33 posts tagged “economics”

Here at The Paleo Blog I am going to try something a bit different. Now that I have my own copy of Dr. Hans-Hermann Hoppe's A Theory of Socialism and Capitalism (ATSC) I will, at least in part and time allowing, "liveblog" it with some notes. These notes will be made into a more "study guide" format. So I'll call these entries "studyblogs." Typing them up will definitely slow my reading, but it is probably better that way so I will (with any luck) absorb more of it.

Currently I have read chapters one, two, and three. The studyblog of chapter three will be posted above in a separate blog entry. I have no timetable of when the next studyblog entries will be posted. But I'll try to post something once a week.

You can "follow along" by buying the book here at the Mises Institute and/or read it on your computer screen by downloading it for free here [pdf].

(This should be implied, but any errors of mine are my own making. I am, after all, just a layman and not a professional economist.)

Chapter 1

• Without the development of a systematic theory, social or political science is nothing but a confusion of random thoughts "equally" defendable by whimsical opinion making by sheer taste.
• (This reminds me of the saying: "There are three kinds of lies: lies, damned lies, and statistics." Someone can try to show that increasing the money supply increases wealth by statistics, but statistics cannot beat logic. Man cannot comprehend a world without the law of identity, the law of non-contradiction, and the law of excluded middle. Did the increase of wealth happen because of the increased supply of money or despite it? In the same way, how can statistics prove or disprove the law of diminishing marginal utility? In a [mostly] similar manner, how can statistics beat the logic of a mathematical theory? One does not have to "test it" and one does not derive pure math from the world.)
• Starting with an absolute and undeniable axiom man can then deduce what it spells out, without the problems of the above. (The axiom of action in praxeology is incontestable. Denying it would be the engagement of action, thus leading to a denial of the original erroneous denial. Likewise, as it will be argued in the book, Hoppe will make a case that argumentation in ethics presumes certain norms in regards to property and aggression.)
  

Chapter 2

Now the fun begins...

• Terms must be defined clearly. They must be understood by all; otherwise the attempt to build a system of thought on top of them will lead to ultimate failure and confusion. This includes "simple" terms, such as property, contract, aggression, capitalism, and socialism. Being so simple man sometimes has trouble defining them in simpler terms or comprehending them accurately.
• A good conceptual analysis of these terms is through a thought experiment to the Garden of Eden.
  

Garden of Eden - An Introduction

In the Garden of Eden everything tangible, other than man's physical body, exists in superabundance.

In such a place the concept of property would not exist. If apples, diamonds, water, fish, etc. exists in superabundance, then the usage of any of these things will have no impact on my present or future supply or on someone else's present or future supply. It thus follows that property rights (i.e., ownership and exclusive control) would not exist. Conflicts cannot arise out of X, if it exists in the Garden of Eden: Man just snaps his finger for X and it appears.

Accordingly a requisite for property is that it must be scarce. This is what differentiates the Garden of Eden from the "Real World." Ours is a world of scarcity. When X is in the Real World, and if it is indeed scarce in the Real World, then it is assigned property rights to rule out potential conflicts over its usage. It is, Hoppe says, "a normative concept: a concept designed to make a conflict-free interaction possible by stipulating mutually binding rules of conduct (norms) regarding scarce resources."

[Sidebar ~ It must not only be scarce, but it must be something controllable and "physical" to the touch. It is a tangible something. If scarcity was the only requisite, then time could be considered "property" but that would obviously be ludicrous. This scarcity requisite, btw, makes intellectual property not "property" at all. Man cannot "own" ideas.]

In the Garden of Eden, however, there is at least one scarce item that must have property rights: man's physical body. There must be property norms to rule out conflicts.

Self-Ownership

• Hoppe will later argue that the "natural" position is the only rationally justifiable one (chapter seven). But until then, the natural position of property norms says that each respected person should own himself.
  
• The naturalness of this position is indicated by, for example, possessive expressions. When we talk, we talk about specific people and imply their ownership of themselves. (E.g., he, she, etc.) And when we talk about actions of specific people. (E.g., Lisa did that, he drove, she ate dinner, etc.)
• Thus, each person owns himself and has control over himself "within the boundaries of [his] surface." Men (women) consequently have every right to make use of their respected body as they see fit.
  

(Newborns and children will be gotten to below.)

Action in the Garden of Eden
(Action which applies just the same for the Real World)

In such a place each man has only one physical body and, let's say that, like in the Real World, it is limited in its lifetime, can be damaged, killed, and so forth. Like stated above, material wealth is not a problem at all. But in the Garden of Eden man can still adopt one lifestyle versus another. He can choose to spend the day (or a hour, minute, etc.) reading a book, drawing, swimming, etc.

• In action man chooses a goal to pursue: A goal which the man has obviously not met; this is why he is acting to get there.
  
• He acts to change his current state into a subjectively higher one of value. (If he was in bliss, he would have no reason to act! Acting would only upset that bliss.)
• Choosing involves preference to do one thing at this moment instead of another. It involves costs: i.e., if I do X it will come at the expense of doing Y.  ("You cannot have your cake and eat it too.")
• All action takes place in time, even in our Garden of Eden. Time is a scarce, limited thing.
• Man using his limited time to pursue the goal of X will cut into Y. Meaning that there will be less time for Y.
• A goal that will take a long time to get implies that there is high cost in waiting for that goal and that the end result of that wait is greater than the cost for the man who is pursuing it. (He could use this time to work for another goal that would reached in a lesser time. This is part of the costs.)
  
• Action implies "property norms" with more than one person. [Say that Adam is joined with Eve.] This is because the action of one person can overlap and cause conflict with another.

Self-Ownership and Contractualism

• Contractualism is based-on and derived from self-ownership and the acknowledgment of such ownership (of property rights). It is this ownership that infers man's right to engage in contractual exchanges with others.
• This means that a man can agree-to or invite another person to do something to his body. (And, of course, to say "no" to someone who wishes to do something to it.)
• Such relations are mutual because each party in a contractual exchange agrees to the exchange. They agree to the exchange because each party expects to benefit from it; otherwise one or both parties would not agree to it.
  
• This does not mean, though, that after an agreed exchange one or both parties might say, in hindsight, it was wrong. The point is that ex ante they thought it would be a positive.
  

Aggression

Aggression is an action done to another without the agreement of that other. (It is uninvited.) For example, raping, beating, killing, stopping someone from doing something they do not personally like, enslaving, etc.

(Note: An invasion can only be done by causing damage or taking command of another's physical integrity of their property. It cannot be an "invasion" on, to quote Hoppe, "the integrity of someone's value system." If that were the case, then no one could act because no one could figure out ex ante if this or that action would hurt someone's, subjective, "value system." Such a task would be impossible. Furthermore it completely violates the property rights system and transforms it into something else, and impossibly so, entirely.)

What Does Aggression Result In?

The attacker, or aggressor, gains in some personal fulfillment, but at the expense of another person (the aggressed----the victim). The victim's fulfillment of happiness has decreased.

(This is unlike voluntary contractualism.)

More on Life (actions) in the Garden of Eden

• Remember: in the Garden of Eden men can still choose different lifestyles. They can do different things with their bodies through time----which is finite and scarce.
• Consumption vs. Investment Decisions:
• ------Consumption Decisions: Lifestyle choices that focus on immediate consumption.
• ------Investment Decisions: Lifestyle choices that only bear fruit in the more distant future. These require "the actor to overcome disutility of waiting." Investment decisions require human capital, i.e., time, patients, effort and things of this nature.
  

Socialism in the Garden of Eden

• With the implementation of socialism, man no longer would have full control over his life. That is to say, aggression (as defined above) has been institutionalized in the Garden of Eden.
• Nonproducers (called this in due to their non-production over bodies that are not their own) would have control over producers.
• The degree and type of control would be far ranging and so, as a result, would the consequences. But we can still deduce from the above the general result.
• These results in the Garden of Eden apply just the same to the Real World of all-around scarcity. [More so, since the Real World has scarcity "outside" of the physical body.]
  

What Would Be The Consequences?

(1) The "Economic" Consequences...

The gratification----the subjective psychic income---a producer can earn from his body will be lowered because the range of choices that he can make will be fewer.  As a result the amount of investment placed in human capital will be lower, since it would "pay" (or, put in another way, bring) less. Since investment-time, which costs in waiting time, would be less valuable as an investment, henceforth man's actions will be more directed towards consumption decisions and opposed to investment decisions.

In a nutshell: Socialism will always, and by necessity, lower income and increase consumption.

"Put drastically," writes Hoppe, "it leads to a tendency to turn philosophers into drunks." (So that explains it! Haha. Just kidding.)

(2) The "Social" Consequences...

A system of socialism that has been institutionalized to the public [e.g., say democracy] will allow for greater numbers of people to pursue their desire by redistribution-socialism, i.e., by using the institution of aggression, at the expense of producers. This will make aggression relatively easier and production more costly. Therefore the institutionalization and acceptance of anti-natural property rights in a society will tend to push men from production to parasitism. It will change men's characters and the social system from producers to nonproducer parasitic-aggressors.

In a nutshell: Socialism will, as I have said before on this blog, turn man into a political animal.

The Real World and Non-Body Private Property

• Ownership cannot be based on just any verbal claim.  There must be an "objective, intersubjectively ascertainable link between the owner and the property owned," writes our author.
• Again, the occupant of one's body is the given man. He is the "first user." (The only direct user!) A man's body is used by him.

As far as property ownership "outside" of one's body in the Real World, this property must be "produced" in the sense that a man transforms nature or "homesteads" it into, let us say, a "product" that the given man subjectively values.

This transformation or homesteading requires the man to in someway indicate a "border" to that thing of nature. To show his ownership. Hence he does not need to transform (or "touch") every thing to make it his property (e.g., every single atom even in the "middle" of this thing, which is impossible). Also, in this transformation it need not be continuous. (I.e., a piece of property does not need to be forever transformed to be owned. It just needs to be homesteaded once sometime in the past.)

After property is developed out of the state of nature and into the hands of a man, it can then be voluntarily exchanged with another (or given as a gift).

As far as newborns: They have been "produced," but they are new "actor-producers." They are owners of their bodies and have the potential to become fully developed adults. Accordingly they have the absolute right not to be aggressed upon. The parents are trustees, but nothing more [i.e., they are not master slave owners!]. Children, in accordance with this, must have the absolute right to runaway and, as Hoppe says, have the right to say "no" when demanded to come back home.

[For more on the subject of homesteading (or children) you can turn to Murray Rothbard's Ethics of Liberty or chapter four (children: chapter seven) of Rothbard's Egalitarianism As a Revolt Against Nature.]

The great paleolibertarian Dr. Hans-Hermann Hoppe's first English book, A Theory of Socialism and Capitalism, is back in print, thanks to the Ludwig von Mises Institute. Needless to say, for those familiar with Hoppe's work, this is a must have. So click away and buy.

Hoppe's other English works include The Economics and Ethics of Private Property, Economic Science and the Austrian Method, Democracy - The God That Failed, and (as editor) The Myth of National Defense. I highly recommend them all----particularly the first listed and the Democracy book. As Dr. David Gordon says "they are packed with matter." These books of great erudition will give you tremendous insight into the world and change the way you look at it.

Some Links:

• HansHoppe.com
• An Interview with Hoppe (1998)
• Another Interview (2004)
• "The Economics of Taxation" by Hoppe
• "The Sociology of Taxation"
• Hoppe on LRC

Murray Rothbard's 1984 essay explains "Ten Great Economic Myths":

• "Myth 1: Deficits are the cause of inflation; deficits have nothing to do with inflation."
• "Myth 2: Deficits do not have a crowding-out effect on private investment."
• "Myth 3: Tax increases are a cure for deficits."
• "Myth 4: Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall)."
• 

  Making Economic Sense by Murray Rothbard
  "Myth 5: Economists, using charts or high speed computer models, can accurately forecast the future."
• "Myth 6: There is a tradeoff between unemployment and inflation."
• "Myth 7: Deflation--falling prices--is unthinkable, and would cause a catastrophic depression."
• "Myth 8: The best tax is a 'flat' income tax, proportionate to income across the board, with no exemptions or deductions."
• "Myth 9: An income tax cut helps everyone; not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut."
• "Myth 10: Imports from countries where labor is cheap cause unemployment in the United States."
  

Read Here.

This entry to The Paleo Blog will be doing what might be called "Defending the Undefendable," with apologies to Dr. Walter Block.

Disaster Hits! Prices Quickly Rise "Because of Evil-Greedy Businessmen." Quick: What Modern Day "Undefendable" is Portrayed as a (so-called) Evilll Villain?

The Wicked Price-Gouger, of course!

But is the price gouger so bad? Or, maybe, is the price gouger actually good?

Following the lead of Dr. Block in "Defending the Undefendable," they not only are not evil but can be considered heroes.

To see how the "price gouger" is a hero, not a villain, all that needs to be done is a simple thought experiment. Imagine a severe storm swept through your town and countless homes were very badly damaged.

Families are going to want to repair their homes, of course. Therefore there will be an increased demand for repairmen. The number of repairmen, like all other economic services and goods, are scarce, limited, finite. They would not be considered economic goods as such if this were not the case. The "limit-ness" of the number of repairmen who live and work in the given community is true to a high degree. As there is a large demand for their services by a great number of people, they are more readily able to charge more money than they usually do. Eager customers would be bidding up those finite services, from the repairmen. Prices will consequently rise.

This has a two-fold impact. For one, the families will have to be more fiscally wise. They will have to conserve and be more cautious. These households will have to think about what is more urgent to repair compared to what is less urgent to repair. They will have to carefully rank their priorities. It is this that will help direct repair activities to be more economically efficient. Greater economic efficiency tends to help diminish the superfluous. Secondly, the community will attract more repairmen from outside of the community than otherwise because the profits to be made will be higher. This will help bring about repairmen from far away, and who would be willing to pay the expense of transportation costs, to profit from helping their new voluntarily paying customers. This will create an increased supply of repairmen to meet the high demand, or (roughly) the "customer competition" of that demand. Due to the increased competition the prices will start to fall. As more "price gougers" "take advantage" (see below) of the state of affairs, competitive conditions will further increase and prices will fall even more quickly.

What happens is that these higher prices are like traffic signals. They direct the traffic of the free market. In the case of a disaster (minor or major), the relatively higher prices will signal the market to diver finite resources to the given location versus another. This is exactly why the market place needs to be left alone. Prices need to go up in accordance with market demand and supply. Individuals cannot respond and act without these directions!  And without any central plan those far away, who might have no knowledge of the severe storm, will respond to the traffic signals of the market. The traffic signals make possible the proper curtailment of resources to accomplish repairs, bring increased competition, and increase the allocation of needed resources into the community. As F.A. Hayek said, knowledge spreads by means of the market in a way that triumphs all. Leaving this community alone from State intervention is what should be greeted happily because such a reflected response comes with the understanding that such market activity brings more resources into the area and, in the long run, lowers prices back to "normal" levels as fast as possible. They could not be brought down as quickly if the market is not left to itself. That is, if civil society is not left to do the task itself.

It should be mentioned that the idea of "taking advantage" with "price gouging" is nonsense. People buy their services because they expect to benefit from the process, too. They are spending their money because they consider it of greater advantage to do so, otherwise they would not spend their money on such services. "Taking advantage" is fallacious reasoning.

Obviously this is not to say that there are no men, in such a crisis, looking to earn very large amounts of profit and is helping out for no other reason but to make "huge" amounts. Such is to miss the point. Statists, however, not only miss the point but want to take these men off the market completely. Needless to say it is better that they are out there than not. By taking them off the market it destroys free exchange between men. It destroys potential exchanges which are voluntary exchanges for mutual benefit. Such doings make matters only worse. It also distorts pricing signaling. One should not only want benevolence, kindness, and charity to resolve the crisis and return life in the community to normalcy. One should want all the help possible. This means help from those that want to earn a buck. Too often do we forget that individual persons and groups of individual persons are involved in these transactions. Socialists wish to take away man's freedom to think and act for himself. Results of such interventionism lead to individual actors not being able to respond rationally to actual market conditions. It is a view of the State bosses knowing better than each and every individual. It is based on the conception that the State is able to collectively determine the needs of various, unique and diverse individuals and families. Trouble is, it cannot possibly do this.

Price hikes and "price gouging" in moments of crisis actually illustrate the rationality of the free market. In fact, the pricing mechanism of the market is most crucial during such times. It helps direct men to confront the reality of the present conditions. It gives the proper market signals, incentives, disincentives, and directions to repair and rectify the situation. As Mr. Rockwell writes in the great linked-to article below, this illustration shows how well the market works all-around. The leap between how the market operates under "normal" compared to "abnormal" conditions should not be such a giant leap for people. The same framwork is at play.

Ultimately it comes down to top-down management through the State versus management through free individuals and groupings of free individuals. If you like the idea of statist management, then you will love FEMA. If you love disastrous fires, you will love the State in control of dealing with them.

Stuff to Read:

• In a Crisis, Markets More than Ever by Llewellyn H. Rockwell, Jr.
• Price Gouging Saves Lives by David M. Brown
• In Defense of Price Gouging by John R. Lott, Jr. and Sonya D. Jones
  
• Creating Economic Crimes by William L. Anderson

See Also: Price Controls (the “politically incorrect” way)

On this subject I am reminded of a joke that Walter Block gave in this [MP3] fun interview hosted by Scott Horton. He originally gave this joke to a bunch of anti-trust lawyers and economists. . .

First joke is that there are three prisoners in the gulag in the former Soviet Union. The three find out why each of them is there. The first said that he came late to work and was accused of cheating the State out of labor. The second guy said that he came early and was accused of brownnosing. The third guy said that he came to work everyday and exactly at time, but accused him of owning a Western wristwatch.

Second joke is that there are three prisoners in the U.S. They were all in jail for economic crimes of violating monopoly laws. First guy said that he charged higher prices than anyone else and the government then accused him of price gouging and profiteering. Second guy charged lower prices than anyone else and they accused him of predatory pricing and cutthroat. And the third guy said that he charged the same prices as everyone else and they accused him of collusion and price fixing.

The first joke got some blithe laughs, but not the second one. They knew that the truth revealed in the second joke would mean the end of them. As Dr. Block says in the interview, we can have a justifiable and definable law against something like murder, but this is not the case with antitrust laws. These laws should not pass our initial olfactory impression.

What about Government Monopolies?

The first question that should be on one's mind, before we further advance in this subject, is how does the term "monopoly" fit with government itself and governmentally created entities. As soon will be seen (I hope) in this entry to The Paleo Blog, is that one cannot find a single example of a free market "monopoly" because each and every one of them fails even the most basic predictions of those who preach how a "monopoly" would behave and act.

Really, this whole topic is so silly in many respects, if you think about it. To be consistent one must attack the entire antitrust department for fitting into the definition of a monopoly! If one wants to talk about monopolies and laws that forbid monopolies, we cannot leave the government out of the picture. Thus to be consistent, which one must be if anti monopoly law rhetoric is correct, we must reason that the entire department of justice and its antitrust division should be broken up into smaller outfits----plural. After all, this department is a monopoly in the truest sense of the word. This judicial department is supposedly created to go after monopolies, and shut them down, but it itself is a monopoly! No free entry is present to go into competition with them because government made it illegal.

As we contemplate government and monopoly, we also must question all of the various government provided "services" it provides. Should not antitrust be applied to government in these various aspects as well?

Another thing that must be kept in the back of one's mind is that government also gives well-politically connected companies monopolistic privileges or, at the very least, protection to limit their (the given company's) competition with other competitors making them, in a way, semi-monopolies. Therefore, on the one hand government is charged with the duty to go after monopolies, and on the other it helps sets them up. Advocates of antitrust or anti-monopoly laws make no sense. We all should be thinking that maybe government should get out of this picture altogether.

Definition of a Real Monopoly.

Today the definition of what is and is not a monopoly is very murky and uncertain. Only the classical definition makes any sense whatsoever, and can be intelligently understood, as where an individual can be able to differentiate a monopoly from a non-monopoly. In the classical sense a monopoly is defined as a given organization, X, that is given complete control over the production or service of Y. That is to say, no other organization can enter into competition with it because of governmentally created laws which have forbid other organizations from entry in this area of work. It is a government phenomenon.

Under monopolistic conditions (be it in the classical definition, or how some judge a "market" monopoly will behave): production will fall, output restricted, and prices rise.

A Market Monopoly: Just a Chimera.

"Monopolies" that are instead attacked are "super size" companies with a large share of the given market it produces in. Why "super sized" companies should be attacked is the first question that one should ask. They are obviously providing a great service to many people, otherwise the given company would never have got as far as it has. All of its customers are voluntary paying clients. If they are not happy-----they should go somewhere else, form their own company, or (if possible) withdraw from the given market (i.e., stop buying X). The company is in the position that it is in because it has vastly benefited people and increased the standard of living. If one of these companies "goes bad," its quality goes down, or prices rise, other capitalists and entrepreneurs will see an opening to make a buck to drive customers away from the company "going bad" and to them.

But, to be perfectly clear on this topic, my defense of these companies or trusts only goes so far as they have earned their position through economic means versus political means. This is a source of confusion that a great deal of people have because (1) the two means are often confused and (2) the current economic order depends heavily on the use of political or "fascistic" means. In fact, the latter means is the very reason why antitrust laws exist and are supported by the establishment. To reintegrate, libertarianism is thus not a defense of the "status quo" of the current makeup of the market place. Quite the opposite.

Government Manipulation --- A Look at Microsoft

Microsoft is a good example of how these anti-"monopoly" laws are used. For years it pretty much minded its own business. It did not worry about politics. Then came the charges that they are a "monopoly." It was only once Microsoft started to give most generous amounts of money to both the Democrat and Republican parties that----all of a sudden like magic----the government left them alone with these false charges. This is the reality of antitrust and how it is used.

Robert Murphy in his book The Politically Incorrect Guide to Capitalism, he quotes Dominick Armentano's Antitrust Policy: The Case for Repeal that reports that 90 percent of antitrust lawsuits "are used by smaller rivals to clobber more efficient competitors." These companies try to use the government to smash their competitors and gain regulatory favors with the law. They use the "political means" that the State makes available to them.

The initial case against Microsoft was brought up by their competitors. Instead of trying to win over the consumer, these rivals decided to go to the government.

It should also be noted, writes Dr. Murphy, that there is some "historical irony" here . . .

many of us can remember when anti-capitalist writers wanted the government to impose uniform standards on the emerging computer industry in the early days of the personal computer revolution. In their view, it was absurd to let competing companies produce whatever operating system they wanted, because ignorant consumers would be helpless before so many options . . . After Bill Gates solved this problem by providing an operating system and other standards that most computer users adopted, the critics changed their tune. . .

A chief charge against Microsoft is that it includes for free Internet Explorer, a web browser.  It is "unfair." As Murphy makes the point in his book, is it "unfair" that Ford sells you "the engine and tires" with the vehicle? I do not know about you, but I like that the vehicle is "integrated" with these things. It is beneficial to consumers. Besides, in the case of Internet Explorer, Firefox is a hop skip and jump away. (Hasn't there been a total of a ~ million plus downloads on it?)

(IBM is another example in the tech world. Government went after them for 13 years for being a supposed "monopolist." In the long run the charges were dropped, but IBM had to waste millions of dollars defending it self from these ridiculous claims.)

The Myths "Robber Barons"

I cannot in this blog entry cover everything point-by-point, but I will focus on a few myths of the so-called "robber barons." This is why I must urge anyone reading this blog (if there is anyone) to buy Thomas DiLorenzo's How Capitalism Saved America. (Antitrust Policy: The Case for Repeal by Dominick Armentano is another one that directly focuses on the topic at hand. It is said to be a basic enough book for the laymen. ... It is on my long list of "to buys.") DiLorenzo's book is a fantastic book and a good start to understand why capitalism (freedom) is the answer to all of your political questions. If you are skeptical of capitalism or believe that antitrust/antimonopoly laws are needed, I order you to buy it.

Monopolies are said to restrict or cut down output and rise prices. Does this fit all of the various "robber barons"?

To quote DiLorenzo:

I surveyed the Congressional Record for 1889 and 1890 to compile a list of industries that were accused during the Sherman Act debates of being monopolies. . . . while real (inflation-adjusted) gross national product (GDP) increased by approximately 24 percent from 1880 to 1890, those industries that were allegedly restricting output actually increased production in that period----by 177 percent, on average. (For example, steel production rose 258 percent; zinc, 156 percent; coal, 153 percent; steel rails, 142 percent; petroleum, 79 percent, and sugar, 75 percent.) In other words, in the decade preceding passage of the Sherman Act, those industries targeted as "monopolies" grew at seven times the rate of the economy as a whole.

In the same period, prices charged by the trusts also fell faster than the general price level did. The consumer price index fell by 7 percent from 1880 to 1890, but on average the trusts' prices fell more dramatically: steel rail prices fell 53 percent; refined sugar was 22 percent cheaper; the price of lead declined 12 percent; the price of zinc was reduced by 20 percent; and the price of bituminous coal remained steady.

None of these fit how a monopolist acts. It is simply a fact that deflation was occurring---i.e., prices were lowering. Capital growth was taking place, wages and standards of livings were going up (even for the average Joe). Take Standard Oil, typically claimed as an "evil monopolist." In no way did it live up as being a monopolist. Rockefeller, in this particular enterprise, got far by actually innovating the oil industry, and thus dramatically benefited consumers. In doing this, he should be praised, not condemned.

Refining oil became more efficient and cheaper: the cost lowered "from 3 cents in 1869 to less than half a cent by 1885." Consumers benefited: "as the price of refined oil plummeted from more than 30 cents per gallon in 1869 to 10 cents in 1874 and 8 cents in 1885." He lowered the cost of kerosene too, now making the average household no longer dark at night. He produced over 300 products by economizing and finding ways to make use of the waste that he produced. Employees were well paid too, more so versus competitors (which numbered around 100).

So he advanced the market, lowered cost, lowered prices. This does not conform to what a monopoly is, at all. The inferior competitors wanted to use the government to give them an edge, instead of these competitors engaging in the capitalistic process themselves. If it were up to these competitors, all of the innovations and advancements, which the public at large benefited from, would not have come into existence! When the antitrust law was used against Standard Oil, it was already loosing more and more of its market share. Yes, previously it had a huge market share but that was because Standard Oil was working for consumers---not for the government or behind government protection to give it a free ride. The market place and the consumers are the greatest "regulators." Attacks directed at Standard Oil were looking out for their own particular interests and not for average folk.

And after the attack on Standard Oil, the oil industry has more or less been in the hands of government. World War I, for instance, the State cartelized the industry, cut down on competition (they called it "waste"!), and created price controls. But sweetness and light did not come after World War I. President Coolidge created actual monopolies in the industry (gave control to and protection to). (Who would have thought? What was all of this talk about Standard Oil?) . . . More regulations have piled up: from the National Recovery Act to the Connally Hot Oil Act to import quotas to restrict competition. There has not been a free market for a long time in this industry.

Another line of attack, because these trusts immensely benefited the public at large and acted exactly the opposite to what "monopoly" theory says, is "predatory pricing." However, there are several things faulty with this. For one, to cut prices so low, how did these trusts/businesses get to where they got in the first place? If one then, let's say theoretically, drove all competition out by its "war chest" of money, why cannot new competition enter the market at a later time? Things are not static, it does not matter what industry we are talking about. Predatory pricing is also completely uneconomic and makes no business sense. As DiLorenzo says: "The would-be 'predator' stands to lose the most from pricing below its average cost, since, presumably, it already does the most business." Furthermore, looping back to point number one, the idea of predatory pricing is based on a contradiction: "The theory posits that predatory pricing is with creates a war chest of 'monopoly profits,' but at the same time it simply assumes that these profits already exist." Neither is there a single empirical example. A famous (or should be famous) counterexample of predatory pricing was Herbert Dow.

(Plus the competitors would notice what is happening. All a competitor would have to do is cut down and freeze their business for the time being, encourage their customers to flood the company attempting "predatory pricing," and, if they felt it necessary, talk to their other competitors to do the same. The company engaging in this dumb activity would go broke!)

Pooling is also a Chimera. Superficially it appears to be a valid concern, but a deeper look shows that this too is nonsense as an objection to a free market. The tendency will always be to break the pool. For example, say that I am a businessman in a pool that agrees to sell my product, along with the other members of the pool, at X. The urge and incentive to break the pool to a price less than X will be very great, because if I precede to do that I will weep the rewards. There is always that urge to "break it" and reap the awards. What fundamental matters is this: Is there open entry or not? It is the use of statism and coercion that closes entry. The complaint that "Well, capitalists want to consolidate and enter into pooling agreements because they will earn more profits. . . " is wrongheaded. If "evil" capitalist pigs, who supposedly think of "nothing but money," want to make more and more money, as this complaint says, then pools that hurt consumers would never last in the long run because they are not as profitable (as the previous example showed) for the various "evil" capitalist pigs. (There has also been game theoretic analysis of this.)

Market Limits

Murray Rothbard extended Ludwig von Mises' socialist calculation problem to show that the larger a firm gets the greater calculation problems it will encounter. This shows that there is a limit to how far a business can grow.

Our analysis serves to expand the famous discussion of the possibility of economic calculation under socialism, launched by Professor Ludwig von Mises over 40 years ago. Mises, who had the last as well as the first word in the debate, has demonstrated irrefutably that a socialist economic system cannot calculate, since it lacks a market, and hence lacks prices for producers' and especially for capital goods. . . . The reason for the impossibility of calculation under socialism is that one agent owns or directs the use of all the resources in the economy. It should be clear that it does not make any difference whether that one agent is the State or one private individual or private cartel. Whichever occurs, there is no possibility of calculation anywhere in the production structure, since production processes would be only internal and without markets. There could be no calculation, and therefore complete economic irrationality and chaos would prevail, whether the single owner is the State or private persons. [Man, Economy, and State; quoted from The Essential Rothbard]

In Power and Market, Rothbard says that "The only viable definition of monopoly is a grant of privilege from government. . . . The antitrust laws, therefore do not in the least 'diminish monopoly.' What they do accomplish is to impose a continual, capricious harassment of efficient business enterprise. The law in the United States is couched in vague, indefinable terms, permitting the Administration and courts to omit defining in advance what is a 'monopolistic' crime and what is not."

[For an advanced economic analysis: See this, this (7 sections) and this.]

The Reasons Behind Today's Law

Senator John Sherman and the Republicans were strong on protectionism because it was beneficial to their big business contributors (and as a result hurtful to consumers). This same exact policy, with these same people, were not now looking after the interest of "the little guy." It was a scam to help protect certain businesses at the expense of the public at large. It was also used to open the door wider between government and the business world.

Something we all have to understand is that the "big guys" will always be running government. Naïveté it is to believe that it is the masses or the poor who pull the strings, or attempt to pull the strings, in government. It always has been and always will be the ones "on top" that rule government. The whole enactment of these laws was to help and benefit politically connected businesses. In the free market consumers are the ones in charge ----- In a statist market the ones connected with government power are the ones in charge.

As Mises Said: "There is no middle way. Either the consumers are supreme or the government."

See for more, and some details of the reasons why these laws were even put into place, "The Truth About Sherman" by DiLorenzo.

Libertarians are many times confronted by people with the question: “But who would build the roads!?” Since us libertarians firmly believe that each and every individual owns his own physical body and justly acquired physical property (by homesteading, voluntary exchange or gift), we do not believe that anyone has the right to coerce others. Robbery is robbery----even if it is under the name of “taxation.” Slavery is slavery----even if it is under the name of “conscription.” Two wrongs do not make a right. Government does not make a wrong, right; neither does the sacrosanct democratic doctrine of mob rule. We do not believe in a grand ruler or a central plan. Freedom has no central plan. Free markets have no director. But it is not only the most moral system with equity. It is also the most efficient system. Capitalism, private property, free markets bring efficiency and are the very means that sustain life. Only production (free markets) brings wealth. Draining from that will only diminish wealth or destroy future production.

Every Friday, unless Pat Buchanan is not there, I watch The McLaughlin Group on television. What this show very badly needs is a consistent defender of liberty, like Lew Rockwell. (I will not hold my breath.) This was demonstrated on a couple of shows ago (8/3).

One of the central topics was the state of the nation's infrastructure. The tragic collapse of the bridge in Minneapolis spurred this topic up. Accordingly Mr. McLaughlin gave a report on the awful state of "Roads, bridges, levees, power grids, water systems," and so on. My reaction was: Does anyone see a pattern here?

An observant viewer would notice with his report that each and every infrastructure in which McLaughlin spoke of is run under the same management. That is, government. It controls and manages them all. Is it just a coincidence? I think not...

(See: The Wrong Lessons of the Bridge Collapse by Brad Edmonds)

Statists claim that private roads (and other such “public property” or "public goods") could not be built (or run) due to such things as the so-called “free-rider” problem, but this overlooks the fact that the majority of roads and canals were private in the nineteenth century. As Thomas J. DiLorenzo writes in his superb book How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present in chapter five, even in 1800 there were a total of 69 different turnpike (privately funded road) companies. This belies so-called “free-rider” problems.

If there is a demand, they will be built. Plus roads are great investments. Imagine a new developing area and say a Wal-Mart goes up. Surely Wal-Mart wants easy access for potential customers to flock to their store. The same goes for any other store. Easy access makes good business. (If they had to build it their self, they would do it. In a free market we might see “Wal-Mart roads.” ... Take that Wal-Mart haters. :) Roads also increase property value. Residents and business folk alike have an interest in good roads. Because in a free market people would be tied directly into the position of wanting to maintain high property values, they will have an incentive to keep the roads well-maintained and attractive. It is something they could affect. This is because they would be in a privately owned state that has to meet the demands of the free market. Currently it is impossible for this to happen. Right now it is almost if the public roads were “un-owned” or in a semi-state of “anarchy.” Maintenance to keep them running well and looking attractive is largely arbitrary when they are run by the government. There exists no effective means to allocate scarce resources under the current environment because, by definition, there are no prices and hence no economic calculation. For prices and economic calculation to exist, the prerequisite is private property. This is what makes socialism fatal: be it road socialism or socialism in medical services or anywhere else.

Just as important, private roads are not subject to politics. Instead they are subject to market demands and conditions of the “real world” of scarcity. Private investors will be more fiscally conservative and wise because (1) the funds are not coercively collected; (2) they can lose money or go bankrupt unlike government; and (3) there is open entry into the field of producing, buying, and/or selling private roads. With every penny they spend they will want to make sure it is used wisely and will do their best not to incur extra costs. Compare this to when government hires out a company to work for them (or if they “do it themselves”). Mercantilism will develop and entrepreneurship will be political and not market based. The company will be nowhere near as constrained with money. They will have an incentive to get as much money as possible for the least amount of work. Quality will suffer as a result. They will overextend. Calculation problems will arise.

Here is what Dr. DiLorenzo has to say in his book:

In private, competitive markets, investment in businesses is directed by the wishes of consumers. With government-funded projects, however, the whims of politicians tend to replace the desires of consumers, and the result is always economic inefficiency and political corruption. The early-nineteenth-century America transportation entrepreneurs proved that the “market failure” rationale for government transportation subsidies (that is, the free-rider problem) was essentially a myth. In contrast, the real failures in early American transportation came from government-funded projects that were spectacularly wasteful.

One direct example DiLorenzo uses is with the railroads (which applies just as well to a comparison between private versus public roads) in chapter seven. James J. Hill was a free market entrepreneur ---- not a political (anti-market) entrepreneur. He built his transcontinental railroads, the Great Northern Railroad, with privately funded money and never trampled on anyone’s private property rights. Compared to other railroads, which were subsidized by government, his is the only one that never went bankrupt.

DiLorenzo:

The Pacific Railroad Act of 1862 created the Union Pacific (UP) and the Central Pacific (CP) railroads . . . For each mile of track build Congress gave these companies a section of land----most of which would be sold----as well as a sizable loan: $16,000 per mile for track build on flat prairie land; $32,000 for hilly terrain; and $48,000 in the mountains. As was the case with Jay Cooke’s Northern Pacific, these railroads tried to build as quickly and as cheaply as possible in order to take advantage of the governmental largesse. Where James J. Hill would be obsessed with finding the shortest route for his railroad, these government-subsidized companies, knowing they were paid by the mile, “sometimes built winding, circuitous roads to collect for more mileage,” as Burton Folsom recounts. . . .

. . . The wasteful costs of construction were astonishing. The subsidized railroads routinely used more gunpowder blasting their way through mountains and forests on a single day than was used during the entire Battle of Gettysburg.

Back to the roads...

Given that we do not live in a free market, but rather a statist market, lobbying groups, as the late Murray Rothbard wrote in his For a New Liberty, used the government (while they were using them to benefit in the process too) to overproduce highways. This cut into the railroads and over stimulated truckers. Also, as Rothbard wrote this at the time, “urban expressways have been built at a cost of from 6 cents to 27 cents per vehicle-mile, while users pay in gasoline and other auto taxes only about 1 cent...” Hence, “[t]he general taxpayer rather than motorists” pay the bills. And, hence, we see yet another incentive distortion. And here “the users of the low-cost rural highways are being taxed in order to subsidize the user of the far higher-cost urban expressways.”

Beyond these distortions and mis-configurations, government has created a mess in running them with traffic congestion. In effect, the state has put into place a price control. Cooling down traffic congestion needs the rationality of the pricing system in the free market. In a free market highways would develop “peak load pricing.” Rush-hours would charge higher tolls then off-hours. Prices and traffic would move towards an equilibrium.

Here is what “Mr. Libertarian” has to say:

But people have to go to work, the reader will ask? Surely, but they don't have to go in their own cars. Some commuters will give up altogether and move back to the city; others will go in car pools; still others will ride in express busses or trains. In this way, use of the roads at peak hours would be restricted to those most willing to pay the market-clearing price for their use. Others, too, will endeavor to shift their times of work so as to come in and leave at staggered hours. Weekenders would also drive less or stagger their hours. Finally, the higher profits to be earned from, say, bridges and tunnels, will lead private firms to build more of them. Road building will be governed not by the clamor of pressure groups and users for subsidies, but by the efficient demand and cost calculations of the marketplace.

Continued:

While many people can envision the working of private highways, hey boggle at the thought of private urban streets. How would they be priced? Would there be toll gates at every block? Obviously not, for such a system would be clearly uneconomic, prohibitively costly to the owner and driver alike. In the first place, the street owners will price parking far more rationally than at present. They will price parking on congested downtown streets very heavily, in response to the enormous demand. And contrary to common practice nowadays, they will charge proportionately far more rather then less for longer, all-day parking. In short, the street owners will try to induce rapid turnover in the congested areas. All right for parking; again, this is readily understandable. But what about driving on congested urban streets? How could this be priced? There are numerous possible ways. In the first place the downtown street owners might require anyone driving on their streets to buy a license, which could be displayed on the car as licenses and stickers are now. But, furthermore, they might require anyone driving at peak hours to buy and display an extra, very costly license. There are other ways. . . . .

An objection someone might have is that the various owners of these roads would decide on chaotic rules for their customers. In retrospect, that should occur to anyone as silly. They would be in the business of pleasing their customers. Many of the things we are accustomed to are very uniform and un-chaotic. They are not this way by the government, but out of the market. We buy CD, MP3, DVD players and they have the same basic template (same pictures) in regards to which button refers to play, pause, stop, etc. And look at computer software and hardware. It is not chaotic.

The railroads, also, without a central government plan or directive, came together to design uniform rules and made sure that their tracks inter-connected. As Rothbard wrote, 6,000 regional freight classifications were worked out without government. The timezones, too, were hammered out:

In order to have accurate scheduling and timetables, the railroads had to consolidate; and in 1883 they agreed to consolidate the existing 54 time zones across the country into the four which we have today. The New York financial paper, the Commercial and Financial Chronicle, exclaimed that "the laws of trade and the instinct for self-preservation effect reforms and improvements that all the legislative bodies combined could not accomplish."

This objection also leaves aside how the very first private roads worked. They were not chaotic or inefficient. Actually, they had a very complex and wonderfully elaborate system.

I take it that the great and wonderful Dr. Walter Block is the privatize road guru. If you have the time, I highly recommend you listen to THIS [MP3] lecture on privatizing the roads. (At least, listen to some of the beginning.)

One of the things that Dr. Block covers is how the first roads, private roads, worked very well. Walkers were charged the least amount of money to travel through them. By horse was a little more. Wagon a little more. In fact, there was a variety of ways the businessmen charged the wagon users: They would charge by the number of axels---how much stuff was in the given wagon---heaviness---and even the width of the wheel because they determined that a narrow one, while it would move faster, caused more damage to the road compared to a wider one, etc.

Another thing Block talks about is how 40,000 people die on the government roads per year! Needless to say, that does not make good business. Road entrepreneurs would compete over the fact that less people die on their road then on their competitors. A competitive environment would tend to thus lead to lower number of deaths per years. As Block reasons, this staggering number is just result to be predicted under road socialism.

From this discussion we have to remember that there is a fundamental difference between public property and private property. Governmentally run property (i.e., public property) does not have to respond to the demands of the market place. The above market signals do not apply to government property. Market efficiency will always be outside of government's reach. Any well-run public property will not be rewarded through collected profits from customers. So there is no incentive or reason for the government workers to run them well. Also, everyone is forced coercively into paying for all public property. This includes public property that one many not even use or desire. Furthermore, when a management-caused accident or disaster happens, government is once again not subject to the normal market forces of the profit-and-loss system. It cannot lose money or go out of business. When someone under this kind of circumstance gets injured (or worse) on public property (and not of their own doing but because of bad infrastructure of property itself), they (or their families) will not be compensated, demonstrating once again the inferiority of public property versus private.

Contrast all of this with private property. When I enter a local shop, it is generally well taken care of. There is no talk about "infrastructure problems." There is a direct incentive to take care of it. It is voluntary. It responds to the profit-and-loss system--------Hence, the likelihood of an accident occurring is less, as we sadly saw in Minneapolis with the government run public bridge. Private property is more secure. Where would you rather be? At Wal-Mart or Central Park at night? Or at Disneyland or Central Park? I think we all know the answer to those questions, if we are honest.

So Just Say No To Commie Roads!

Fiat money is a definite impossibility on the unhampered free market. Only a statist market allows fiat money to come into being. So how does government turn an originally market developed hard-based commodity money into a backless and pathetic fiat paper currency? [I also covered this much more briefly in my loosely constructed highlights and notes from Walter Block's tremendous book Defending the Undefendable, which could also be called "Libertarianism in One Lesson."]

It is only once a free market money has developed and evolved that it is a possibility for the government to then regulate and monopolize the monetary system. The market place is the fountainhead of the creation of money as a solution to the many problems and limitations of a barter system. Money cannot develop apart from the market place. It is the prerequisite. Government's meddling into money only can come in later. The reason for government wanting to take control of the monetary system is simple and straightforward: It wants to obtain more revenue! What better way then to take control of the supply and management of the lifeblood of the economy, i.e. money? And in contrast to all forms of direct taxation, the bonus of appropriating revenue via monetary means is that it is indirect and unseen.

Now let us all assume that the economy of which we speak is fairly developed. The money that arose is gold (and perhaps also silver---more on this later). For government to enter the picture, it must first monopolize the minting operations. Because...., you must know, we cannot trust free individuals (evil capitalists and entrepreneurs) with such a task! Individuals will screw it up, but individuals in government are perfectly wise and trustworthy----much more so. They deserve a monopoly! (Right...?)

With the government in control of minting operations it will probably have the face of the government officials on it. (Not a pretty sight, to say the least!) Another change will be the names of these coins. Instead of terms referring to these coins in reference to weight units, they will almost certainly be replaced with other names that distort the actual means to measure "their value" relative to each other. That is to say, to quote Murray Rothbard------"Instead of using grains or grams of gold or silver, each State fostered its own national name in the supposed interests of monetary patriotism: dollars, marks, francs, and the like." [What Has Government Done to Our Money, p 70] The public at large with myopic credulity will start to judge that money and the government are interlocked and unbroken operations. It is then governments have always started to debase money. Weight and quality therefore decreases. What the government extracts from this, government will add to its own pocket and at the expense at the public at large. With no doubt at all, this just comes to show that any kind of original assertion that such an industry must be socialized for the public's protection completely falls flat as blatantly absurd. Under free market conditions, such activity would be considered fraud and even if it did occur (man being what he is----imperfect) would be severely limited to a complete stop because of competition. Competitive conditions would allow people to seek honest and high quality companies. Such a possibility is, by definition, not possible under governmental management.

For historical examples of debasement, here is Rothbard:

Rapid and severe debasement was a hallmark of the Middle Ages, in almost every country in Europe. Thus, in 1200 A.D., the French livre tournois was defined at ninety-eight grams of fine sliver; by 1600 A.D. it signified only eleven grams. A striking case is the dinar, a coin of the Saracens in Spain. The dinar originally consisted of sixty-five gold grains, when first coined at the end of the seventh century. The Saracens were notably sound in monetary matters, and by the middle of the twelfth century, the dinar was still sixty grains. At that point, the Christian kings conquered Spain, and by the early thirteenth century, the dinar (now called maravedi) was reduced to fourteen grains. Soon the gold coin was too light to circulate, and it was converted into a sliver coin weighting twenty-six grains of sliver. This, too, was debased, and by the mid-fifteenth century, the maravedi 1.5 silver grains, and again too small to circulate. [pp 71-2]

Legal tender laws, in short, were created to try to make sure that money transactions would not take into account government's debasement and mismanagement. With these laws people were forced to trade in terms of what was officially declared by the State. One could no longer judge money in terms of its weight or quality. But, obviously, doing this would only reinforce "bad" money to replace "good" money in the market place. Gresham's Law would come into effect. Such action is nothing but a form of price control. Contra economic ignorance most people have, a price control (be it on housing or job wages) does not overturn the laws of economics----anymore than the quadratic formula to a second degree polynomial can be overturned. Something that is artificially undervalued will then be driven out of the market place to be overrun with that which is artificially overvalued.

Rothbard sums it up:

Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. ... “Gresham’s Law”----[tells us] that an artificially overvalued money tends to drive an artificially undervalued money out of circulation----is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other. Maximum price causes a shortage----disappearance into hoards or exports----of the currency suffering the maximum price (artificially undervalued), and leads in circulation by the overpriced money. [p 72]

Bimetallism is a vivid illustration of this. (More on this in a bit.) This economy would have two moneys living side-by-side.* Say they are gold and silver. Gold is used in large transactions and silver in smaller ones.

*(Although this is unlikely in a totally free market that has sufficiently developed into a very complex and advanced division of labor. This is because with two moneys, in effect, there would be a kind of "barter" between them. Only relatively less complex markets could, for a time, have two moneys. The only reason an economy can, in "the long run," hold onto two moneys is with interventions and distortions from a statist economy.)

To take a small step back, free markets are good because they are free. Earth is not the Garden of Eden: Life is not constant nor do goods exist in infinite supply. A good is considered an economic means because it is used in the attainment of substituting a better state of affair for a lesser one. It is used as an economic means as such only because it is scarce; otherwise it would not be considered an economic good.  In the "real" world of scarcity and uncertainty, unlike the Garden of Eden, supplies and demands change. So too with money: there is a supply and a demand. It is like any other commodity that is subject to the market and economics. (The difference is that, basically, demand comes from its use as a medium of exchange unlike something to be consumed. Its value is relative to the infinite possible exchanges that can be made with it. It is relative to all of the other "regular" goods and services, and hence the supply of a hard free market money does not matter once it is established. No social benefit come from an increased supply. On the other hand, an increase in the supply of a "regular" good does---i.e., it increases the standard of living.) Artificially trapping them in some statist program only leads to practical failure.

Placing a kind of price control (bimetallism) on the relationship, for example, between our gold and silver society would only distort the market signals. The ratio between how much silver trades into gold (and vice versa) can never be constant. (Life is not constant!) Government cannot change that fact. In the past when governments were to put an exact ratio between the two all that would occur is that when one, be it gold or silver, was artificially overvalued it would be overly used and the one artificially undervalued would be stored up and driven off the market. And since life is indeed not constant, flip-flops take place to what is being undervalued and what is being overvalued. Under that condition, they switch to which is in the market and which goes underground. As we can see, the price control makes the market chaotic---all in the name for making it "stable"!

Here we see a constant with government....Government comes in and all of these bad consequences and unintended  consequences occur. Next the call for more government involvement is asked for. Then more bad consequences occur. Next more government is called for. ... Etc.

The cycle must be stopped. The answer to previous regulation is not more regulation but deregulation. (This means getting government out of the picture. No "in between" solutions will work or are acceptable.)

Well, the process should have been stopped. Instead to "fix" this chaotic bimetallism event, the government just chopped off one of the moneys and forced everyone to stick with just the one.

So, to recap: Government takes over minting. It debases money. Creates legal tender laws. The next step is inflation a.k.a. counterfeiting. And then the creation of a central bank. And ultimately moving to a completely backless paper money.

To do this it must encourage the use of paper money instead of gold as a substitute. Government gives paper tickets or "token coins" as substitutes for "their" gold. But they start to print more tickets than are backed in gold. Counterfeting happens. Wealth redistribution happens. The monopolization and cartelization of the banking system must then take place. But a reasonable question to ask, is this: Why would the banks cooperate with a scheme just to enrich the government? It is because they will benefit too!

In a free market, how are banks beneficial? Firstly, and most obviously, they safe keep one's money. They are, in this regards, similar to renting out storage space. (From this it is straightforward to see that if a bank engages in handing out more paper tickets than gold it holds in storage, it is no different morally than a storage place taking one's items away from their customers as they promise to guard them.) Safekeeping also allows for a more easily allowable environment for exchange of money between individuals. Secondly, banks provide increased transactions between savers and entrepreneurs. People can then more readily participate in the capitalistic process. However, one of the problems with the banks is that they also got into the business of facilitating "investment" transactions between the government. And these ties between the banks and government kept enlarging.

Here is what Rothbard had to say:

The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip-deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their client’s government bonds. Hence, the powerful and baleful political influence of investment bankers in the nineteenth and twentieth centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States. [Makings Economic Sense; p 278]

Today banks

make money by literally creating money out of thin air, nowadays exclusively deposits rather than banking notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.) [pp 279-80]

Example:

Let’s see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I “lend out” $10,000 to someone, ether for consumer spending or to invest in his business. How can I “lend out” far more than I have? Ahh, that’s the magic of the “fraction” in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Joes borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don’t have to save up the money myself, but simply can counterfeit it out of thing air. ... Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation’s money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way. [p 280]

Of course, there is a limit to such activity without the Fed. Under competitive conditions, a bank could easily go bankrupt. All for the good, though, because profit-and-loss is an important part of a free market system. When government instead makes inflation uniform, it vaporizes away restraint, and then produces moral hazard whereas banks engage in riskier activity than they would otherwise do.

Back to Rothbard:

The bluntest way for government to foster inflation, then, is to grant the banks the special privilege of refusing to pay their obligations, while yet continuing in their operation. While everyone else must pay their debts or go bankrupt, the bands are permitted to refuse redemption of their receipts, at the same time forcing their own debtors to pay when their loans fall due. The usual name for this is a “suspension of specie payments.” A more accurate name would be “license for theft;” for what else can we call a governmental permission to continue in business without fulfilling one’s contract? [What Has Government Done To Our Money?; p 78]

The War of 1812 was the first example here in America:

Most of the country’s banks were located in New England, a section unsympathetic to America’s entry into the war. These banks refused to lend for war purposes, and so the government borrowed from new banks in the other states. These bands issued new paper money to make the loans. These banks issued new paper money to make the loans. The inflation was so great that calls for redemption flooded into the new bands, especially from the conservative nonexpanding banks of New England, where the government spend most of its money on war goods. As a result, there was a mass “suspension” in 1814, lasting for over two years (well beyond the end of the war); during that time, banks sprouted up, issuing notes with no need to redeem in gold or silver. ... This suspension set a precedent for succeeding economic crises; 1819, 1837, 1857, and so forth. [pp 78-9]

It is this that fostered what has been called "wildcat banking." Typically statists will point to this as a so-called "market failure" whereas the government needs to come to the rescue. Yet, how could government possibly be the solution? (Again, calling for additional regulations on top of previous regulations is only to call for more trouble. It is like a man hitting one's head a second time to "cure" the first time he hit his own head.) Like usual under these conditions of econom