Cartels: Economists and Central Bankers

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A cartel is
an organization made up of senior managers or their representatives
in an industry. Established members of an industry fear competition
from newcomers. Newcomers will cut prices and thereby reduce existing
companies’ profit margins. So, cartels seek government protection
against newcomers. In this quest, they give lots of money to politicians’
campaigns. Then, having bought access, they seek to persuade politicians
to establish legal barriers to entry in their industry. These barriers
are imposed in the name of the public interest. Their justification
is that they raise standards of production. The sales pitch is this:
"Higher standards require higher prices."

In any textbook
on introductory economics, the author includes one or more chapters
on the phenomenon of the cartelization of industries and professions.
Economists discuss cartels and monopolies in terms of government
intervention into the free market.

Cartels are
created by legislation which is defended in the name the public
interest. Economists generally are suspicious of claims that invoke
the public interest. All modern economic theory, beginning with
Adam Smith’s Wealth
of Nations
(1776), begins with this presupposition: "Individuals
act in their self-interest, however each individual defines his
self-interest." Smith was hostile to business cartels. He had
nothing good to say about such associations.

In general,
self-interest is defined as the pursuit of money, although the economist
will add a few sentences on self-interest as encompassing more than
money. But if you read an economic textbook, it’s mostly about money.
It is filled with graphs: price (Y axis) and quantity (X axis).

Economics as
a science is seen by its practitioners as having progressed by identifying
more and more institutions as governed by personal self-interest.
Yet when economists come to banking and education, they refuse to
extend this traditional analysis. They either remain silent or invoke
the mantra of public interest.

You will search
in vain for a chapter on education as an oligopoly within the context
of tax-funding, laws mandating education up to age 16, and government
licensing of college-accreditation agencies. Somehow, economics
textbook authors skip over any analytical discussion of this, the
largest sector of the American economy.


There is a
chapter on central banking. Here, the entire conceptual apparatus
which the author used in the other chapters is quietly abandoned.
Yet there is no doubt, analytically speaking, that a central bank
is a government-licensed monopoly. Yet the author never uses this
word to explain central banking in general or the Federal Reserve
System in particular. If there is an exception to this rule, I have
not seen it.

In the other
chapters, economic textbooks describe how special-interest business
groups organize to pressure the government to intervene into market
pricing, so that existing businesses are favored at the expense
of those kept out by government-created barriers to entry. They
show how this restricts the freedom of new producers to offer consumers
better deals. It also restricts existing producers from offering
discounts or other arrangements to consumers.

Free market
economists generally argue that all cartels break down over time
because "cheating" — in a non-pejorative sense —
takes place. Consumers eventually persuade cartel members to cheat
by offering consumers better deals. None of this analysis is applied
to central banking. Yet it explains the push toward international
central banking and currency unions. The cartel’s member banks need
ways to forestall cheating by each other.

textbooks explain the Federal Reserve System as an organization
created by politicians and run by disinterested economists and commercial
bankers whose goal is to serve the public interest. How does it
do this? Through expert scientific economic analysis which the voters
do not possess. Because the central bank is legally semi-independent
from the government that created it, this hampers voters from influencing
monetary policy through the Congress or the President.

As faithful
defenders of democracy, the authors would affirm: "Military
affairs are too important to be left to the generals." Yet
they mentally affirm this position: "Monetary affairs are too
important NOT to be left to central bankers." (They would do
much the same with higher education, if they included a chapter
on education, which they don’t.) They refuse to say this openly,
because the blatant inconsistency of their position — generals
vs. central bankers — would become evident, but this is the
operating presupposition which undergirds every college-level economics

What we never
see is the chapter on central banking in the section of the textbook
on "Monopoly, Oligopoly, and Cartels." Yet there is nothing
analytically that separates the monopoly of central banking from
any other government-licensed monopoly. There is nothing conceptually
that distinguishes the cartel of commercial banking from any other

A few of the
authors may have written articles or specialized books on one of
these two issues, in which they apply the presumption of self-interest
to education or central banking. But when we read their textbooks,
we find no such analysis.


An enquiring
person might ask this: "What is the economic self-interest
of textbook publishers?" The obvious answer: "To sell
a lot of textbooks at the normal mark-up of ten to one." But
no economics textbook ever asks this. (Don’t ask. Don’t tell.)

The next question:
"How is it that the only segments of the book publishing industry
that has a ten-to-one mark-up are the textbook market and the market
for academic books bought only by university libraries?" (Don’t
ask. Don’t tell.)

There is never
a section in the chapter on oligopoly on the textbook industry as
an oligopoly within the framework of an academic economic cartel.
(Don’t ask. Don’t tell.)

There is never
a section on government-licensed regional accreditation agencies
as barriers to entry against new universities. (Don’t ask. Don’t

There is never
a chapter on tax-funded education within the context of (1) self-interested
politicians in the market for votes and (2) self-interested, university-certified
professors seeking above-market salaries. (Don’t ask. Don’t tell.)

There is never
a chapter on fractional reserve banking as a form of fraud, in which
depositors are promised that they can get their money on demand
at any time. (Don’t ask. Don’t tell.)

There is never
a chapter on fractional reserve banking as theft, in which holders
of money lose purchasing power through monetary inflation’s effect:
higher prices. (Don’t ask. Don’t tell.)

There is never
a chapter on the Federal Reserve System in terms of the what the
textbooks say is the supreme economic issue: the self-interest of
the promoters of the Federal Reserve Act. (Don’t ask. Don’t tell.)

There is never
a section on the Federal Reserve System as a government-licensed
monopoly which was created because of political pressure put on
politicians by commercial bankers as a way to protect fractionally
reserved commercial banks from bankruptcy resulting from their depositors’
bank runs. (Don’t ask. Don’t tell.)


We are all
familiar with such sayings as these: "Don’t bite the hand that
feeds you." "He who pays the piper calls the tune."
"If you take the king’s shilling, you do the king’s bidding."
These are all consistent with the principle of economic self-interest.

The textbook
publishing companies do not hand academic economists a form in which
they are instructed not to write a chapter on the economics of education.
The committees of peers who read submitted manuscripts do not reject
manuscripts because authors included such a chapter. The system
is more subtle than this.

Textbooks are
supposed to cover only what is relevant to first-year students.
A textbook cannot cover everything. So, it must skip over topics.
The litmus test of orthodoxy is not just how certain topics are
covered. It is also which topics are not covered. The economics
profession considers the question of tax-funded education and accreditation
as beyond the interest of the profession. So, textbooks avoid the
topic. Only in monographs and journal articles are such topics ever

If there is
a university press monograph written by a Ph.D.-holding economist
that attacks all tax-funded education on the basis of the State’s
coercion as misallocating resources, I have never come across it.
A free market economist’s argument at best recommends vouchers:
the economic equivalent of food stamps that are used to pay for
pre-collegiate educational services supplied by State-certified
schools. Vouchers are the economist’s attempt to provide parental
choice in a world of compulsory attendance laws and confiscated
tax money. His goal is this: "to gain an increased degree of
economic efficiency and personal freedom in a world of universal
and unquestionable educational coercion." In short, the economist
wants to improve a system which rests on people in uniforms who
stick guns in citizens’ bellies.

You will find
no article in a peer-reviewed journal favoring tax money going to
churches. You will also find no article in a peer-reviewed journal
favoring the closing of all tax-funded schools. Yet, analytically
speaking, there is no difference between tax-funded churches and
tax-funded schools. It was no accident that Massachusetts in 1833
was the last state to outlaw tax-funded churches, and four years
later established America’s first tax-funded public school system.


What about
banking? To leave out a discussion of money and banking would be
inconceivable in an economics textbook. So, the publishers follow
the guidelines of the committees.

Textbook committees
are made up of senior academicians who have risen in their fields
in terms of a screening process. This screening process begins in
college: the introductory course. It extends to upper division,
then graduate school, then the tenure-granting process. Certain
questions in each academic discipline are not subject to questioning.

  • Astronomy:
    the Big Bang
  • Biology:
    evolution through natural selection
  • American
    history: Lincoln and F.D. Roosevelt as visionaries
  • Economics:
    the necessity of central banking

Whenever a
professor challenges a central presupposition of his academic guild,
he will be relegated to the outer darkness: teaching undergraduates,
or worse, teaching lower division students.

Such was the
fate of Murray Rothbard through most of his career. He not only
denied the legitimacy of central banking, he also demonstrated that
it was fraudulent, a monopoly protecting a cartel, and the creator
of the boom-bust economic cycle. He wrote what no other economist
had ever written, an upper division-level textbook on money and
banking that demonstrated all of these points. No textbook publishing
company would touch it. It was published by a tiny, short-lived
company that was owned by a hard money newsletter publisher. Its
title was guaranteed to kill college sales: The
Mystery of Banking
. It went out of print within a year or
two. Only because of the web can you obtain it today. It’s offered
as a free download. I wrote the Foreword.

So, anyone
in a position to write an economics textbook knows what is required
before he begins writing. He looks at half a dozen textbooks to
see what is covered and what isn’t. Then he begins his outline.

He knows there
will be a screening committee hired by the publisher. He knows that
a committee will veto any textbook that breaks with what is representative
in the profession. He knows that textbooks are not supposed to be
creative. They are supposed to be adopted in as many schools as
possible. He also knows that the most successful economics textbook
in history is Paul Samuelson’s Economics.
There is a saying in economics departments: "Nobody ever got
fired for assigning Samuelson."

They all should
have been fired for assigning Samuelson. The fact that they weren’t
testifies to the nature of the quid pro quo underlying the educational
oligopoly: what the State is buying when it creates barriers to
entry (accreditation) and funding.


tell us to follow the money. They offer only one exception: the
source of the money.

They tell us
to beware of claims of actions "in the public interest"
regarding industry associations that seek government regulation
of their industry. They recommend these investigative strategies.
Ask: "Who wins? Who loses?" "Who pays?"

But then, with
nary a nod to inconsistency, they cease following the money whenever
they get to their discussion of fractional reserve banking.

Anyone who
raises the question regarding the beneficiaries of banking regulation
is going to see his textbook’s manuscript come back.

Anyone who
follows the money from the 1907 panic to the 1913 Federal Reserve
Act is unlikely to receive tenure.

It would seem
legitimate to ask the question: "Why don’t economists follow
the money when it comes to the creation and distribution of money?"
There is an answer: economic self-interest.

When, after
nine decades, no economist with academic tenure has asked this question
in print, let alone suggesting the obvious answer, the young economist
who truly believes in economic self-interest should ask himself:
"Why is it not in my economic self-interest to investigate
the economic self-interest of members of the economics profession?"

If he pursues
this logically, he will eventually have to ask this: "What
agency is in a position to impose negative sanctions on those who
follow the money?" If this were a segment of The Sopranos,
the answer would be obvious.

But this is
not The
. The people we are talking about have serious power
compared to The Sopranos. There are lots of books and movies
exposing the Mafia. There are no movies or books on the Mafia and
the public interest.

Power is the
ability to operate on your own terms without fear of exposure. It
is the ability to persuade shapers of public opinion not to follow
the logic of their convictions.

In the 1931
movie, Dracula,
the vampire was repelled by three things: a crucifix, a mirror (no
reflection), and sunlight. In other words, he was repelled by the
symbol of Christianity, self-awareness of his status as half-dead,
and exposure.

It is much
the same with central banking.


Those few people
who understand the inherent moral fraud in all fractional reserve
banking find that they are not understood by their peers. They also
find that their arguments are not taken seriously by academic economists.

They find it
difficult to explain why the entire profession has made a monumental
methodological error in not applying the theory of monopoly to central
banking. The answer is close at hand: self-interest.

The doctrine
of self-interest is the academic economists’ equivalent of the mirror.
They want everyone else to look into it. They refuse to look into
it themselves.

The doctrine
of economic self-interest, when pursued consistently, eventually
raises the question of conspiracy. Conspiracy is the economists’
equivalent of the satanist’s crucifix: an inverted Christ. They
cry out, "conspiracy theorist!" whenever they find someone
who follows the money back to the source of the money. This accusation
usually works. Every Ph.D.-holding academic turns aside his face
and holds up his cape — or leather elbow patch — to shield
himself. Rothbard refused. "Conspiracy theorist? You’ve got
it!" he chortled. The economics cartel could never deal with
him successfully.

for sunlight, that would be a comprehensive series of studies on
the history and economics of collegiate accreditation. It would
also be an analysis equating tax-funded schools with tax-funded
churches. With this, the economists would have to go back into their

If you ever
read an economics textbook, think of the author as Bela Lugosi.
This will help you to understand the chapters on money and banking,
as well as the non-chapters on education.

11, 2007

North [send him mail]
is the author of Mises
on Money
. Visit
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible

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