results. Here we have a theme
we find often in economics, the attempt to drive a wedge between
what makes sense for individuals and what is good for society.
We see this on display in this recessionary environment, when
people are told to spend spend spend, even though most people
understand that recessions are times for saving.
Continuing on, we find the Broken Window fallacy popping up even
after 9-11.
Timothy Noah of Slate wrote: "We live in a very wealthy
nation that responds to horrible disasters by spending large sums
of money…. It will also provide a meaningful Keynesian stimulus
to a national economy that, let's face it, was tottering on the
brink of recession well before Sept. 11. The recession may still
come, but the countercyclical spending should help shorten it."
Another economist declared: "Initially, this could provide
a significant boost to an economy that had been slumping. The
construction industry could benefit from the rebuilding process.
There may also be a boon for slumping tech sales, in replacing
lost equipment."
Thus can we see the continuing relevance not only of Bastiat's
allegory but also of the characters in the story. The posturing
wiseguy who says that breaking windows is good for the economy
keeps reappearing again and again. So entrenched is this mistake
that we might call it official economic doctrine for the whole
country.
I ask you to consider the absurd discussion of a stimulus package
designed to rescue the economy from recession. The idea is that
the government will inject funds into private markets to stimulate
them to the point that they will run on their own. Not once in
this debate have I heard anyone ask the core question: where is
this money going to come from?
It seems that Washington wants us to believe that they have some
magic machine that can turn up $150 billion in new assets without
anyone having to do anything to make these assets appear. One
wonders, then, why we need to wait until a recession to stimulate
the economy. Why not magically create hundreds of billions every
day, and not just for this country but for the entire world? Why
are we holding back?
Now, the ideas of the stimulus package are not 100% awful. Some
people are talking about tax cuts, which is a good thing but rather
pointless without spending cuts. I'm particularly intrigued by
the underlying assumption here that taxes work as a drag on an
economy whereas tax cuts fuel expansion. If that is the case,
and is indeed true but for different reasons than Washington gives,
why wait until the recession to cut taxes? If taking less from
us is good for the economy, we should institute this as a universal
policy.
One great lesson of political economy, emphasized for centuries,
is that the government creates no wealth of its own. Everything
it has it has to get from you and me, one way or another. It can
tax. It can borrow. And, finally, it can inflate by means of credit
market manipulation. This third option is the most disguised.
When people hear the words monetary policy, they figure that this
is something they will leave to experts. And central bankers have
an astonishing talent for obfuscation to the point that no one
knows with certainty precisely what they are doing.
The whole show is designed to make us go to sleep and not think
about what is really going on. The unvarnished truth is that when
the Fed artificially lowers rates, it is creating new money that
waters down the value of the existing money stock, yielding a
lower purchasing power for the dollar. That's another way of saying
that it creates inflation – perhaps not right away, and
perhaps not across all economic sectors, but eventually and certainly.
This, my friends, is a form of breaking windows. It is wealth
destruction. It matters not that there will be more dollars to
spend, because prices will be higher and wealth has been drained
out of the private sector, and redistributed within it. It is
Bastiat's fallacy reinvented in a new form.
New money also distorts production structures. At the very time
when the market is pressuring long-term investment to pull back,
the lower rates encourage expansion in ways that prolong the crisis.
It only delays and worsens the inevitable. The Great Depression
taught us that government is capable of doing this to the point
that the crisis can last for 17 years. So this is no small matter.
A government determined to prevent recession is a government that
might end up sustaining one to the point of the collapse of civilization
itself.
It is a perverse belief, but pervasive nonetheless. It is believed
by both political parties. It is held by the president, the media,
and the congress (except for Ron Paul). It is a reflexive belief,
one that reflects a failure to think between stages and see the
unseen effects of government intervention.
One reason that Bastiat's example has power is that it applies
not just in one area of policy but all areas. If it isn't true
that breaking windows creates wealth, it is not true that government
spending and inflating is a boon to the economy. It only ends
up draining wealth from the private sector, which is the only
source of wealth creation.
It doesn't matter what the government spends money on. For example,
building pyramids with tax dollars is not good for the economy,
despite what Keynes claimed. But neither is waging war good for
us or the victim country, despite constant claims to the contrary.
It is surely one of the most deadly myths that the Second World
War ended the depression. As Robert Higgs has shown, it further
prolonged it, all phony data aside. And consider the spending
on the war on terror. If government spending were capable of stimulating
the economy, we would not have recession right now.
Chris Westley assembled some data on the last seven years of
economic conditions, and it is sobering indeed. Since 2000, tax
revenues are up 25%. That's wealth destruction. Government spending
is setting records for expansion, with $1 trillion added to the
annul budget, with military spending up $250 billion each year
over the egregious $400 billion spent annually in 2000. That's
wealth destruction. The national debt is up 59%. That has to be
paid. More destruction.
Social security liabilities are up 60%. That too is the promise
of future destruction. The money supply is up 72%. More destruction.
Inflation itself has risen 20%, so the dollar of 2000 is now worth
80 cents. The gas price alone is up 118%, so that too is wealth
destroyed. As an indication of economic trouble, the gold price
is up 206%.
Here is the story so far of the government's great stimulus.
It has led to hard economic times. More of the same will create
more of the same and worse. The unemployment rate is rising. Savings
are falling. Prices are rising. We are less secure, less prosperous,
and we have fewer opportunities than ever to dig our way out of
this mess.
Government expansion has actually created the absurd scenario
mentioned above. The boy threw the rock, the crowds in Washington
believed the sophist, and now they are plotting to raze all homes
on the block, in the name of economic recovery.
Have we learned from the Great Depression? Ben Bernanke believes
that he has learned something. He believes that the key problem
of that period was a failure of the central bank to pump in enough
money and credit. He has never absorbed the critical observation
of Rothbard that the Fed did attempt to pump up the money supply
from 1929–1934. They used every mechanism, but the credit
markets found few takers, and without their cooperation, the money
supply does not expand.
The real lesson of the Great Depression is that there is nothing
that the central bank can do to forestall a recession whose time
has come, and nothing government can do to improve the situation
once the recession has arrived. Everything it attempts to do –
except shrink – only ends up making matters worse.
So it is in our time. We must ask ourselves what Washington is
capable of doing this time around. I believe that the answer is
anything and everything. Bernanke will attempt to flood the economy
with money. Washington is perfectly capable of imposing price
and wage controls on the entire economy. It is capable of terrifying
levels of protectionist legislation. New taxes are less likely
but taxation through debt accumulation is probably inevitable.
There might be rationing, spending mandates, anti-hoarding legislation,
and more.
The assumption that driving up consumption is the key to prosperity
is particularly dangerous, and also pregnant with irony. During
good economic times, we are hounded constantly by the intellectual
elites for our consumption habits. It is said that we are a greedy
nation, buying ever more fripperies and not looking after the
long term. The American public is decried by the intellectual
elites as materialist, consumerist, and short sighted.
Then recession hits and the tune changes completely. Reliable
leftists, fresh from having complained about the egregious spending
habits of the American consumer, suddenly turn on a dime and tell
us that more consumption is the key to economic growth. They favor
policies that would get us to fork over ever more of our money,
under the belief that the core problem is a lack of demand!
A recent example is Barack Obama, who said last year that the
problem with popular culture is that it "saturates our airwaves
with a steady stream of sex, violence and materialism." But
only this week, he seemed to endorse one of the three. "If
the economy continues to decline in the coming weeks, we should
send checks to people," he said. "This is the quickest
way to help people pay their bills and get them to start spending."
In fact, less spending and more saving is what is called for
during a recession, which is nothing but a market correction writ
large. Attempting to coerce spending threatens the value of the
dollar itself.
Here we face a very dangerous situation. If the dollar ever ceases
to be the international currency of choice, and this could happen,
we could face roaring inflation. And with dreadful legislation
that prohibits any kind of choice in currency, Americans will
be stuck. Here is a problem that could cause near panic in Washington.
The irony here is that after a century of failed interventionism
and socialism, Washington is no less likely, and probably far
more likely, to take the path of least resistance and accumulate
ever more power unto itself, at our expense.
We are in an election season, so of course people ask who would
be the least bad person to head the state in the years ahead.
The answer here is not at all clear, if it is not Dr. Paul. As
with the 1930s we face a choice between militaristic fascism and
Keynesian-style socialism combined with environmentalism. These
are two very grim choices.
I tell you this not to spread gloom but merely to be realistic
about the prospects for the future of American politics. But there
is also good news to be considered. The private sector has raced
so far ahead of the state, and is so global, that it is far more
resilient than before. There are safety valves available in the
form of international capital markets.
The government is so much bigger now than in the 1930s, but,
paradoxically, that also makes it less effective than it once
was, which is very good news. It is a massive, lumbering giant,
whereas the markets are a speed racer.
I might also point out that the government enjoys nowhere near
the respect it once had. Once the governing elite consisted of
the nation's elite, coming from the best families and the best
schools. Today, the governing elite has never been more transparently
ridiculous and even freakish. Gone are the aristocratic public
servants of yesterday; today, the government is made up of a class
of hucksters and gangsters that inspires no confidence.
This is all to the good, for as Mencken said, it is always great
when we do not get all the government we pay for.
On the intellectual level, the teachings of economics in the
Austrian School tradition have never been more available to the
world, or more frequently cited and discussed. And a recessionary
environment guarantees more attention to the Austrian theory of
the business cycle simply because this is the only model that
makes sense of our current problems.
We should never underestimate the power of ideas to make a difference
in the world. During the Great Depression, the resistance to the
state was present but weak. Today we have built up a mighty intellectual
army that extends across the globe. We are prepared in ways that
they were not. We have thousands of students and faculty, and
men and women of affairs who know real economics. We have the
internet. We have new books that put the whole problem in perspective,
such as Jesús Huerta de Soto's work on business cycles.
We have the biography of Mises now, and it illustrates the heroism
of political dissidence. The works of Rothbard on the Great Depression
and central banking have never been more widely circulated and
available. This time our masters in Washington will not go unopposed.
At the Mises Institute, now in our 26th year, we tried to maintain
a careful balance between serious and fundamental scholarly work,
and public advocacy. We must never lose sight of the need for
research and detailed work. It is not enough to merely repeat
slogans. At the same time, there are some foundational lessons
of economics that must be taught again and again with each new
generation. The fallacy of the Broken Window is one of them, and
its implications are truly radical.
Both Bastiat and Hazlitt saw that the government is the great
window breaker, that destroyer of wealth that drives the economy
backwards. The engine of creativity, recovery, and expansion is
the private sector, completely unencumbered by state intervention.
Ron Paul's newest book is called Pillars of Prosperity: Free Markets,
Sound Money, and Private Property. The title nicely sums up the
message of the economics of freedom.
It bears repeating in every age, in all places, for we will never
be completely free of the great threat of the window breaker.
So long as there are governments with stones ready to throw, there
will be a need for someone to point out that destruction is never
productive, never beneficial, and never a path to the good life
that we all seek.
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