Imagine you’re living in the 15th Century. You’re witnessing a revolution that will profoundly change the world. This revolution doesn’t involve swords and cannons, but rather words and books. The cause of this upheaval is the most important invention in more than a thousand years: the printing press, by Johannes Gutenberg.

Within a few decades of its launch, you see the printing press transform the field of bookmaking in ways previously unimaginable. Printed books are far easier, faster, and less costly to produce than the books that had preceded them, which had to be laboriously copied, one page at a time, by hand. In the time it took to copy one page by hand, the printing press could turn out hundreds or thousands of copies of that same page, thereby making it possible for the first time in history for almost anyone to own books. Within a century of its creation, the printing press will spread throughout Western Europe, producing millions of books, spurring the economic development of industries related to it, such as papermaking, and spreading literacy and knowledge around the world. The printing press will make possible the rapid development of education, science, art, culture – and the rise of mankind from the Medieval period to the Early Modern age.

Let us further imagine that not everyone in the 15th Century is happy about this innovation. Unable to match the benefits of the printing press, the producers of hand-copied books are outraged. The scribes are being put out of business. The penmanship schools that train the scribes, the quill makers that supply their pens, and the manufacturers of the stools and drafting tables that literally support them are seeing a drop in sales. The hand-copied books are now priced too high to compete with the Gutenberg press, so their publishers are experiencing no growth, with no new capital coming into their industry. The sales force for the hand-copied books is also in despair, with their customers now ordering the new printed books from the Gutenberg people, and their lost income being money they can no longer put into their communities. Alas, the monopolistic monster, the printing press, is taking over.

The hand-copied book interests complain bitterly to the Great Sages at their Hallowed Council of Justice. “Sires,” they cry, “you must stop the predatory pricing and scorched earth policies of the Gutenberg press. It’s wiping out the competition. How can this be in the public interest?”

Fast-forward to the 21st Century, and we see another revolution that is turning the book industry topsy-turvy – the transformation from printed books to electronic ones. This revolution is spearheaded by a modern-day Gutenberg, Amazon.com, the pioneer of the e-book, the Kindle device for reading it, and the online marketplace for publishing and selling it.

What Amazon has accomplished is truly amazing. With Kindle, it has eliminated the industry middlemen that come between the writer and reader of a book – from agents to publishers to distributors to wholesalers to brick-and-mortar bookstores. Kindle has also eliminated the need for a physical inventory of books, with its high printing, warehousing, and shipping costs. These innovations have resulted in far less expensive books now available to consumers. And the new marketplace of e-books has been especially advantageous for small and self-publishers unable to get their books accepted through the traditional channels, who now have an avenue open to them for reaching customers directly.

The popularity of these ground-breaking innovations is enormous, with Kindle books now outselling the combined total of all paperback and hardcover books purchased from Amazon.

Without any middlemen or gatekeepers, with virtually no costs involved, and with self-marketing possible through social media and other Internet channels, electronic publishing is creating a robust market for new writers and books. For example, one novelist who was unable to find an agent or publisher has self-published two of her novels on Kindle. With her books priced at $2.99 and with a 70-percent royalty from Kindle, she earns approximately $2 per book. She is selling 55 books per day, or 20,000 books per year, which amounts to sales of $60,000 and royalties to her of $40,000. (As a simple comparison, without getting into the complexities of book contracts, this author might earn a royalty of approximately 10-percent from a traditional publisher, which would require her to achieve sales of $400,000 to earn as much money as she does self-publishing on Kindle.) Other authors are doing even better, including two self-published novelists who have become members of the Kindle Million Club in copies sold. These writers started with nothing – they were not among the favored few selected by agents and trade publishers, and they had no publicists or book tours – yet, thanks to electronic publishing, they are making a living, with some achieving stunning success.

The low-pricing of e-books, scorned by the traditional publishing interests, is the emerging writer’s new ticket of admission into the book industry. While readers may be highly reluctant to risk $25 in a bookstore to try a new writer’s hardcover work, they are buying the e-books of new writers priced at or around $2.99 on Kindle. Writers are finding their fans and making money at these prices, and readers, judging by Amazon’s “customer reviews,” are happy with these low-cost books.

The writer-publisher in America dates back to our founding, promoting vigorous free speech and intellectual entrepreneurship. Benjamin Franklin’s Poor Richard’s Almanac and Thomas Paine’s Common Sense, both best-sellers in their day, were self-published. If the American Dream is to start with nothing but one’s own talent, motivation, and hard work, and from that achieve success, then in recent times this dream was essentially closed to writers who failed to win the favor of the agents and trade publishers. Prior to the e-book revolution and online marketing spurred by Amazon, there was a stigma attached to self-publishing, despite its long and distinguished tradition in America. The major trade reviewers would not consider a self-published book, which meant that libraries and bookstores, which order based on the reviews, would not carry it. Now, e-books are not only taking the stigma out of self-publishing, but arguably making it the preferred route. Amazon has opened the avenue to pursuing the intellectual’s American Dream once again.

Yet the same medieval attacks projected above against the printing press are now being launched against Amazon, with the attackers imploring the modern-day “sages” at the Justice Department to stop the new menace called Amazon.

Leading the charge back to the Middle Ages is The New York Times. Two articles appearing on the front page of its business section on April 16, 2012 illustrate what happens when the Luddites, i.e., those hostile to technological development, meet the statists, i.e., those who look to achieve their ends through government force.

“Daring to Cut Off Amazon” by David Streitfeld praises a publisher-distributor for pulling its printed books out of Amazon. (Not only does Amazon discount e-books, but also the printed books it so successfully sells.) The company is Educational Development Corporation, whose CEO Randall White laments, “Amazon is squeezing everyone out of the business. . . . They’re a predator. We’re better off without them.”

One of Mr. White’s concerns was that his sales people were losing business because their customers were buying the company’s books cheaper from Amazon. Sales consultant Christy Reed comments about her local customers: “Yes they got the books for less [from Amazon]. But my earnings go back into our community. Amazon’s do not.” It apparently didn’t occur to her that by buying books cheaper on Amazon, her former customers have more money to spend in her community, and the Amazon staff who replaced her have more money to spend in their communities. But where spending does or doesn’t take place is not the main economic point. The real point is that for the same total spending in the economic system as a whole, people now obtain more books and have money left over to buy more of other things.

“Book Publishing’s Real Nemesis” by David Carr cites the recent antitrust suit brought by the Justice Department against five publishers and Apple, charging they engaged in the price-fixing of e-books. Instead of condemning this police action against production and trade, Mr. Carr bemoans the fact that the strong arm of the law didn’t go far enough to grip the “monopolistic monolith” Amazon, which “has used its market power to bully and dictate.” Mr. Carr considers it bullying and dictating when a private company (Amazon) sets its terms, and other players (the publishers) are free to do business with it or not. But it’s not bullying and dictating when the compulsory power of the state intervenes to set economic terms and punish businesses arbitrarily?

Mr. Carr quotes Authors Guild president and best-selling author Scott Turow, who worries that the club of authors and publishers will shrink. (Really?) “It is breathtaking to stand back and look at this and believe that this is in the public interest,” complains Mr. Turow about Amazon’s success. He also wonders if Amazon will drive the price of books so low that there will be “no one left to compete with them.” Apparently the “public interest” doesn’t include the millions of customers who choose to buy the mother load of affordable e-books from Amazon and who may not welcome his solicitous concern over the low prices they’re paying. And apparently the “public interest” doesn’t include the fresh crop of new authors now sprouting through e-books, without the benefit of the major publishers and lucky breaks that he had.

The Luddite tone of the attacks against Amazon rings like the following: The electric light will replace the candle. The car will replace the horse-and-buggy. The cure for tuberculosis will put the sanatoriums out of business. The computer will replace the typewriter. The statist element lies in the attackers’ desire to enlist the police power of the state to stifle the competition and artificially prop up their businesses.

Granted, it may be disappointing and painful for those whose jobs are thinning out or becoming obsolete due to technological advancements, but that can’t justify government intrusion. Morality is on the side of the people engaged in voluntary trade and against those who urge the Justice Department’s encroachment into their industry. The charges levied against Amazon – as a predator, monopolist, bully, etc. – actually do not apply to a company engaged in voluntary trade, no matter how big its market share, but rather to those trying to preserve their interests through government action. In the case of Amazon, the ones trying to restrain trade are the attackers, themselves. Moreover, not only is morality on the side of Amazon, but so too are the long-run material self-interests of everyone in the economic system. Everyone working will earn money, but, thanks to Amazon, and every other innovator of better products or more efficient methods of production, the buying power of the money he earns will be greater. The enemies of productive innovators are, by the same token, anti-social enemies of the general buying public.

The complaints lodged against Amazon would be harmless if the complainers could not use the government to advance their cause. But they can, through antitrust laws. These laws give the state the power to evaluate the price of a company’s product in relation to its competition and to punish companies – severely and arbitrarily – for prices deemed to be unacceptable. If a company’s price for its goods is deemed to be too low, it can be punished for being predatory and destructive of competition. If the price is deemed to be the same as its competitors, it can be punished for collusion and price-fixing. If the price is deemed to be too high, it can be punished for being monopolistic.

Using antitrust laws against the book industry poses an additional grave danger over and above their use against other industries. Because the book industry represents the dissemination of knowledge and ideas, an attempt to regulate the price of books abridges the free flow of ideas and violates our First Amendment right to freedom of the press.

Anyone interested in the survival of a robust book industry – or any other industry – with the free flow of products, the creativity of new business methods, and the preservation of economic freedom and property rights, must support the repeal of these oppressive laws.

The market – comprising the voluntary decisions of millions of free people – determines the pricing of books, the form a book will take, the device it will be read on, the winners and the losers of the competition. If the market chooses an innovative technology and a new direction, then so be it. Let the Medieval bookmakers copying their books by hand and their contemporary counterparts using needless paper and ink, warehouses, delivery trucks, and bookstores, adopt the advances or quit! Totally unlike competition in the animal kingdom, in which the losers are eaten or die of starvation, the losers of an economic competition do not die. At worst, they must relocate in the economic system at a lower level. But in an economic system free enough rapidly to progress, as ours has been for most of the last two and a half centuries, even the lowest paid workers enjoy a standard of living that surpasses that of the kings and emperors of earlier ages. This is why the Gutenbergs of the world must be left free to dream, to create, and to trade without fear of punishment.

Gen LaGreca is the author of Noble Vision, a novel that won a ForeWord magazine Book-of-the-Year Award and was a finalist in the Writer’s Digest International Self-Published Book Awards. After being rejected by dozens of agents and unable to find a trade publisher, it now enjoys steady ranking in the Top 100 Best Sellers in medical and political genre fiction on Kindle. George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his blog and his website.

The Best of George Reisman

• Introduction
• Credit Expansion, Standard Money, and Fiduciary Media
• The Stock Market and Real Estate Bubbles
• Evasion of Responsibility for the Bubbles
• The Saving Glut Argument
• The Non-Existence of a Saving Glut
• Current Account Deficits as a By-Product of the Increase in the Quantity of Money
• Net Saving as a By-Product of the Increase in the Quantity of Money
• Summary and Conclusion

Introduction

Readers who are already familiar with the nature of credit expansion and the concepts of standard money and fiduciary media should skip the first section. Readers who are also already familiar with the role of credit expansion and fiduciary media in generating the stock market and real estate bubbles should skip the second section as well and proceed directly to the third section “Evasion of Responsibility for the Bubbles.”

Credit Expansion, Standard Money, and Fiduciary Media

Since the mid-1990s, the United States has experienced two major financial bubbles: a stock market bubble and a housing bubble. In both instances, the bubble was inaugurated and sustained by a process of massive credit expansion, i.e., the lending out of newly created money by the banking system, operating with the sanction and support of the country’s central bank, the Federal Reserve System.

The concept of credit expansion rests on two further concepts: standard money and fiduciary media. Standard money is money that is not a claim to anything beyond itself. It is that which, when received, constitutes payment. Under a gold standard, standard money is gold coin or bullion. Under a gold standard, paper notes, which were claims to gold, payable on demand, were not standard money. They were merely a claim to standard money, which was physical gold. The dollar was defined as a physical quantity of gold of a definite fineness, i.e., approximately one-twentieth of an ounce of gold nine-tenths fine.

Today in the United States, standard money is the irredeemable paper currency issued by the United States government. That money is not a claim to anything beyond itself. Receipt of such money today constitutes final payment.

The total of standard money today is the sum of the outstanding quantity of paper currency plus the checking deposit liabilities of the Federal Reserve System. Since the Federal Reserve has the power to print as much currency as it likes, and thus is always in a position to redeem its outstanding checking deposits in currency, these checking deposit liabilities can properly be viewed as a kind of different denomination of the paper currency, much like hundred dollar bills that are to be redeemed for notes of smaller denomination, or one-dollar bills that are to be redeemed for notes of larger denomination. Thus the total supply of standard money is to be understood as the sum of the supply of paper currency in the narrower sense plus the checking deposit liabilities of the central bank.

These two magnitudes, currency plus checking deposit liabilities of the central bank, when taken together, are known as the “monetary base.”

In December of 1994, the monetary base was $427.3 billion. In December of 1999, it was $608 billion. In December of 2007, it was $836.4 billion. In all years prior to 2008, the overwhelming portion of the monetary base consisted of currency. For example, in December of 2007, currency was $763.8 billion, while, as just noted, the monetary base as a whole was $836.4 billion.

A portion of the currency outstanding and a portion of the checking deposit liabilities of the Federal Reserve constitute the reserves of the banking system. These reserves are the standard money that the banks possess and can use to meet the withdrawals of depositors requesting currency. The reserves are also used to meet the demand of other banks seeking to redeem net balances accruing in their favor in the process of the clearing of checks.

In December of 1994 such reserves were $61.36 billion; in 1999, they $41.7 billion; in December of 2007, they were $42.7 billion.

Normally, as the overall quantity of money in the economic system increases, bank reserves increase more or less in proportion. The fact that reserves were almost one-third lower in December of 1999 than in December of 1994, and then barely higher in December of 2007 than they were in December of 1999, despite major increases in the quantity of money over these years, is a major anomaly. It reflects the long-standing, deliberate policy of the Federal Reserve System of reducing and even altogether eliminating reserve requirements.

As a recent scholarly paper noted,

The Depository Institutions Deregulation and Monetary Control Act of 1980 had begun phasing out interest-rate ceilings on deposits and modified reserve requirements in complex ways. Combined with subsequent administrative deregulation under Greenspan through January 1994, these changes left all the financial liabilities that M2 adds to M1 — savings deposits, small time deposits, money market deposit accounts, and retail money market mutual fund shares — utterly free of reserve requirements and allowed banks to reclassify many M1 checking accounts as M2 savings deposits. M2 and the broader measures became quasi-deregulated aggregates with no legal link to the size of the monetary base.1

The concept of standard money underlies the concepts of fiduciary media and credit expansion. As I wrote in Capitalism, “Fiduciary media are transferable claims to standard money, payable by the issuer on demand, and accepted in commerce as the equivalent of standard money, but for which no standard money actually exists.”2

$95 $80

The overwhelmingly greater part of our money supply today consists of fiduciary media in the form of checking deposits of one kind or another. For example, as of December 2007, the total money supply of the United States, i.e., currency plus bank deposits of all kinds that are subject to the writing of checks, including the making of payments by debit card, was $6901.9 billion;3 at the same time, the monetary base was $836.4 billion. Accordingly, the amount of fiduciary media in the United States was equal to the difference, which was $6065.5 billion. This was the sum of money representing transferable claims to standard money, payable on demand by the various banks that issued them, accepted in commerce as the equivalent of standard money, but for which no standard money actually existed.

The only standard money that the banks had available with which to redeem their checking deposits was $42.7 billion in standard money reserves. These $42.7 billion of reserves were the standard-money backing for a total of $6108.2 billion checking deposits, i.e., deposits equal to the sum of $42.7 billion + $6065.5 billion. To say the same thing in different words, there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.

The quantity of fiduciary media in existence at any time represents the cumulative total of all of the credit expansion that has taken place in the country’s money supply up to that time. It represents the sum of all of the loans and investments that the banking system has made based on the foundation of the creation of money out of thin air. The difference between the amount of outstanding fiduciary media at two points in time represents the credit expansion that has taken place in the interval.

The simplest way in which to understand the process of the creation of fiduciary media and credit expansion is to imagine a deposit of standard money in the form of currency into a checking account. After making the deposit, the depositor has just as much spendable money in his possession as he did before making it. Instead of a roll of currency, he has a checking balance of equal amount. Either way, he can spend the same amount of money. Before making his deposit, he would have had to peel off bills from his roll in order to make payments. Now, instead, he writes checks and makes payment by check. Instead of his roll of currency diminishing each time he peels off a bill, his checking balance diminishes each time he writes a check. In the one case, the spendable money in his possession is his roll of currency; in the other it is his checking balance.

Up to this point in our imaginary scenario, there has been no creation of fiduciary media and no credit expansion. The money supply does not exceed the quantity of standard money. In the one case, before making his deposit, the standard money is in the possession of an individual. After the individual makes his deposit and holds money in the form of a checking balance, the same quantity of standard money is in the possession of his bank. Under such conditions, the quantity of money in the economic system is equal to the quantity of standard money held either by individuals as holdings of currency, or by banks as reserves against the checking deposits of those individuals and equal in amount to the size of those checking deposits.

Fiduciary media and credit expansion enter the picture insofar as the banks in which standard money has been deposited proceed to lend out the standard money that has been deposited with them. To the extent they do this, borrowers from the banks now have spendable money in their possession which is in addition to the spendable money in the hands of the banks’ checking depositors. There has been a creation of new and additional money, which new and additional money represents fiduciary media and an equivalent expansion of credit.

The currency which the banks lend out can easily, and almost certainly will, be deposited. When it is deposited, the same process of the creation of fiduciary media and credit expansion can be repeated. Indeed, under the conditions largely created by Greenspan, checking deposits came to stand in a multiple of more than 160 times the standard money reserves of the banks. In December of 2007, there were $6901.9 billion of checking deposits backed by a mere $42.7 billion of standard money reserves.

In modern conditions, of course, banks do not lend currency. Rather, they simply create new and additional checking deposits for their borrowers. When the borrowers spend those checking deposits by writing checks of their own, the people who receive the checks in turn deposit them in their banks. Those banks then call upon the banks that have created the deposits, for payment. This entails a shifting of standard money reserves from the one set of banks to the other.

To the extent that all banks have engaged in the process of checking deposit creation, the reserve balances due from any bank may be more or less closely matched by the reserve balances due it from other banks. This is because the checks written by its customers to the customers of other banks will be more or less closely matched by checks written by the customers of other banks to customers of this bank. In such a case the only movement of reserves will be the net amount due in the clearing.

From December of 1994, prior to the start of the stock market bubble, to December of 2005, shortly before the end of the housing bubble, the quantity of fiduciary media increased from $1.91 trillion to $4.93 trillion. This represented a compound annual rate of increase in excess of 9 percent over the eleven-year period. From December of 1999, shortly before the start of the housing bubble, to December of 2005, the amount of fiduciary media increased from $3.25 trillion to $4.93 trillion, which represented a compound annual rate of increase of 7.21 percent.

The increase in the quantity of fiduciary media over the period as a whole is significant, not just the increase that took place over the period of the housing bubble itself. This is because fiduciary media created in the years prior to the housing bubble played an important role in financing that bubble. And the same was true of the role of fiduciary media created in the years prior to the stock market bubble in financing that bubble.

As interest rates rose in the latter parts of these two bubbles, vast checking balances created earlier, that had been held as though they were savings accounts, and on which a modest rate of interest was being earned, were drawn into the financing of stock market purchases in the one case and housing loans in the other. The transformation of these deposits from de facto savings accounts into de facto checking accounts was based on the combination of their having had the potential for check writing all along, together with a rise in the rates of return that could be earned by switching their use from a vehicle for savings into a vehicle for buying investments. The rise in rates of return in the one case was in the gains to be had from stock market investment; in the other, in rates of interest on various vehicles for financing housing and real estate purchases.

It might be thought that what I have said of the transformation of deposits on which checks could be written would largely apply also to genuine savings deposits, on which checks could not be written. For the rise in rates of return would provide the same incentive to move funds from them into more lucrative investments. This is true. But nevertheless, there is a crucial difference.

Before the savings deposits can be spent, they must first be converted into checking deposits. All of the checking deposits that come under the heading of M1, most notably those held at commercial banks, require that those banks hold significant reserves, typically in an amount equal to 10 percent of a bank’s total deposits in excess of $44 million. Savings deposits in contrast have not required the holding of any reserves whatever for many years, and even when they did require the holding of reserves, it was at a far lower percentage than applied to checking deposits.

As a result, any movement of funds from savings into checking accounts entails an increase in required reserves. To obtain these additional reserves, banks must sell various assets, the effect of which would be to reduce their prices and to raise their effective yields to the new buyers. Unless the Federal Reserve intervened to provide new and additional reserves equal to the increase in the need for reserves, the effect would be not only a rise in interest rates but a general tendency toward a contraction of credit. This last would result from the loss of reserves by banks whose reserves were already at the bare minimum necessary to conduct operations.

In contrast, the use of savings held in accounts with already existing check-writing privileges to make purchases does not require any additional reserves. The problem of a need for additional reserves arises only insofar as a net movement of funds might occur, through the clearing, from checking accounts of a kind requiring no reserves to checking deposits of a kind that do require reserves. Checking deposits with no legal reserve requirements are money-market deposit accounts and retail and institutional money market funds. Checks drawn on such accounts and then deposited in other such accounts do not require any additional reserves. Additional reserves are required only when and to the extent that checks drawn on such accounts and deposited in conventional checking accounts exceed the volume of checks coming from conventional checking accounts and deposited in such accounts.

To the extent that the Federal Reserve is willing to supply the necessary additional reserves to meet the greater need for reserves arising from such a movement of funds, all checking deposits come to stand on an equal footing as sources of spendable money. And so too do savings deposits that end up being convertible into checking deposits with no net increase in the scarcity of reserves because the Fed has enlarged the supply of reserves to the same or even greater extent than the increase in the amount of reserves required as the result of such conversion.

Consistent with the fact cited earlier that total reserves were substantially lower in December of 1999 than they had been in December of 1994 and grew only slightly from December of 1999 to December of 2007, it must be pointed out that additional reserves can be supplied by the Fed by means of its reducing or eliminating reserve requirements at various points in the banking system. Thus, for example, when the Fed eliminated the requirement that once existed that a 3 percent reserve be held against savings deposits, all of the reserves previously held to meet that requirement became equivalent to a supply of new and additional reserves of that same amount.

The same was true when the Fed allowed commercial banks on weekends and holidays to “sweep” substantial parts of their outstanding checking deposits into types of accounts that did not require reserves. This too made a substantial portion of already existing reserves the equivalent of new and additional reserves. Indeed, the amount of such new and additional reserves constituted such an excess of reserves above the now diminished reserve requirements, that the Fed was obliged to reduce the outstanding amount of reserves by means of resorting to “open-market operations” in which it sold some of its holdings of government securities in exchange for newly excess reserves.

The Stock Market and Real Estate Bubbles

Credit expansion was the source of the funds that fueled both the stock market and the real estate bubbles. In the case of the stock market bubble, credit expansion provided funds for the purchase of stocks. The sellers of the stocks then used the far greater part of their proceeds to purchase other stocks, whose sellers did likewise. In this way, the new and additional money created by credit expansion traveled from one set of stocks to another, raising the prices of the great majority of them. It continued to do this so long as the credit expansion went on at a sufficient rate.

Ultimately, a sufficient rate would have had to be an accelerating rate. This is because rising share prices resulted in people feeling richer and thus believing themselves able to afford more luxury goods. It also led to a stepped up demand for physical capital goods by firms coming into possession of the new and additional money by virtue of sales of stock of their own. The issuance of such stock and use of the proceeds to finance the purchase of physical capital goods was encouraged by the fact that the rise in stock prices made it more and more attractive in comparison with acquiring capital goods through the purchase of stocks in other companies.

Thus, an important later effect of the credit expansion was a tendency for funds to be withdrawn from the stock market, for the purchase of luxury consumers’ goods and also of physical capital goods. To offset this withdrawal of funds, more rapid credit expansion would have been necessary.

When, instead of an acceleration of the credit expansion, there was a diminution in its rate, the basis of the market’s rise was doubly undercut. Since the funds provided by credit expansion had come to represent an important part of the demand for stocks, the reduction in credit expansion constituted a reduction in that demand. Coupled with the outflows of funds just described, the result was that share prices began to plummet. Their fall was compounded by the unloading of shares by people who had purchased them for no other reason than their expectation of a continuing rise in stock prices.

The more recent, real estate bubble originated in the Fed’s panic-response to the collapse of the stock market bubble it had caused earlier. To overcome the effects of that collapse, it progressively reduced its target federal-funds rate, i.e., the rate of interest banks pay one another on the lending and borrowing of funds that qualify as reserves against commercial-bank checking deposits. In this way, it launched a new and more momentous credit expansion.

For the three years 2001—2004, the Federal Reserve created as much new and additional money in the form of additional bank reserves as was necessary to drive and then keep the federal-funds rate below 2 percent. And from July of 2003 to June of 2004, it drove and kept it even further down, at approximately 1 percent.

The new and additional money created by the banking system on the foundation of these new and additional reserves appeared in the loan market as a new and additional supply of loanable funds. The effect was a reduction in interest rates across the board.

Because interest is a major determinant of monthly mortgage payments, the fall in interest rates made home ownership appear substantially less expensive. As a result, a great surge in the demand for mortgage loans and in the purchase of homes took place. Instead of pouring into the stock market as in the previous bubble, the funds created by credit expansion now poured into the real estate market and drove up the prices of homes and commercial real estate rather than the prices of common stocks.

In the stock market bubble and even more so in the real estate bubble there was both large scale overconsumption and malinvestment. These are the two leading features of booms as explained by the monetary theory of the trade cycle developed by Ludwig von Mises. In both cases, the rise in the price of major assets — most notably, stocks and homes respectively — led people to believe that they were richer and could thus afford to consume more. In both cases, particular branches of industry were greatly overexpanded relative to the rest of the economic system, resulting in a subsequent major loss of capital. In the stock market bubble, the malinvestment was mainly in such things as the “dot.com” enterprises that later went broke. In the real estate bubble, it was in housing and commercial real estate.

Evasion of Responsibility for the Bubbles

Credit expansion is what was responsible for both the stock market and the real estate bubbles. Since its establishment in 1913 and certainly since the expansion of its powers in World War I, responsibility for credit expansion itself has rested with the Federal Reserve System. The Fed is the source of new and additional reserves for the banking system and determines how much in checking deposits the reserves can support. It has the power to inaugurate and sustain booms and to cut them short. It launched and sustained the stock market and real estate bubbles. It had the power to avoid both of these bubbles and then to stop them at any time. It chose to launch and sustain them rather than to avoid or stop them.

To be responsible for a bubble and its aftermath is to be responsible for a mass illusion of wealth, accompanied by the misdirection of investment, overconsumption, and loss of capital, and the poverty and suffering of millions that follows. This is what can be traced to the doorstep of the Federal Reserve System and those in charge of it. It is destruction on a scale many times greater than that wrought by Bernard Madoff, the swindler who first made his clients believe they were growing rich, only to cause them ultimately a loss of more than $50 billion. Madoff is one of the most justly hated individuals in the United States.

In contrast to the $50 billion of losses caused by Madoff, the losses caused by the Federal Reserve System and those in charge of it amount to trillions of dollars, probably to more than $10 trillion if the stock and real estate bubbles are taken together. Instead of affecting thousands of people as in the case of Madoff, tens of millions have been made to suffer hardship. Indeed, practically everyone has been harmed to some extent by what the Federal Reserve has done: the owners of stocks that have plunged, pensioners, the unemployed and their families, towns and cities suffering the consequences of business failures and plant closings.

It is difficult to imagine living with the knowledge that one is personally responsible for such massive destruction. Such knowledge might easily drive someone to suicide or at least to some means, such as drink or drugs, of not having to allow it into consciousness.

Alan Greenspan, who was Chairman of the Federal Reserve’s Board of Governors from 1987 to 2006, the period encompassing both bubbles, is clearly the single individual most responsible for the bubbles. The present Chairman, Ben Bernanke, also bears substantial responsibility, though not to the same extent as Greenspan. While Chairman only since January of 2006, Bernanke has been a member of the Federal Reserve Board since 2002. Thus he was present in a major policy-making position during most of the housing bubble and crucial years leading up to it.

Neither Greenspan nor Bernanke have resorted to drink or drugs to conceal their responsibility from themselves. Instead they have resorted to specious claims about the cause of the bubbles, the housing bubble in particular.

One can read through their widely disseminated public statements and not find a single explicit reference to credit expansion and fiduciary media, nor to malinvestment and overconsumption. To avoid recognition of any need to discuss these phenomena, Greenspan seems to have wiped his mind clean of all knowledge of how Federal Reserve interest-rate policy affects interest rates in the economic system.

In what appears to be his closest reference to credit expansion, he wrote, in an article in The Wall Street Journal of March 11, 2009:

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today’s financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise.

After all, the prices of long-lived assets have always been determined by discounting the flow of income or imputed services by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates — such as the fed-funds rate — to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

In these passages Greenspan invents a version of the opposition to Federal Reserve—sponsored credit expansion that no opponent of credit expansion or “easy money” has ever held. No opponent of credit expansion has ever claimed that reductions in the federal-funds rate need directly affect long-term interest rates. To the contrary, the significance of reductions in the federal-funds rate is that what is required to bring them about in the actual market for those funds is an increase in member-bank reserves. The increase in those reserves is then the foundation of credit expansion to a vast multiple of the additional reserves. That credit expansion is what then serves to lower long-term interest rates, such as mortgage rates.

The way the process works is as follows. To actually achieve the lower federal-funds rate that it announces as its target, the Federal Reserve goes into the market and buys government securities from banks or the customers of banks. It pays for those securities by means of the creation of new and additional standard money. When the Fed purchases securities from banks, the banks directly and immediately have equivalently more reserves in their possession. When it purchases securities from the customers of banks, the banks gain equivalently more reserves as soon as those customers deposit the checks they have received that are drawn by the Fed on the Fed. These checks are then forwarded to the Fed and the reserve accounts of the banks in question are equivalently increased.

Depending on the amount of their increase, the immediate effect of the additional reserves is to reduce or eliminate deficiencies in the required reserves of some, many, or all of the banks that have had such deficiencies, to replace deficiencies of reserves with excesses of reserves, and to increase the excess reserves of some, many, or all of the banks that have had excess reserves. The effect of this in turn is to reduce the demand for federal funds, i.e., funds that qualify as reserves, while increasing their supply. This combination is what brings down the federal-funds rate in the market for federal funds.

What is far more significant is that the creation of new and additional excess reserves by the Fed — reserves beyond the amount legally required to be held — places the banking system in a position in which it can expand the supply of checking deposits and thus fiduciary media to a multiple of the additional reserves. And thanks largely to Mr. Greenspan that multiple came to be enormous. By December of 2005, it exceeded 126 times. Two years later, it exceeded 160 times.

Thus for each dollar of additional excess reserves created, a credit expansion was made possible on the order of a vast multiple. The new and additional fiduciary media corresponding to the credit expansion were the source of the funds for stock purchases in the stock market bubble and for housing and commercial real estate purchases in the housing bubble. Their pouring into the home mortgage market was what drove down mortgage interest rates. Between December of 1999 and December of 2005, almost $1.7 trillion of new and additional fiduciary media were created and lent out.

As market interest rates started rising in the second half of 2004 and then through 2005, increasing amounts of deposits earning a modest rate of interest and on which checks could be written, came to be used more and more as checking accounts rather than savings accounts. They were drawn into the spending stream in response to the higher comparative rates of return that could be earned through investment in securities. This allowed the life of the housing bubble to be extended until 2006.

The Saving Glut Argument

Along with denying the causal role of Federal Reserve expansionary monetary policy in the housing bubble, Greenspan advances the claim, greatly elaborated by Bernanke, that what was actually responsible for the bubble was an excess of global saving. He argues in his Wall Street Journal article that

[T]he presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

In a series of lectures beginning in March of 2005 and continuing into the current year, Bernanke elaborates on this claim. At a lecture given at the Bundesbank in Berlin, Germany, on September 11, 2007, titled “Global Imbalances: Recent Developments and Prospects,” he argued that stepped up saving in developing countries was largely responsible for “the substantial expansion of the current account deficit in the United States, the equally impressive rise in the current account surpluses of many emerging-market economies, and a worldwide decline in long-term real interest rates.” (For the benefit of non-technical readers, the “current account” balance encompasses the difference between exports and imports both of goods and services, the difference between incomes earned abroad and incomes paid to abroad, plus the difference between remittances from and to abroad.)

These developments, he held, “could be explained, in part, by the emergence of a global saving glut, driven by the transformation of many emerging-market economies — notably, rapidly growing East Asian economies and oil-producing countries — from net borrowers to large net lenders on international capital markets.”4

In a speech delivered on April 9 of this year at Morehouse College in Atlanta, Bernanke stressed that “the net inflow of foreign saving to the United States, which was about 1-1/2 percent of our national output in 1995, reached about 6 percent of national output in 2006 an amount equal to about $825 billion in today’s dollars.” He then proceeded to blame the housing boom on this inflow of foreign savings. “Financial institutions,” he declared, “reacted to the surplus of available funds by competing aggressively for borrowers, and, in the years leading up to the crisis, credit to both households and businesses became relatively cheap and easy to obtain. One important consequence was a housing boom in the United States, a boom that was fueled in large part by a rapid expansion of mortgage lending.”

Thus, according to Bernanke, it was not credit expansion or anything that he and the Federal Reserve System and Mr. Greenspan were responsible for, but the inflow of foreign savings. That inflow, representing a “global saving glut,” was responsible for the bubble and its aftermath.

Bernanke uses the expression “saving glut” repeatedly: 9 times in his lecture at the Bundesbank in September of 2007, 11 times in his lecture at the Virginia Association of Economics in March of 2005, and 10 times in his Homer Jones Lecture in St. Louis in April of 2005. Despite his constant repetition of the claim, it turns out to have absolutely no substance. Nowhere is the existence of anything remotely approaching a saving glut in any way substantiated.

The Non-Existence of a Saving Glut

The very notion of a saving glut is absurd, practically on its face. As I wrote in Capitalism:

Before the scarcity of capital … could be overcome, capital would have to be accumulated sufficient to enable the 85 percent of the world that is not presently industrialized to come up to the degree of capital intensiveness of the 15 percent of the world that is industrialized. Within the industrialized countries, capital would have to be accumulated sufficient to enable every factory, farm, mine, and store to increase its degree of capital intensiveness to the point presently enjoyed only by the most capital-intensive establishments, and, at the same time, to enable all establishments to raise the standard of capital intensiveness still further, to the point where no further reduction in costs of production or improvement in the quality of products could be achieved by any greater availability of capital…. 5

Long before such a point could ever be reached, time preference would put an end to further increases in the degree of capital intensiveness.

It is doubly absurd to believe that the source of a saving glut would be precisely countries possessing very little capital compared to the United States and other industrialized countries. But that is what Bernanke claims. He claims that countries such as Thailand, China, Russia, Nigeria, and Venezuela are the source of the alleged saving glut.6

There are further theoretical considerations that argue specifically against any form of “saving glut” being responsible for the housing bubble.

First, if saving had been responsible, and not credit expansion and the increase in the quantity of money, then the additional saving taking place in the countries providing it, would have been accompanied by a reduction in consumer spending in those countries. People would have had to spend less for consumption in those countries, in part, in order to make available funds for additional spending on capital goods that were exported to the United States. Such export of capital goods to the US would not have fueled a boom here. To the contrary, it would have resulted in lower prices of capital goods in the US. Only the portion of funds saved that was used to finance purchases within the US could have contributed to any higher prices of capital goods and land in the US. And, of course, whatever rise in the prices of capital goods and land that might have taken place in the US would have tended to be matched by a fall in the prices of consumers’ goods in the countries that had stepped up their saving. The only way that the demand for capital goods and land could rise without the demand for consumers’ goods falling would be on the strength of an increase in the quantity of money and the total, overall volume of spending in the economic system.7

Indeed, the fact that in the absence of an increase in the quantity of money and volume of spending in the economic system, shifts in spending serve to reduce prices as much as increase them has a parallel in the further fact that increases in the relative size of some of the countries in the world’s economy imply equivalent decreases in the relative size of other countries in the world’s economy. In the absence of an increase in the quantity of money and volume of spending, growth in the relative size of the economies of many Asian countries would not by itself be sufficient for greater saving in those countries serving to increase global spending for capital goods. For that greater spending would be accompanied by reduced spending for capital goods in other countries, i.e., countries that were already in the category of developed economies and now had to yield some portion of their previous relative size.

In the present instance, what this means is that greater spending for capital goods and land in the US, financed by saving in parts of Asia, would be accompanied by less spending for capital goods in the US (and possibly elsewhere) financed by saving in the US or financed by saving elsewhere in the world. If spending for capital goods financed by saving in Asia is not accompanied by reduced spending for capital goods financed by saving elsewhere, the only ultimate explanation is an increase in the quantity of money and volume of spending in the world’s economy. Of course the source of such an increase in today’s conditions is none other than the Federal Reserve System.

Second, contrary to popular understanding, when saving is divorced from the increase in the quantity of money and volume of spending, and takes place without such increase, it does not tend to grow larger from year to year. Nor does consumer spending tend to decrease from year to year. And thus more saving would not serve to raise the prices of capital goods or land from one year to the next. Its effect would essentially be limited to a discrete, one-time only increase.8 Yet for the prices of capital goods and land to rise from one year to the next on the strength of an increase in the demand for capital goods and land based on an increase in saving, the increase in saving would have to become progressively larger from year to year. And this would mean that the demand for consumers’ goods would have to become progressively smaller from year to year.
For example, imagine that at the expense of an equal fall in the demand for consumers’ goods, the demand for capital goods rose by some given amount, say, 100. This 100 can represent however many billions or hundreds of billions of dollars as may be required to make it realistic in terms of present spending levels. In such circumstances, there would be nothing present that would make the prices of capital goods or land any higher in the second and later years of 100 of additional such spending than in the first year.

Indeed, as the years wore on, the increases in production achieved by a greater supply of capital goods would start reducing prices, including the prices of capital goods themselves, as the supply of capital goods itself was increased on the foundation of a general increase in production. Even land prices would fall to the extent that improvements in the supply of capital goods permitted the adoption of methods of production that allowed the economical use of previously submarginal land or so increased the output per unit of land as to make part of its supply redundant.

In circumstances of an unchanged supply of money and demand for money for holding, each act of greater saving and accompanying greater expenditure on capital goods operates in a manner analogous to the relationship between force and acceleration in the physical world. In the physical world, in the conditions of a friction-free environment, a single application of force to an object imparts continuous motion at a constant velocity. Similarly, in the economic world, in the conditions of an unchanged quantity of money and volume of spending, each act of reduced expenditure for consumers’ goods and increased expenditure for capital goods, causes the economic system to adopt a greater relative concentration on the production of capital goods and a reduced relative concentration on the production of consumers’ goods. This produces an inertial effect on capital accumulation.

The first result of the greater relative concentration on the production of capital goods is a greater production of capital goods, alongside a smaller production of consumers’ goods. These additional capital goods, however, obtained on the foundation of additional saving, are the basis of an increase in the ability to produce both consumers’ goods and further capital goods. That is to say, the additional capital goods make possible a general increase in production, an increase in the production of consumers’ goods and a further increase in the production and supply of capital goods as well. The process of an increasing supply both of consumers’ goods and capital goods, based on the foundation of a single fall in consumption and increase in saving, can go on indefinitely if it is accompanied by further scientific and technological progress. In these circumstances, a further fall in the demand for consumers’ goods and rise in the demand for capital goods would be analogous to a further application of force to an object and would result in an acceleration of the increase in production.

A further point must be mentioned here. And that pertains to the durability of capital goods and its implications for capital accumulation, saving, and spending. Thus, if the average life of the capital goods in our example of 100 of additional spending for capital goods were, say, 10 years, then a diminishing process of saving would go on for 10 years with no further fall in the demand for consumers’ goods nor rise in the demand for capital goods. Net saving and equivalent net investment in the economic system would take place in a pattern 100, 90, 80, …10, as the 100 of additional spending for such capital goods was accompanied by successive increases in annual depreciation charges. The additional depreciation charges would be 10 in the year following the first year’s expenditure of an additional 100 for such capital goods. In the next year, when there were two such batches of capital goods, depreciation would be 20. At the end of the tenth year, the depreciation charges on ten such batches of capital goods would be 100, and net saving and net investment would disappear, unless, of course, there were a further decline in consumption expenditure and increase in demand for capital goods.

What is particularly important to realize here is that the net saving of years 2 through 10 would not serve at all to raise the demand for capital goods and land nor their prices, but would contribute to the supply of capital goods being larger, production in general consequently being greater, and prices in general, including the prices of capital goods, being lower as a result. Such results, and those of the process of saving and capital accumulation in general that were described a moment ago, cannot be reconciled with the conditions of a bubble. They should not be cited as the basis of explaining a bubble.

Third, if somehow saving were responsible for the housing bubble, why did it suddenly collapse? Why did people suddenly stop saving and stop making funds available for the purchase of homes? Obviously, the explanation was that the bubble did not depend on saving but on credit creation and its acceleration and that when the ability to create sufficiently more credit came to an end, the props supporting the bubble were removed and it collapsed.

Fourth, if saving were responsible for the bubble, why have banks and countless other firms found themselves confronting an acute lack of capital? Saving provides new and additional capital. How can it be that an alleged process of saving has resulted in widespread major capital deficiencies? This situation of insufficient capital is the result of malinvestment and overconsumption, which are the consequences of credit expansion, not saving.

Fifth, if saving had been responsible for the increase in spending on capital goods and land, the rate of profit would have modestly fallen from the very beginning, and continued its fall until net saving came to an end. It would not have risen, let alone risen dramatically, as it did during the bubble.9

This is the implication of the discussion, above in this section, of the second reason why saving was not responsible for the bubble. In particular it is the implication of the example of 100 more of spending for capital goods financed by 100 of saving derived from 100 less of spending for consumers’ goods. In that example, in which there is no increase in the quantity of money or total volume of spending, the global economic system would have had the same total aggregate business sales revenues, with the sales revenues coming from the sale of consumers’ goods diminished by the amount of saving, and those coming from the sale of capital goods equivalently increased. At the same time, however, it would have had a tendency toward a rise in the aggregate costs of production deducted from those sales revenues.

The rise in costs would have been the result of such things as additional depreciation charges on the new and additional capital goods purchased, or additional cost of goods sold following additional purchases of materials and labor on account of inventory. In the example of 100 more being spent for capital goods each year with an average life of 10 years and accompanying depreciation charges in the respective amounts of 10, 20, …, 100 in the 10 years following the rise in demand for capital goods, aggregate profit in the economic system would have been falling year by year by an amount equal to the increase in depreciation.

A falling aggregate amount of profit together with the increasing amount of capital invested in the economic system, would have progressively reduced the economy-wide average rate of profit. It would have been a case of a falling amount-of-profit numerator divided by a rising-amount-of-capital denominator.

Totally contrary to what one would expect from these effects of a rise in saving, the reality, of course, was a sharply higher average rate of profit in the economic system so long as the bubble lasted. This can be explained only on the foundation of credit expansion and an expanding quantity of money and volume of spending, not on the basis of saving.

If none of these five reasons are sufficient to dispel the notion that a saving glut was responsible for the bubble, then hopefully it will be sufficient to point out that there simply was no saving glut, but rather only a very modest rate of saving, a mere trickle of saving. For it turns out that over the 13 year period 1994—2006, the rate of saving in the US, together with all foreign saving entering the country in connection with deficits in the current account, never exceeded 7 percent, and in 8 of those 13 years was 3 percent or less. In 5 of those years it was a mere, 1 or 2 percent. And what is of special significance is that in the years of the housing bubble, 2002—2006, it was especially low: 2 percent in 2002, 1 percent in both 2003 and 2004, 3 percent in 2005, and 4 percent in 2006.

To see this result, it is necessary to begin by removing all fictional elements in the reported amounts of domestic net saving and GDP. These fictional amounts consist of various “imputations.” The leading imputations that are relevant here are those that arbitrarily convert what is in fact consumption expenditure into investment expenditure. These have the effect of reducing reported consumption and equivalently increasing reported saving.10, 11

The two most important such imputations are these: 1) the treatment of the purchase of single family homes that the buyer intends to occupy and that thus will not be a source of any money revenue of income to him, as though they were nonetheless income producing assets and therefore represented an investment; 2) the treatment of government expenditure for fixed assets such as buildings, as though it were an investment expenditure rather than a consumption expenditure.

When such imputations are removed from the calculation of net saving and from GDP, the very modest extent of saving that has been going on over the last decade or more is clearly shown. Indeed, since 2002, domestic net saving has been negative to the extent of several hundred billion dollars each year.

The following table describes the situation:

The table has 6 columns. Column 1 lists the years 1994 through 2006, the period encompassing both the stock market and the real estate bubbles. Column 2 shows the current account deficit in those years. This deficit is taken as representing the foreign savings coming into the United States. (For this reason it is shown as a positive number.) Column 3 shows net saving in the United States in those years when such savings are calculated free of imputations. Column 4 is the sum of Columns 2 and 3. It shows total saving in the United States as the sum of foreign saving entering the country together with domestic saving. Column 5 is GDP year by year, with all imputations removed. Column 6 is the sum of imputation-free foreign and domestic saving divided by such GDP, presented in decimal format.

The notion that there was a saving glut behind the housing bubble is simply a fiction. Its proponents could manufacture as much of a glut as they like simply by reclassifying such things as expenditure for automobiles, major appliances, furniture, and clothing as investment expenditures, on the grounds that these goods too are durable, like houses. That would equivalently reduce consumption expenditure and increase reported saving in the economic system.

Current Account Deficits as a By-Product of the Increase in the Quantity of Money

Bernanke and Greenspan et al. focus on deficits in the current account as representing the counterpart of foreign saving and investment, which they believe must be present to finance the deficits. There is certainly a very close relationship between foreign saving and investment on the one side and the financing of deficits in the current account on the other. The following example may help to highlight this relationship.

Thus imagine Saudi Arabia back in the days when geologists had determined that the country possessed vast oil reserves but before it had any oil wells, pipelines, refineries, or facilities for the handling of supertankers. Those things had yet to be built.

Now how could those facilities be built? The only way was by means of the arrival of shiploads of equipment and construction materials from Europe and the United States. In addition, large quantities of various consumers’ goods were required for the foreign engineers and other workers who were required to carry out the construction. All these goods coming into Saudi Arabia were imports of foreign goods. But Saudi Arabia had hardly anything to export before its ability to produce oil was developed. Thus, in the interval, there was a massive excess of imports over exports. That excess represented foreign investment in Saudi Arabia. Its physical form was all of the facilities under construction and then, ultimately, the completed facilities for producing oil.

Foreign investment very often, perhaps most of the time, has this kind of close connection to the existence of an excess of imports over exports and, more broadly, an excess of outlays of all kinds on current account over receipts of all kinds on current account. (As previously explained, the balance on current account includes not only the difference between the imports and exports of goods, but also of services. In addition, it includes the difference between incomes paid to abroad and incomes paid from abroad, and finally, the difference between remittances to and from abroad.)

Nevertheless, it should be realized that the essential, core concept of the current account, namely, the so-called balance of trade, which is the difference simply between the import and export of goods, was developed long before the emergence of any significant international investment. It was developed and employed by a school of writers known as the mercantilists, who were current from the 16th to the third quarter of the 18th Century, when the school was laid to rest by Adam Smith.

The main concern of the mercantilists was the accumulation of gold and silver within the borders of their country and the prevention of any loss of gold or silver by their country. Gold and silver were the money of the day everywhere and, it was believed, needed to be accumulated within the country in order to be available if and when the government might need them, in order to finance military operations outside the country or any other activities in which circumstances might operate to draw precious metals away from the country.

Inasmuch as already by that time, most of the European countries had no gold or silver mines within their territory, the only way they could gain gold or silver was by means of the export of goods. The import of goods was seen as constituting a loss of gold or silver by the country. Accordingly, the goal of mercantilist policy was to maximize exports while minimizing imports. That would allegedly ensure the greatest possible accumulation of the precious metals within the country.

Centuries later, in the chapter “On Foreign Trade” in his Principles of Political Economy and Taxation, Ricardo developed the principle that the supply of the precious metals tends to be distributed among the different countries essentially in proportion to the relative size of their respective economies. He wrote: "Gold and silver having been chosen for the general medium of circulation, they are, by the competition of commerce, distributed in such proportions amongst the different countries of the world as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter."

The operation of this principle can, of course, be modified by the operation of other principles working alongside it. Thus a country with a relatively small economy, but with an exceptional reputation for the security of property and the enforcement of contracts, might well have a quantity of money within its borders far in excess of what corresponded to the relative size of its economy. By the same token, countries with larger economies but in which property rights and the enforcement of contracts were in retreat, could possess a proportion of the world’s money supply substantially less than what corresponded to the relative size of its economy.

It follows from Ricardo’s principle that countries with gold and silver mines will experience a chronic excess of imports over exports. The gold and silver that they mine cannot all be retained within their borders. If they were retained, the country would have a disproportionately large supply of the precious metals. This would serve to raise prices in that country relative to prices abroad. The effect would be an outflow of the precious metals until their buying power at home did not fall short of their buying power abroad by more than the costs of shipping them abroad.

Today, the US dollar is in a position similar to that of gold under an international gold standard. The dollar is a virtual world money — not completely, but substantially. The United States is the country with the “dollar mines.” When dollars are created in the US, a substantial portion of them will flow abroad. And this applies not just to currency, but also to checking deposits and all other short-term financial instruments easily convertible to currency.

Most of the dollars that “flow abroad” need not actually circulate abroad but to a large extent serve as mere precautionary holdings of money, and, to an important extent, as reserves for financial institutions that create various moneys other than dollars. These other moneys that are created on the foundation of additional dollars circulate abroad.

Now the fact that the United States compared to almost all other countries in the world still has the most reliable protection of property rights and enforcement of contracts, is responsible for the fact that much or most of the money that “flows abroad” does not in fact leave the country. Rather it passes into the ownership of foreign individuals, firms, and governments who continue to hold it within the United States.

The increase in such foreign owned assets within the United States has the appearance of foreign investment. Actually, it is nothing more than the by-product of credit expansion and the increase in the quantity of money within the United States.

There is no genuine surge in foreign saving. There is domestic credit expansion and money supply increase that serves to increase imports and shift ownership of a substantial portion of the additional money supply, and short-term claims to money, to foreigners.

Ironically, Bernanke himself helps to confirm this interpretation of the increase in the current account deficit. He says: “First, the financial crises that hit many Asian economies in the 1990s led to significant declines in investment in those countries in part because of reduced confidence in domestic financial institutions and to changes in policies — including a resistance to currency appreciation, the determined accumulation of foreign exchange reserves, and fiscal consolidation — that had the effect of promoting current account surpluses.” (Bundesbank Lecture, Berlin, Germany, September 11, 2007.)

What Bernanke describes here is not any sudden increase in foreign saving but rather decisions to change the way in which a portion of previously accumulated savings are held, i.e., to hold them to a greater extent in the form of US dollars and short-term claims to dollars.

In the same passage, Bernanke presents a second reason for the alleged growth in foreign savings, namely the sharp increase in the price of oil that had taken place. He says, “sharp increases in crude oil prices boosted oil exporters’ incomes by more than those countries were able or willing to increase spending, thereby leading to higher saving and current account surpluses.”

Here, Bernanke overlooks the role of credit expansion and the increase in the quantity of money in bringing about the higher price of oil. He also overlooks the effect of the higher price of oil on the real incomes and ability to save of everyone who had to pay that higher price.

The role of credit expansion and the increase in the quantity of money in causing the rise in oil prices was confirmed by the subsequent plunge in oil prices once credit expansion was brought to an end and appeared to be about to turn into massive credit contraction. It has since been further confirmed by the recent rise in oil prices following the growing belief that the government’s program of renewed credit expansion will be sufficient to eliminate the danger of a financial collapse and will serve to maintain and increase the demand for oil.

Net Saving as a By-Product of the Increase in the Quantity of Money

My discussion of the fallacy of a saving glut as being responsible for the housing bubble and its aftermath would not be complete if I did not point out that the continued existence of net saving is itself a by-product of the increase in the quantity of money and volume of spending in the economic system. In the absence of increases in the quantity of money and volume of spending, economy-wide, aggregate net saving would tend to disappear. It would cease when total accumulated savings came to stand in a ratio to current incomes and consumption that people judged to be sufficiently high that they had no further need to make still greater relative provision for the future.

What keeps net saving in existence is that the increase in the quantity of money and volume of spending tends continually to raise incomes and consumption in terms of money. In order to maintain any given ratio of accumulated savings to a rising level of income and consumption, it is necessary to increase the magnitude of accumulated savings. At the same time, the increasing quantity of money provides the financial means of spending more and more each year for capital goods as well as consumers’ goods and for thus maintaining the desired balance in the face of growing magnitudes of spending.

Thus it is the increase in the quantity of money and the volume of spending that it supports that is responsible for net saving continuing in being. In the absence of the continuing increase in the quantity of money, net saving would disappear, and capital accumulation would take place simply by means of a continually increasing purchasing power of the same capital funds. That growing purchasing power would be created by the increase in the production and supply of capital goods and the fall in prices of capital goods that would result.

Summary and Conclusion

The real estate bubble, like the stock market bubble before it, was caused by credit expansion. The credit expansion was instigated and sustained by the Federal Reserve System, which could have aborted it at any time but chose not to. As a result, the Federal Reserve System and those in charge of it at during the real estate bubble bear responsibility for major harm to tens of millions of Americans.

In order to avoid having to accept this responsibility, a specious doctrine has been advanced by Alan Greenspan and Ben Bernanke, the former and present Chairman of the system, and others. That is the doctrine of a “global saving glut.” Not credit expansion but the saving glut was responsible, they claim.

The truth is that time preference puts an end to further saving long before it could outrun the uses for additional saving. This makes a saving glut impossible. In addition, there are five major reasons why saving could not have been responsible for the real estate bubble in particular. First, if saving had been responsible, rather than credit expansion and the increase in the quantity of money, there would have been a corresponding decline in consumer spending in the countries allegedly doing the saving. The fact is that there was no such decline.

Second, saving implies a growing supply of capital goods, more production, and lower prices, including lower prices of capital goods and even of land. These are results that are incompatible with the widespread increases in prices typically found in a bubble.

Third, if somehow saving had been responsible for the housing bubble, the spending it financed would not suddenly have stopped. Such stoppage is a consequence of the end of credit expansion and the revelation of a lack of capital.

Fourth, if large-scale saving rather than credit expansion had been present, banks and other firms would have possessed more capital, not less. They would not be in their present predicament of having inadequate capital to carry on their normal operations. This situation of insufficient capital is the result of malinvestment and overconsumption, which are the consequences of credit expansion, not saving.

Fifth, in the absence of increases in the quantity of money and overall volume of spending in the economic system, saving also implies an immediate tendency toward a fall in the economy-wide average rate of profit. This is another result that is incompatible with what is observed in a bubble or boom of any kind, which is surging profits so long as “the good times” last.

Especially noteworthy is the fact that in the real estate bubble, there simply was no saving glut. In the 13-year period 1994—2006, the rate of saving in the US, together with all foreign saving allegedly entering the country in connection with deficits in the current account, never exceeded 7 percent, and in 8 of those 13 years was 3 percent or less.

What has served to conceal how low the actual rate of saving has been is the fact that major fictional items have been counted in saving, which add hundreds of billions of dollars every year to its reported amount. The most notable instance is that purchases of single family homes that the buyers intend to occupy and that will thus not be a source of any money revenue or income to them, are treated as though they were nonetheless purchases of income producing assets and therefore represented an investment. Similarly, government spending on account of buildings and structures is treated as investment. Such overstatement of investment correspondingly understates consumption expenditure in the economic system. And when the artificially reduced amount of consumption is subtracted from any given amount of national income or GDP, saving appears to be equivalently larger.

The alleged saving entering the American economy via deficits in its current account is in fact largely not saving at all, but the by-product of US credit expansion and money supply increase. Dollars today are a virtual global money. And in conformity with Ricardo’s principle concerning the distribution of the precious metals throughout the world based on the relative size of the economies of the various countries, most of the additions to the supply of dollars and short-term claims to dollars cannot remain in the possession of Americans but must gravitate into the ownership of foreigners. This creates a deficit in the balance of trade and in the whole of the so-called current account. While it may appear that increased foreign holdings of dollars and short-term dollar-denominated securities represent foreign investment, the truth is that much or possibly even all of the alleged foreign saving entering the United States is nothing other than a consequence of US credit expansion and money supply increase.

Finally, net saving itself, as a continuing phenomenon is nothing more than a by-product of the increase in the quantity of money, in that it would come to an end if the money supply were to stop increasing.

The conclusion to be drawn is that the housing bubble was indeed the product of credit expansion, not a “saving glut.”

Notes

1. David R. Henderson and Jeffrey Rogers Hummel, Greenspan’s Monetary Policy in Retrospect, Cato Institute Briefing Paper 109, Cato Institute, Washington, D.C., November 3, 2008, pp. 4f.
2. George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) p. 512.
3. This figure is arrived at by taking the sum of M1, sweep accounts, money market mutual fund accounts both retail and institutional, and one half of savings deposits as the measure of money market deposit accounts, the data for which are apparently otherwise unavailable. The same procedure is used as the basis of all other statements of the money supply or changes in the money supply.
4. Italics in original.
5. Reisman, Capitalism, p. 57.
6. “Homer Smith Lecture,” St. Louis, MO, April 14, 2005.
7. For a comprehensive explanation of the role of the quantity of money in determining the volume of spending in the economic system, see Reisman, Capitalism, chaps. 12 and 19.
8. For an explanation of the role of saving in capital accumulation, see ibid., pp. 621—642.
9. For a thoroughgoing discussion of the determinants of the rate of profit and its relationship to saving and capital accumulation, see ibid., chaps. 16 and 17.
10. For a comprehensive explanation of the distinction between capital goods and consumers’ goods and investment or, better, productive expenditure and consumption expenditure, see ibid., pp. 445—456.
11. For a detailed critique of the imputed income doctrine, see ibid., pp. 456—459.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

The Best of George Reisman

The President’s statement reveals a great deal about his understanding or, more correctly, lack of understanding of economics.

Collective bargaining is the joining together, typically through the instrumentality of a labor union, of all workers in a given occupation or industry for the purpose of acting as a single unit in seeking pay and benefits. It is an attempt to compel employers to deal with just one party — i.e., the labor union — and to come to terms agreeable to that party or to be unable to obtain labor.

The imposition and maintenance of collective bargaining necessarily depends on compulsion and coercion, i.e., on the use of physical force against both employers and unemployed workers. This coercion is necessitated, in substantial measure, precisely by the seeming success that collective bargaining can achieve.

That success is measured in terms of the rise in wage rates that it achieves. That rise in wage rates is all that labor union leaders and their ignorant supporters are aware of.

Precisely this “success,” however, is the cause of major problems. The first is that higher wage rates reduce the quantity of labor that any given amount of capital funds can employ. For example, at a wage of $20,000 per year, $1 million of payroll funds can employ 50 workers for a year. But at a wage of $25,000 per year, it can employ only 40 workers for a year. With every further rise in the wage, correspondingly fewer workers are able to be employed.

Higher wage rates also serve to raise costs of production and thus the selling prices of the products that the higher-paid workers are producing. These higher selling prices reduce the quantities of the products that buyers are able and willing to buy. And thus, whether as the result of the reduced purchasing power of capital funds in the face of higher wage rates or the reduced quantities of products demanded by customers in the face of higher product prices, the effect of collective bargaining is a reduced quantity of labor employed, i.e., unemployment.

It is shocking, indeed, frightening, that the President of the United States, whose main concern at the moment is supposedly with overcoming mass unemployment and preventing its getting worse, does not understand that any policy that drives up wage rates drives up unemployment.

The unemployment that collective bargaining causes is what explains why it is necessary to resort to coercion against wage earners in order to maintain the system. The self-interest of the unemployed is to find work, and to accept lower wage rates as the means of doing so. And taking advantage of that fact is to the self-interest of employers. Thus there are two parties, unemployed workers and employers, whose self-interest lies with a reduction in the higher wage rates achieved by collective bargaining.

If these parties are free to act in their self-interest, the system of collective bargaining must break down. How are they to be prevented from acting in their self-interest?

The answer is physical force. Stepping outside the system of collective bargaining must be made illegal if the system is not to break down. That means employers and unemployed workers must be threatened with fines or imprisonment for acting in their self-interest and withdrawing from the system of collective bargaining. In the last analysis, they must be threatened with the specter of armed officers ready to cart them off to jail if they disobey the requirements of the system, and to club and shoot them should they physically resist being carted off to jail. (It is not always necessary that the physical force that imposes and maintains collective bargaining come directly from the government. It can often come from labor unions that the government chooses not to prosecute when their members physically assault strikebreakers, surround factories and refuse to allow entry or exist, start fires, set off stink bombs, shoot out tires, and perform other acts of vandalism and intimidation.)

In saying, “I don’t buy the argument that providing workers with collective-bargaining rights somehow weakens the economy or worsens the business environment,” President Obama confesses to not knowing that collective bargaining raises prices and causes unemployment. He confesses to not knowing that it raises costs and prices not only through the imposition of artificially high wage rates, but also in imposing on employers the use of unnecessary labor, sometimes as many as four or five workers to do the job that just one could do.

(A classic example of this is the insistence on the use of a carpenter, plumber, electrician, tile setter, and drywaller to make a simple repair in a bathroom, merely because the separate labor unions involved claim each operation as belonging to their respective members exclusively, i.e., claim a monopoly on that type of operation.) He confesses to not knowing how the enormous difficulties that labor unions put in the way of firing incompetent workers are responsible for such phenomena as so-called Monday-morning automobiles. That is, automobiles poorly made for no other reason than because they happened to be made on a day when too few workers showed up, or too few showed up sober, to do the jobs they were paid to do. The automobiles companies were unable to fire such workers without precipitating a crippling strike, to which the system of compulsory collective bargaining gave them no alternative.

Collective bargaining, with its imposition of higher costs and prices and lower product quality, is at the root of the destruction of the American automobile industry and many other American industries. President Obama not only chooses not to know this, but selects union leaders as his companions, including the leader of the United Automobile Workers Union. (The Times article from which I quoted him is accompanied by a photograph that shows him, in what appears to be a round of golf, with Ron Gettelfinger, who is the president of the U.A.W., James Hoffa, who is the president of the Teamsters, and John Sweeney, who is the president of the A.F.L.-C.I.O. The article notes that “Mr. Sweeney has visited the White House at least once a week since Inauguration Day.”)

The reader should keep in mind the coercive nature of collective bargaining. Then he should consider Mr. Obama’s observation that “If you’ve got workers who have decent pay and benefits [as the alleged result of collective bargaining], they’re also customers for business.” This statement makes about as much sense as declaring that people who are successful at sticking up gas stations are also customers of gas stations.

Moreover, the workers who are unemployed by collective bargaining are not customers of business, or not very good customers (they can’t afford to be). And the products offered by business to its customers are poorer and more expensive because of collective bargaining. This is something, it must be stressed, that reduces the buying power of the wages of workers throughout the economic system, i.e., reduces what economists call their “real wages.” Mr. Obama needs to forget the nonsense he believes about collective bargaining and paying extortionate wages somehow benefiting business and learn to understand how it harms wage earners, how it harms every wage earner who must pay more and get less as the result of legally enforced collective bargaining. He must learn to understand how it also harms every worker who must earn less as the result of being displaced by collective bargaining from the better-paying jobs he could have had if wage rates in those lines had not been driven artificially still higher by collective bargaining and thus reduced the number of workers who could be employed in them and thereby forced those workers into lower-paying jobs.

Unfortunately, it does not seem very likely that Mr. Obama will ever learn any of this. He appears to be so charmed by the use of compulsion and coercion that he and his supporters in Congress are ready to unleash a reign of outright mass intimidation against American workers.

In a bow to Orwell’s 1984 and its world filled with such slogans as “war is peace,” “freedom is slavery,” and “love is hate,” Obama and his henchmen are readying “the Employee Free Choice Act.” This is an act designed precisely to end employee free choice, by depriving workers of the benefit of a secret ballot in deciding whether or not they want to join a union. In the words of The Times article, this is “a bill that unions hope will add millions of new members by giving workers the right to union recognition as soon as a majority of employees at a workplace sign pro-union cards. The bill would take away management’s ability to insist on a secret ballot election.”

Here we have it. Obama is against the secret ballot. No, he’s not yet announced any opposition to the secret ballot in elections for public office. But there’s absolutely no difference in principle between being against the secret ballot in elections concerning whether or not to unionize and being against it in elections for public office. In both cases, it is a matter of subjecting people to intimidation if they express a choice that is opposed to the one that an organized, powerful group wants them to make. In this case, that group would be the union goons who would distribute the “pro-union cards” that workers would be asked to sign or refuse to sign in their presence. Are Obama and his followers really so nave as not to know that any worker who would reject joining a union in these circumstances would, at a minimum, be exposing himself to ostracism and the chance of substantial personal economic loss in the event the union gained recognition and he is on record as having opposed it?

Be assured, they are not so nave. They look forward to the intimidation. They look forward to it in the recognition that that is what is required to swell the ranks of the unions once again.

The wider principle here is the readiness of Obama and his associates to resort to intimidation to further their goals. It is the method of street thugs and of dictators. That is what is present in their attempt to deprive workers of the secret ballot in deciding whether or not to unionize.

The last occupant of the White House often gave the impression of having an inadequate command of the English language and of experiencing great difficulty in speaking in grammatical sentences and using words in accordance with their proper meaning. The present occupant of the White House speaks impeccable English, with crisp, clear pronunciation. Nevertheless, his actual knowledge — of economics, of the meaning of individual rights, and of the nature of government — appears to lag far behind that of his bumbling predecessor.

Furthermore, while Bush may be accused of disregarding the rights of foreign terrorists at war with the United States, Obama is out to disregard the rights of peaceful, productive American citizens. This is apparent not only in his readiness to deprive American workers of the secret ballot in union organizing elections, but also in his efforts to dramatically raise the taxes of everyone earning more than $250,000 per year, in an attempt to achieve a substantial redistribution of income. It is also evident in his policies on energy and healthcare as well.

In sum, the “change” that Obama promised his mesmerized supporters in the election campaign, and is now in process of actually delivering, is nothing more than change from dumb to dumber and from bad to worse.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

George Reisman Archives

Capital, Saving, and Our Economic Crisis

Imagine an individual who is lethargic and lacks the energy to function at his normal level because of too little sleep. There are drugs that can make him feel fully refreshed, even after a night without any sleep whatever, and apparently capable of functioning the next day with full efficiency.

Nevertheless taking such drugs is definitely not a good idea. This is because the individual’s underlying problem of insufficient sleep is not only not addressed by his being stimulated but is actually worsened. For the stimulus further depletes his body’s already diminished energy reserves and takes him down the path of utter exhaustion.

This description applies to the current slowdown in our economic system and to the efforts to overcome it through the use of u201Cfiscal policyu201D and its u201Cstimulus packages.u201D The meaning of these terms is more government spending and lower taxes specifically designed to promote consumption. This includes giving income-tax refunds to people who paid no income tax and who, because of their low incomes, can presumably be most counted on to rush out and consume more as soon as additional funds are put in their hands.

The main difference between such economic u201Cstimulantsu201D and pharmaceutical stimulants is that the economic stimulants will not succeed even in temporarily restoring the economic system to anything approaching its normal level of activity.

An economic system entering into a major recession or depression is in a situation very similar to that of our imaginary, sleep-deprived individual. All that one need do is substitute for the loss of the sleep required for the body’s proper functioning the loss of something required for the proper functioning of the economic system.

Capital

In the case of the economic system, that something is capital. The economic system is not functioning properly because it has lost capital. Capital is the accumulated wealth that is owned by business enterprises or individuals and that is used for the purpose of earning profit or interest.

Capital embraces all of the farms, factories, mines, machinery and all other equipment, means of transportation and communication, warehouses, shops, office buildings, rental housing, and inventories of materials, components, supplies, semi-manufactures, and finished goods that are owned by business firms.

Capital also embraces the money that is owned by business firms, though money is in a special category. In addition, it embraces funds that have been lent to consumers at interest, for the purpose of buying consumers’ goods such as houses, automobiles, appliances, and anything else that is too expensive to be paid for out of the income earned in one pay period and for which the purchaser himself does not have sufficient savings.

The amount of capital in an economic system determines its ability to produce goods and services and to employ labor, and also to purchase consumers’ goods on credit. The greater the capital, the greater the ability to do all of these things; the less the capital, the less the ability to do any of these things.

Saving

Capital is accumulated on a foundation of saving. Saving is the act of abstaining from consuming funds that have been earned in the sale of goods or services.

Saving does not mean not spending. It does not mean hoarding. It means not spending for purposes of consumption. Abstaining from spending for consumption makes possible equivalent spending for production. Whoever saves is in a position to that extent to buy capital goods and pay wages to workers, to lend funds for the purchase of expensive consumers’ goods, or to lend funds to others who will use them for any of these purposes.

It is necessary to stress these facts because of the prevailing state of utter ignorance on the subject. Such ignorance is typified by a casual statement made in a recent New York Times news article. The statement was offered in the conviction that its truth was so well established as to be non-controversial. It claimed that u201CA dollar saved does not circulate through the economy and higher savings rates translate into fewer sales and lower revenue for struggling businesses.u201D (Jack Healy, u201CConsumers Are Saving More and Spending Less,u201D February 3, 2009, p. B3.)

The writer of the article apparently believes that houses and other expensive consumers’ goods are purchased out of the earnings of a single week or month, which is the normal range of time between paychecks. If that were the case, no savings would be necessary in order to purchase them. In fact, of course, the purchase of a house typically requires a sum equal to the purchaser’s entire income of three years or more; that of an automobile, the income of several months; and that of countless other goods, too large a fraction of the income of just one pay period to be affordable out of such limited funds.

In all such cases, a process of saving is essential for the purchase of consumers’ goods. The savings accumulated may be those of the purchaser himself, or they may be borrowed, or be partly the purchaser’s own and partly borrowed. But, in every case, savings are essential for the purchase of expensive consumers’ goods.

The Times reporter, and all of his colleagues, and the professors who supposedly educated him and his colleagues, all of whom spout such nonsense about saving, also do not know other, even more important facts about saving. They do not know that saving is the precondition of retailers being able to buy goods from wholesalers, of wholesalers being able to buy goods from manufacturers, of manufacturers, and all other producers, being able to buy goods from their suppliers, and so on and on. It is also the precondition of sellers at any and all stages being able to pay wages.

Such expenditures must generally be made and paid for prior to the purchaser’s receipt of money from the sale of his own goods that will ultimately result. For example, automobile and steel companies cannot pay their workers and suppliers out of the receipts from the sale of the automobiles that will eventually come in as the result of using the labor and capital goods purchased. And even in the cases in which the payments to suppliers are made out of receipts from the sale of the resulting goods, the seller must abstain from consuming those funds, i.e., he must save them and use them to pay for the capital goods and labor he previously purchased.

In contrast, the Keynesian reporters and professors believe that sellers do nothing but consume or hoard cash. They are too dull to realize that if that were really the case, there would be no demand for anything but consumers’ goods. This becomes clear simply by following the pattern of the Keynesian textbooks in allegedly describing the process of spending.

Thus a consumer buys, say, $100 dollars worth of shirts in a department store; the owner of the department store, following his Keynesian u201Cmarginal propensity to consumeu201D of .75, then buys $75 worth of food in a restaurant, and allegedly hoards the other $25 of his income; the owner of the restaurant then buys $56.25 (.75 x $75) worth of books, while allegedly hoarding the remaining $18.75 of his income; and so on and on. Now, unknown to the Keynesians, if such a sequence of spending actually took place, all that would exist is a sum of consumption expenditures and nothing else.

The fact is that most spending in the economic system rests on a foundation of saving. The seller of the shirts will likely save and productively expend $95 or more in buying replacement shirts and in paying his employees and making other purchases necessary for the conduct of his business, and perhaps only $5 on consumption. And so it will be for those who sell to him, or to the suppliers of his suppliers, or to the suppliers of those suppliers, and so on.

Any business income statement can provide a simple confirmation of such facts. The ratio of costs to sales revenues that can be derived from it, is an indicator of the ratio of the use of savings to make expenditures for labor and capital goods relative to sales revenues. For the costs it shows are a reflection of expenditures for labor and capital goods made in the past. The saving and productive expenditure out of current sales revenues will show up as costs in the future. The higher is the ratio of costs to sales, the higher is the degree of saving and productive expenditure relative to sales revenues. A firm with costs of $95 and sales revenues of $100 is a firm that can be understood as saving and productively expending $95 out of its $100 of sales revenues. This relationship applies throughout the economic system.

Hoarding Versus Saving

To the extent that u201Choardingu201D or, more accurately, an increase in the demand for money for cash holding takes place, it is not because people have decided to save. What is actually going on is that business firms and investors have decided that they need to change the composition of their already accumulated savings in favor of holding more cash and less of other assets.

For example, an individual may decide that instead of being 90 percent invested in stocks and other securities and having only 10 percent of his savings in cash in his checking account, he needs to increase his cash holding to 20 or 25 percent of his savings.

Similarly, a corporation may decide that it needs to increase its cash holding relative to its other assets in order to be better able to meet its bills coming due. Indeed, this is happening right now as more and more firms find that they can no longer count on being able to borrow money for such purposes.

Furthermore, the increases in cash holdings that take place in such circumstances are not only not an addition to savings but occur in the midst of a sharp decline in the overall amount of accumulated savings. For example, the increases in cash holdings that are taking place today are in response to a major plunge in the real estate and stock markets, of numerous and sizable corporate bankruptcies, and of huge losses on the part of banks and other financial institutions.

All of this represents a reduction in asset values, i.e., in the value of accumulated savings. People are turning to cash in order to avoid further such losses of their accumulated savings. Of course, widespread attempts to convert assets other than cash into cash, entail further declines in the value of accumulated savings, since the unloading of those assets reduces their value.

Accumulated savings in the economic system have fallen by several trillion dollars, and nothing could be more incredible than that, in the midst of this, many people, including the great majority of professional economists, fear saving and think that it is necessary to stimulate consumption at the expense of saving. Such is the complete and utter lack of economic understanding that prevails.

One might expect that a group of people such as most of today’s economists, who pride themselves on their empiricism, would once and a while look at the actual facts of the world in which they live, and, in the midst of the loss of trillions of dollars of accumulated savings, begin to suspect that there might actually be a need to replace savings that have been lost rather than do everything possible to prevent their replacement.

Depressions and Credit Expansion

The loss of accumulated savings is at the core of the problem of economic depressions. Recessions and depressions and the losses that accompany them are the result of the attempt to create capital on a foundation of credit expansion rather than saving. Credit expansion is the lending out of new and additional money that is created out of thin air by the banking system, which acts with the encouragement and support of the government. The money so created and lent has the appearance of being new and additional capital, but it is not.

The fact of its appearing to be new and additional capital creates an exaggerated, false understanding of the amount of capital that is available to support economic activity. Like an individual who believes he has grown rich in the course of a financial bubble, and who is led to adopt a level of living that is beyond his actual means, business firms are led to undertake ventures that are beyond their actual means.

For an individual consumer, the purchase of an expensive home or automobile in the delusion that he is rich later on turns out to be a major loss in the light of the fact that he cannot actually afford these things and would have been better off had he not bought them. In the same way, business construction projects, stepped up store openings, acquisitions of other firms, and the like, carried out in the delusion of a sudden abundance of available capital, turn out to be sources of major losses when the delusion of additional capital evaporates.

Credit expansion also fosters an artificial reduction in the demand for money for cash holding, which sets the stage for a later rise in the demand for money for cash holding, such as was described a few paragraphs ago. The reduction in the demand for money for cash holding occurs because so long as credit expansion continues, it is possible for business firms to borrow easily and profitably and thus to come to believe that they can substitute their ability to borrow for the holding of actual cash. The rising sales revenues created by the expenditure of the new and additional money that is lent out also encourages the holding of additional inventories as a substitute for the holding of cash, in the conviction that the inventories can be liquidated easily and profitably.

Recessions and depressions are the result of the loss of capital in the malinvestments and overconsumption that credit expansion causes. The losses are then compounded by the rise in the demand for money for cash holding that subsequently follows. They can be further compounded by reductions in the quantity of money as well, such as would occur if the losses suffered by banks resulted in losses to the banks’ checking depositors. (Checking deposits are part of the money supply, indeed, the far greater part. In such cases, they would lose the status of money and assume that of a security in default, which would render them useless for making purchases or paying bills.)

The Housing Bubble

Our housing bubble is an excellent illustration of the malinvestment and overconsumption caused by credit expansion. Perhaps as much as $2 trillion or more of capital has been lost in the construction and financing of houses for people who, it turned out, could not afford to pay for them. The housing bubble was financed by the creation of $1.5 trillion of new and additional money in the form of checking deposits created for the benefit of home buyers.

The creation of these deposits rested on the readiness of the Federal Reserve System to create whatever new and additional supporting funds were required in the form of bank reserves. In the three years 2001—2004, the Federal Reserve created enough such funds to drive the interest rate paid on them, i.e., the Federal Funds Rate, below 2 percent. And from July of 2003 to June of 2004, it created enough such funds to hold this rate down to just 1 percent. The end result was a substantial reduction in mortgage interest rates and thus in monthly mortgage payments, which served greatly to increase the demand for houses.

Government also greatly contributed specifically to loans being made to homebuyers who were not credit worthy. It did this through its various loan-guarantee programs, carried out by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development; and by means even of outright extortion, though the Community Reinvestment Act, which required banks to make sufficient such loans as would satisfy local u201Ccommunity groups.u201D

In physical terms, the result of credit expansion was the passage of literally millions of houses that represented capital to the firms that built them, and to the banks and others that financed them, into the hands of consumers who not only had not contributed anything remotely comparable to the wealth and capital of the economic system but also had no realistic prospect of ever being able to do so. The further result has been that many of the builders of these houses are now ruined as are many of the banks and other investors that financed the construction and sale of those houses. And because so many lenders have lost so much, the business firms that depend on them for loans can no longer obtain those loans, and so they must close their doors and fire their workers.

The growing problem of unemployment that we are experiencing and the accompanying reduction in consumer spending on the part both of the unemployed and of those who fear becoming unemployed is the result of this loss of capital, not of any sudden, capricious refusal of consumers to spend or of banks to lend. Indeed, the kind of consumer spending that so many people want to revive and encourage, by means of u201Cstimulus packages,u201D played a major role in the loss of capital that has taken place and now results in unemployment and impoverishment.

During the housing boom, millions of owners of existing houses thought that they were growing rich as the result of the rise in the prices of their homes and that they could actually live to a substantial degree off the accompanying increase in the equity in their homes. They borrowed against the increased equity and spent the proceeds. This consumption was at the expense of capital investment in the economic system, which was rendered correspondingly poorer by it. And when housing prices collapsed, and fell below the enlarged mortgage debts that had been taken on, the effect was to add to the losses suffered by lenders. This was the case to the extent such equity-consuming homeowners then walked away from their homes, leaving their creditors to lose by the decline in the price of their homes.

Keynesian Ignorance and Blindness

The immense majority of people, including, of course, most professional economists, are ignorant of the actual nature and cause of our financial crisis. This is because they are ignorant of the role of capital in the economic system. They are all Keynesians. (Even Milton Friedman, the alleged arch-defender of capitalism is reported to have said, u201CWe are all Keynesians now.u201D)

But as von Mises so aptly put it, u201CThe essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.u201D (Planning for Freedom, 4th ed., p. 207. Italics in original.) In the eyes of Keynes and his countless followers, economic activity begins and ends with consumption.

So deeply do people hold the view that consumption is everything, that it blinds them to obvious facts. Thus, the present crisis has been well underway at least since the late spring of 2007, when the sudden collapse of two large Bear Stearns hedge funds occurred. This was followed by a continuing string of bankruptcies between June of 2007 and August of 2008 of significant-sized and fairly well-known firms, such as Aloha Airlines, Levitz Furniture, Wickes Furniture, Mervyns Department Stores, Linens N’ Things, IndyMac Bank, and Bear Stearns itself. The list includes an actual run on a major bank — Northern Rock in Great Britain — in September of 2007, probably the first such run since the 1930s.

Financial failures reached a crisis point in September of 2008, with the collapse of such major firms as American International Group (AIG), Lehman Brothers, and the Halifax Bank of Scotland. These were followed by the bankruptcy of Fannie Mae and Freddie Mac, the two giant government-sponsored mortgage lenders that had led the way in guaranteeing sub-prime mortgages to borrowers who could not repay them.

Yet as late as September of 2008, the unemployment rate in the United States was no more than 6.2 percent and at mid-month the Dow Jones Industrial Average was still well above 11,000.

All this confirms that the crisis did not originate in any sudden refusal of consumers to consume or in any surge in unemployment. To the extent that unemployment is growing and consumption is declining, they are both the consequence of the economy’s loss of capital. The loss of capital is what precipitated a reduction in the availability of credit and a widening wave of bankruptcies, which in turn has resulted in growing unemployment and a decline in the ability and willingness of people to consume. The collapse in home prices and the more recent collapse in the stock market have also contributed to the decline in consumption, and probably to an even greater extent, at least up to now. Both of these events are also an aspect of the loss of capital and accumulated savings.

What Economic Recovery Requires

What all of the preceding discussion implies is that economic recovery requires that the economic system rebuild its stock of capital and that to be able to do so, it needs to engage in greater saving relative to consumption. This is what will help to restore the supply of credit and thus help put an end to financial failures based on a lack of credit.

Recovery also requires the freedom of wage rates and prices to fall, so that the presently reduced supply of capital and credit becomes capable of supporting a larger volume of employment and production, as I explained in u201CFalling Prices Are Not Deflation but the Antidote to Deflation,u201D which was my first article in this series. Recovery will be achieved by the combination of more saving, capital, and credit along with lower wage rates, costs, and prices.

In addition, recovery requires the rapid liquidation of unsound investments. If borrowers are unable to meet their contractual obligation to pay principal and interest, the assets involved need to be sold off and the proceeds turned over to the lenders as quickly as possible, in order to put an end to further losses and thus salvage as much capital from the debacle as possible.

In the present situation of widespread financial paralysis, firms and individuals can be driven into bankruptcy because they are unable to collect the sums due them from their debtors. Thus, for example, the failure of mortgage lenders would be alleviated, if not perhaps altogether avoided in some cases, if the mortgage borrowers who were in default on their properties lost their houses quickly, with the proceeds quickly being turned over to the lenders.

In that way, the lenders would at least have those funds available to meet their obligations and thus might avoid their own default; in either event, their creditors would be better off. In helping to restore the capital of lenders, or what will become the capital of the creditors of the lenders, quick foreclosures would serve to restore the ability to originate new loans.

Recovery requires the end of financial pretense. There are banks that do not want to see the liquidation of various types of assets that they own, notably, u201Ccollateralized debt obligationsu201D (CDOs). These are securities issued against collections of other securities, which in turn were issued against collections of mortgages, an undetermined number of which are in default or likely to go into default. The presumably low prices that such securities would bring in the market would likely serve to reveal the presence of so little capital on the part of many banks that they would be plunged into immediate bankruptcy. To avoid that, the banks want to prevent the discovery of the actual value of those securities. At the same time, they want creditors to trust them. Yet before trust can be established, the actual, market value of the banks’ assets must be established, even if it serves to bankrupt many of them. The safety of their deposits can be secured without the banks’ present owners continuing in that role.

When these various requirements have been met and the process of financial contraction comes to an end, the profitability of business investment will be restored and recovery will be at hand.

The Nature of Stimulus Packages

As was shown earlier in this article, economic recovery requires greater saving and the accumulation of fresh capital, to make up for the losses caused by credit expansion and the malinvestment and overconsumption that follow from it. Yet the imposition of u201Cstimulus packagesu201D results in the further loss of capital. The Keynesians not only do not know this, but would not care even if they did know it.

Because of their ignorance of the role of capital in the economic system and resulting inability to see even the clearest evidence that suggests it, the Keynesians can conceive of no cause of a recession or depression but an insufficiency of consumption and no remedy but an increase in consumption. This is the basis of their calls for u201Cstimulus packagesu201D of one kind or another.

They assume that the economic system always has enough capital, indeed, that it is in danger of having too much capital, and that the problem is simply to get it to use the capital that it has. The way that this is done, they believe, is to get people to consume. Additional consumption will be the u201Cstimulusu201D to new and additional production. When people consume, the products of past production are taken off the shelves and disappear from the stores. These products, the Keynesians believe, now require replacement. Hence, the shops will order replacement supplies and the manufacturers will turn to producing them, and thus the economic system will be operating again and recovery will be achieved, provided the u201Cstimulusu201D is large enough.

The essential meaning of a u201Cstimulus packageu201D is the government’s financing of consumption, indeed, practically any consumption, by anyone, for almost any purpose, in the conviction that this will cause an increase in employment and production as the means of replacing what is consumed. Despite talk of avoiding wasteful spending and being u201Ccareful with the taxpayers’ money,u201D the truth is that from the point of view of the advocates of economic stimulus, the bigger and more wasteful the project, the better.

This was made brilliantly clear many years ago by Henry Hazlitt, who chose the example of government spending for a bridge. It is one thing, Hazlitt showed, if the government builds a bridge because its construction is necessary to facilitate the flow of traffic. It is a very different matter, he pointed out, if the government builds the bridge for the purpose of promoting employment. In the first case, the government wants the best bridge for the lowest possible cost, which implies the employment of as few workers as possible, both in the construction of the bridge and in the production of any of the materials that go into it.

In the second case, that of stimulating employment, the government wants a bridge that requires as many workers as possible, for their employment is its actual purpose. The greater the number of workers employed, of course, the greater must be the cost of the bridge.

Indeed, no one could be more clear or explicit concerning the nature of government u201Cfiscal policyu201D and its u201Cstimuliu201D than Keynes himself, who declared (on p. 129 of his General Theory) that u201CPyramid building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.u201D

Acts of sheer destruction, such as wars and natural disasters, appear as beneficial to Keynes and his followers for the same reason that the u201Cstimulusu201D of government-financed consumption appears beneficial. This is because they too create a need for replacement and thus allegedly result in an increase in employment and production. So widespread is this view that one can very often hear people openly express favorable opinions about the alleged economic benefits of such things as earthquakes, hurricanes, and even wars.

Stimulus Packages Mean More Loss of Capital

Despite the fact that what the economic system needs for recovery is saving and the accumulation of new capital, to replace as far as possible the capital that has been lost, the effect of stimulus packages is further to reduce the supply of capital, and thus to worsen the recession or depression.

The reason that stimulus packages cause a further loss of capital is that their starting point is the consumption of previously produced wealth. That wealth is part of the capital of the business firms that own it. The stimulus programs offer money in exchange for this wealth and capital. But the money they offer does not come from the production of any comparable wealth by the government or those to whom it gives money — wealth which has had to be produced and sold and thus put into the economic system prior to the withdrawal that now takes place. The starting point for the government and its dependents is an act of consumption, which means a using up, a loss of previously existing wealth in the form of capital.

The supporters of stimulus packages look to the fresh production that is required to replace the wealth that has been consumed. It will require the performance of additional labor. They are delighted to the extent that this fresh production and additional employment materialize. They believe that at that point their mission has been accomplished. They have succeeded in generating new and additional economic activity, new and additional employment. The only shortcoming of such a policy, they believe, is that it may not be applied on a sufficiently large scale.

Unfortunately, there is something they have overlooked. And that is the fact that any fresh production and employment that results is incapable by itself of replacing the capital that was consumed in starting the process. The reason for this is that all production, including any new and additional production called into being by stimulus packages, itself entails consumption. And this consumption tends at the very least to approximate the fresh production and, indeed, is capable of equaling or even exceeding it.

Thus, for example, we start with the purchase and consumption of a new television set by someone who has not previously produced and sold anything of equivalent monetary value that provided the funds for his now buying the television set. He has simply received the money from the government. In this case, what we have is one television set withdrawn from the capital of the economic system and placed in the hands of a non-producing consumer.

We can assume, for the sake of argument, that the retailer of the television set will order a replacement set from the wholesaler, and that the wholesaler in turn will order a replacement set from the manufacturer. We can assume further that the manufacturer will now produce a new television set to replace the one that he sells to the wholesaler from his inventory.

The production of the replacement television set entails a using up of materials and components and part of the useful life of the plant and equipment required. Aspects of such using up of capital goods also take place on the part of the retailer and wholesaler and in the transportation of the television set.

Very importantly, any new and additional workers who may be employed — precisely the goal of the whole operation — in producing a new television set or in moving a television set through the channels of distribution must be paid wages, which they in turn will consume. The goods these workers receive when they spend their wages represents a further depletion of inventories, on the part of all the retailers with whom they deal. In addition, the various business firms involved have additional profits, or at least diminished losses, as the result of the various additional purchases. This enables their owners to consume more and probably results in the payment of additional taxes, which the government consumes.

Even whatever depreciation allowances are earned along the way in the various stages of replacing the television set are likely to be consumed. This is because in the context of a recession or depression investors are afraid of losses if they invest in private businesses and thus prefer to invest in short-term treasury securities, such as treasury bills, which they consider to be far safer. But when depreciation allowances are used to purchase treasury securities, they end up financing consumption rather than capital replacement. This is because the Treasury uses the proceeds from the sale of its securities to finance nothing but consumption, either that of the government itself or that of the private individuals to whom the government gives money.

The point here is that any replacement of a good consumed by a non-producer itself entails very substantial additional consumption of inventories and the useful life of plant and equipment of business firms. The same is obviously true of the replacement of goods that have simply been destroyed, whether by war or by an act of nature.

No matter how long the process of spending and respending of the funds introduced into the economic system by a stimulus package might continue — no matter how many instances of replacement production there might be following the purchase and consumption of our hypothetical television set or of any other such good — the initial loss of capital need never be made up.

This is because each act of replacement production is accompanied by corresponding additional consumption. Thus the initial act of consumption — or destruction — of wealth and capital may be followed by 10 or 100 acts of subsequent production, each carried on in order to replace the goods used up before it. But if each of these subsequent acts of production is accompanied by fresh consumption that is equivalent to it, the net effect is still one act of consumption. As a result, the supply of capital is reduced. For what is always present is X instances of production respectively following X+1 instances of consumption.

Now countries have suffered enormous losses of capital and yet still managed to recover and go on to new heights of wealth and prosperity. Germany and Japan in the decades following World War II are perhaps the most outstanding examples of this.

What enabled them to recover was not further acts of consumption, not u201Cstimulus packagesu201D of any kind, but increases in production in excess — substantially in excess — of increases in consumption. That is to say, it was a process of saving and capital accumulation that made their recovery possible. On average, people in those countries, in those years, saved and reinvested a major portion of their income, often in excess of 25 percent.

It is possible, but highly unlikely, that the replacement production induced by an initial consumption/destruction of wealth might itself entail some such new saving. If round after round of replacement production were in fact accompanied by some such saving, then, eventually, the original loss of capital would be made good. But that would be the case only if such saving was not offset by fresh acts of u201Cstimulusu201D or other policies that waste or destroy capital.

However, as I say, such an outcome is highly unlikely. If for no other reason, this is because, as I have already pointed out, the stimulus packages take place in an environment in which investors fear to invest in private firms. As a result, they use not only whatever new and additional savings they might make, for the purpose of buying u201Csafeu201D treasury securities but also even funds they earn that are required for the replacement of capital goods. In this way, savings are diverted into consumption rather than capital accumulation.

(It is ironic that while, if it did manage to occur and was not diverted into consumption, such saving might mitigate the effects of a stimulus package, it is attacked as undermining the process of recovery. Thus, for example, Paul Krugman, the 2008 Nobel Prize winner in economics, writes: u201CMeanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts…because a large fraction of any tax cut will simply be saved.u201D New York Times, January 26, 2009, p. A23.)

In addition to the diversion into consumption of such new savings as might occur subsequent to a u201Cstimulus,u201D there is the fact that the source of any such saving, namely, the net product produced, is likely to be greatly diminished. The net product is the excess of the product produced over the capital goods used up in order to produce it. It is what is available for consumption or saving out of current wage, profit, and interest income.

The net product is diminished to the extent that production is made to take place in accordance with methods requiring the employment of unnecessary capital goods per unit of output. Environmental and consumer product safety legislation provide numerous instances of this kind.

For example, requiring gas stations, dry-cleaning establishments, and many other types of businesses to substantially increase their capital investments merely in order to placate the largely groundless fears of the environmental movement. Similarly, requiring safety features in automobiles, dishwashers, display cases, ice machines, stepladders, and countless other goods — features that the market does not judge to be worth their cost — adds to the cost of the materials and components that enter into the production of products without increasing the perceived value of the products. In both instances, the result is a larger consumption of capital goods but no increase in production, and thus a reduction in the size of the net product produced and thus in the ability to engage in saving out of current income.

As indicated earlier in this article, the effect of capital decumulation, whether caused by stimulus packages or anything else, is a reduction in the ability of the economic system to produce, to employ labor, and to provide credit, for each of these things depends on capital. The reduced ability to produce and employ labor may not be apparent in the midst of mass unemployment. But it will become apparent if and when economic recovery begins. At that point, the economic system will be less capable than it otherwise would have been, because of the reduction in its supply of capital. Real wages and the general standard of living will be lower than they otherwise would have been. And all along, the ability to grant credit will be less than it otherwise would have been.

Stimulus Packages Are a Drain on the Rest of the Economic System

Even though stimulus packages may be able to generate additional economic activity, they cannot achieve any kind of meaningful economic recovery. Their actual effect is the creation of a system of public welfare in the guise of work. That is in the nature of employing people not for the sake of the products they produce but having them produce products for the sake of being able to employ them.

But stimulus packages are much more costly than simple welfare. On top of the welfare dole that allows unemployed workers to live, stimulus packages add the cost of the materials and equipment that the workers use in producing their pretended products.

The work created by stimulus packages is a make-believe work that is carried on at the expense of the rest of the economic system. It draws products and services produced in the rest of the economic system and returns to the rest of the economic system little or nothing in the way of goods or services that would constitute value for value or payment of any kind. In other words, stimulus packages and the needless work they create cause the great majority of other people to be poorer. I’ve already shown how they cause them to have less capital. Shortly, I will show how they also cause them to consume less. (For elaboration on this point, please see the forthcoming republication of my article u201CWho Pays for `Full Employment’?u201D)

Rising Prices in the Midst of Mass Unemployment

If economic recovery is to be achieved, the first thing that must be done is to stop u201Cstimulus packagesu201D and undo as far as possible any that are already in progress. This is because their effect is to worsen the problem of loss of capital that is the underlying cause of the economic crisis in the first place.

Unfortunately, they are not likely to be stopped. If they are implemented, especially on the scale already approved by Congress, the effect will be a decumulation of capital up to the point where scarcities of capital goods, including inventories of consumers’ goods in the possession of business firms, start to drive up prices.

Higher prices of consumers’ goods will result not only from scarcities of consumers’ goods (which, of course, are capital goods so long as they are in the hands of business firms), but also from scarcities of capital goods further back in the process of production. Thus a scarcity of steel sheet will not only raise the price of steel sheet, but will carry forward to the price of automobiles via the higher cost of producing automobiles that results from a rise in the price of steel sheet. Likewise, a scarcity of iron ore will carry forward to the price of steel sheet, which, again, will carry forward to the price of automobiles. And, of course, the pattern will be the same throughout the economic system, in such further cases as oil and oil products, cotton and cotton products, wheat and wheat products, and so on.

A rise in the prices of consumers’ goods is capable of stopping further capital decumulation stemming from the stimulus packages. When the point is reached that additional funds spent on consumers’ goods serve merely to raise their prices, then no additional quantities of them are sold. The same quantities are sold at higher prices. This ends the decumulation of inventories. From this point on, the buyers who obtain their funds from the government consume at the expense of people who have earned their incomes but now get less for them.

Once inventories become scarce in relation to the spending for goods, all of the funds that the government has been pouring into the economic system become capable of launching a major increase in prices. This rise in prices can take place even in the midst of mass unemployment. This is because the abundance of unemployed workers does nothing to mitigate the scarcity of capital goods that has occurred as the result of the attempts to stimulate employment.

Even though rising prices can deprive stimulus packages of the ability to cause further capital decumulation, the inflation of the money supply by the government results in continuing capital decumulation. In large part, this occurs as the result of the fact that the additional spending resulting from a larger money supply raises business sales revenues immediately while it raises business costs only with a time lag. So long as this goes on, profits are artificially increased.

Despite the fact that most or all of the additional profits may be required simply in order to replace assets at higher prices, the additional profits are taxed as though they were genuine gains. This impairs the ability of firms to replace their assets. The destructive consequences of this phenomenon can be seen in the transformation of what was once America’s industrial heartland into the u201Crustbelt.u201D

At the same time, throughout the economic system, starting long before today’s stimulus packages and continuing on alongside them, regular, almost year-in, year-out government budget deficits do their work of destruction. They cause a continuing diversion into consumption not only of a considerable part of whatever savings might be made out of income but also of the replacement allowances for the using up of plant and equipment and all other fixed assets. Generations of government budget deficits have sucked up trillions of dollars of what would have been capital funds and have gone a long way toward turning America into an industrial wasteland.

The blind rush into massive u201Cstimulus packagesu201D is the culmination of generations of economic ignorance transmitted from professor to student in the guise of advanced, revolutionary thinking — the u201CKeynesian revolution.u201D The accelerating destruction of our economic system that we are now experiencing is the product of a prior destruction of economic thought. Our entire intellectual establishment has been the victim — the willing victim — of a massive intellectual con job that goes under the name u201CKeynesianism.u201D And we are now paying the price.

I say, willing victims of an intellectual con job. What other description can there be of those who were ready to hail as a genius the man who wrote, u201CPyramid building, earthquakes, even wars may serve to increase wealth….u201D

Only a brave few — most notably Ludwig von Mises and Henry Hazlitt — stood apart from this madness, and for doing so, they were made intellectual pariahs. But the time is coming when it will be clear to all who think that it is they who have had the last word.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented.

The front-page, lead article of The New York Times of last November 1 provides a typical example of this confusion. It declares:

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

The word for this is deflation, or declining prices, a term that gives economists chills.

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.

Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.

Read the rest of the article

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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A recent New York Times article provides two significant pieces of information about Larry Summers, the man designated by President-Elect Obama to be head of the National Economic Council and, as such, according to The Times, “his lead economic adviser inside the White House.” (David Leonhardt, “The Return of Larry Summers,” November 26, 2008, p. B1.)

First, The Times’ article informs its readers that Summers, a former Secretary of the Treasury under President Clinton, and later President of Harvard University, so impressed Henry Kissinger that years ago “Kissinger suggested that Mr. Summers be given a White House post in which he was charged with shooting down or fixing bad ideas. Mr. Summers’ loyal protégés — Timothy Geithner, who beat him out to become the next Treasury secretary; Peter Orszag, the next budget director; Sheryl Sandberg, the chief operating officer of Facebook; and others — say that Mr. Summers can make them smarter in ways that almost no else can.”

The second significant piece of information provided by The Times’ article describes the nature of Mr. Summers’ own ideas. It describes how “His favorite argument today…goes like this: To undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago.”

The Times’ reporter has apparently known about Mr. Summers’ redistributionist ideas, as well as his closeness to Mr. Obama, for at least a year and a half. As a professional journalist, he had a moral obligation to share such important knowledge with the general public. But he, and many others, similarly so informed, did not bother to do so. Instead, even in the face of the substantial public upset in connection with the question about redistribution posed to Mr. Obama by the now famous “Joe the Plumber,” they chose to remain silent.

They personally favored the election of Mr. Obama and his ideas on the subject of redistribution. Badly lacking in professional standards and personal morals, they placed their own political agenda above their professional obligation to inform the public about a matter vital to an intelligent decision as to how to cast its ballots.

And now, when they openly describe the redistributionist egalitarianism of Mr. Summers and, implicitly, Mr. Obama, they try to make a far-left agenda more palatable by depicting these gentlemen as belonging to the “center” of the political spectrum.1

Summers apparently does not see, or if he does see, does not care, that in presenting his proposal for redistribution, what he is urging is armed robbery on a massive scale. That is the essence of any policy of “redistribution,” whether advocated by Summers and Obama or by Lenin, Stalin, or Mao.

For what is going to make each of the top 1 percent of income earners pay an extra $800,000 in taxes? The only thing that would make them pay it is fear of being arrested and imprisoned. And who will arrest and imprison them? Armed thugs wearing the uniforms and badges of officers of the United States Government, who would give them no other choice but to pay the money or be hauled off to jail and clubbed or shot if they resisted. (What a total perversion this would be of what the United States Government once stood for: a transformation from an institution designed for the protection of individual rights into a gang of bandits massively violating individual rights.)

How does this differ in any essential respect from those who are to receive the loot, in the form of $10,000 checks, taking matters into their own hands and simply robbing the homes and businesses of the top 1 percent of income earners to the extent of $10,000 each? They would give the homeowners and businessmen the same choice, of their money or their lives.

And why should it stop at $800,000 in extra taxes and $10,000 each for the looters? If the economic inequality represented by that $800,000 per capita of the top 1 percent of income earners must be done away with, why should not all economic inequality be done away with? Why not make everyone an equal owner and equal income recipient, i.e., why not go straight for communism? That’s the logic in what Summers is advocating.

Not only is Summers advocating the kind of evil committed by criminals, but he also displays a degree of lack of thought that is often found among criminals.

One of the implications of his proposal is that an individual who increased his earnings by just one dollar could be liable for an additional $800,000 in taxes. Based on the most recent available data, which are for 2006, an individual who increased his earnings from $388,806 to $388,807 would thereby be thrust into the top 1 percent of income earners and thus be made subject to the $800,000 of additional taxes urged by Summers. This, of course, would leave such an individual with an after-tax income of minus $411,193. (In addition, of course, all of the ordinary income taxes for which he would be liable at that level of income would also have to be subtracted, throwing him still further into Summers’ Alice-In-Wonderland world of negative after-tax income.)

Summers is probably unaware of this, because he appears to focus on the $1.7 million average income of the top 1 percent of income earners. This enables him to ignore all the below-average incomes of members of that group that would be rendered negative on an after-tax basis if his scheme were imposed.

A proposal this hare-brained makes Summers come across more as an intellectual lightweight than as any kind of brilliant thinker able to identify the errors in others’ thoughts.

There is actually a reason for Summers’ advocating a scheme that implies negative after-tax income for many upper income taxpayers. That’s the fact that that is what is necessary to make it appear that redistribution can constitute any kind of significant gain to large numbers of people. If one rules out taxes that imply negative after-tax income, and also taxes that serve to reduce the demand for labor or capital goods, it turns out that there is very little to “redistribute.”

First of all, all of the wealth of businessmen and capitalists that is in the form of capital (which in the case of large businessmen and capitalists, is almost all of their wealth) already benefits the entire population. It does so by virtue of serving to produce the goods and services that everyone buys and by virtue of constituting the source of the demand for the labor that wage earners sell.

The wealth of Exxon, General Motors, Dell, etc., is in the means of production that bring gasoline and heating oil, automobiles and SUVs, computers and monitors to the masses. Their wealth and that of all other firms is also the source of the demand for the labor that wage earners sell. Thus there is a twofold general benefit from privately owned means of production: the benefit to the buyers of products and to the sellers of labor.

Exactly the same is true of profit and interest income and of capital gains and inheritances to the extent that they are saved and invested, which, in the case of large incomes and inheritances is overwhelmingly the case as a rule. The only special benefit of the businessmen and capitalists, i.e., the only benefit that they obtain which the non-owners of the means of production do not obtain, is the additional personal consumption that their wealth makes possible, plus the satisfaction of knowing that if necessary they could consume their wealth.

The truly personal consumption of businessmen and capitalists is insignificant in the scheme of things. For Warren Buffet, the world’s richest man, it appears to be on the order of an extra ice-cream soda per billion dollars of additional capital accumulated, plus mosquito nets to fight malaria in Africa. The few dozen or even few hundred mansions, yachts, and personal jets of other very wealthy businessmen and capitalists, pale into insignificance alongside the tens of millions of ordinary homes, automobiles, refrigerators, freezers, washer-dryers, air-conditioners, television sets, and computers of the general population. A major, probably the greater part of the consumption of the leading businessmen and capitalists takes the form of the support of such institutions as universities, hospitals, opera companies, libraries, and the like. When all this is taken into account, it turns out that in the first place there is simply not very much to redistribute that the intended beneficiaries of the redistribution do not already have.

It also turns out that attempts to redistribute the wealth of businessmen and capitalists serves almost entirely to reduce the supply of means of production and the demand for labor. It is a self-destructive policy of eating the seed corn. Summers and Obama are ignorant of such facts. Never having studied the works of Mises, they have no way of knowing them. (For elaboration of these points, see the author’s Capitalism: A Treatise on Economics, pp. 297—303, 622—639.)

It speaks volumes that apparently no one to whom Summers presented his “favorite argument” had the ability to find any moral or practical flaws in it.

Summers should be fired. He’s too shallow and ignorant and his ideas too evil for him to serve in the United States Government in any capacity. Although generally viewed as a prominent professional economist, his actual knowledge of the subject is minimal. This conclusion follows from the fact that the essential subject matter of economics is capitalism. And Summers’ ideas on redistribution reveal that he fails to understand the nature of the most essential feature of capitalism, namely, private ownership of the means of production and the indispensable role it plays in the standard of living of the average person.

His views may qualify him to be an economic advisor to Hugo Chavez of Venezuela or Robert Mugabe of Zimbabwe, but certainly not to be an economic advisor to the President of the United States. Before anyone assumes that position, he should know and understand the ideas of Ludwig von Mises, who is far and away the leading theorist of capitalism, and whose works explain its operation as it is has never before been explained. In the absence of extensive knowledge of Mises, one is, simply put, an economic ignoramus, irrespective of the degrees, awards, and public acclaim one may enjoy.

1. These are the same kind of reporters who define laissez-faire capitalism in an equally bizarre way. Just as you supposedly can be an egalitarian and a Marxist and still be a centrist, so too you allegedly can have virtual economic fascism and it will still be laissez-faire capitalism. And it will be laissez-faire capitalism which is then blamed for all of the evils of economic fascism. Thus, irrespective of the present-day magnitude of taxation and government control over economic life, irrespective of the massive government intervention in the form of credit expansion and of laws compelling the making of loans to unqualified borrowers, which in fact caused our present financial crisis, laissez-faire, they say, still existed and it is what is responsible for the crisis. They claim that laissez faire existed because financial innovations were able to take place without their first being thoroughly understood by government bureaucrats and only then being allowed to occur. Never mind that the major flaw in the innovations was the mistaken belief, held almost universally, but first and foremost by government bureaucrats and by their allies in the media, that the Federal Reserve had made the existence of depressions impossible. (For elaboration on the attempt to blame the crisis on laissez-faire, see the author’s “The Myth that Laissez Faire Is Responsible for Our Financial Crisis.”)

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism.

The attempt to place the blame on laissez faire is readily confirmed by a Google search under the terms u201Ccrisis + laissez faire.u201D On the first page of the results that come up, or in the web entries to which those results refer, statements of the following kind appear:

u201CThe mortgage crisis is laissez-faire gone wrong.u201D

u201CSarkozy [Nicolas Sarkozy, the President of France] said ‘laissez-faire’ economics, ‘self-regulation’ and the view that ‘the all-powerful market’ always knows best are finished.u201D

u201C’America’s laissez-faire ideology, as practiced during the subprime crisis, was as simplistic as it was dangerous,’ chipped in Peer Steinbrck, the German finance minister.u201D

u201CPaulson brings laissez-faire approach on financial crisis….u201D

u201CIt’s au revoir to the days of laissez faire.u201D1

Recent articles in The New York Times provide further confirmation. Thus one article declares, u201CThe United States has a culture that celebrates laissez-faire capitalism as the economic ideal….u201D2 Another article tells us, u201CFor 30 years, the nation’s political system has been tilted in favor of business deregulation and against new rules.u201D3 In a third article, a pair of reporters assert, u201CSince 1997, Mr. Brown [the British Prime Minister] has been a powerful voice behind the Labor Party’s embrace of an American-style economic philosophy that was light on regulation. The laissez-faire approach encouraged the country’s banks to expand internationally and chase returns in areas far afield of their core mission of attracting deposits.u201D4 Thus even Great Britain is described as having a u201Claissez-faire approach.u201D

The mentality displayed in these statements is so completely and utterly at odds with the actual meaning of laissez faire that it would be capable of describing the economic policy of the old Soviet Union as one of laissez faire in its last decades. By its logic, that is how it would have to describe the policy of Brezhnev and his successors of allowing workers on collective farms to cultivate plots of land of up to one acre in size on their own account and sell the produce in farmers’ markets in Soviet cities. According to the logic of the media, that too would be u201Claissez faireu201D — at least compared to the time of Stalin.

Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above. Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual’s rights against the initiation of physical force. This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual’s own government. This last is accomplished by such means as a written constitution, a system of division of powers and checks and balances, an explicit bill of rights, and eternal vigilance on the part of a citizenry with the right to keep and bear arms. Under laissez-faire capitalism, the state consists essentially just of a police force, law courts, and a national defense establishment, which deter and combat those who initiate the use of physical force. And nothing more.

The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States.

1) Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted u201Cbailouts.u201D What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.

2) There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.

3) The economic interference of today’s cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.

4) To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been u201Ctilted in favor of business deregulation and against new rules.u201D Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.

5) And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.

What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state than to laissez-faire capitalism. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez-faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.

Government Intervention Actually Responsible for the Crisis

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one’s money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.

All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.

Perhaps as much as a trillion and a half dollars or more of new and additional checkbook-money capital was channeled into the housing market as the result of the artificially low interest rates caused by the presence of an even larger overall amount of new and additional money in the loan market. Because of the long-term nature of its financing, housing is especially susceptible to the effect of lower interest rates, which can serve sharply to reduce monthly mortgage payments and in this way correspondingly increase the demand for housing and for the mortgage loans needed to finance it.

Over a period of years, the result was a huge increase in the production and purchase of new homes, rapidly rising home prices, and a further spiraling increase in the production and purchase of new homes in the expectation of a continuing rise in their prices.

To gauge the scale of its responsibility, in the period of time just since 2001, the Federal Reserve caused an increase in the supply of checkbook-money capital of more than 70 percent of the cumulative total amount it had created in the whole of the previous 88 years of its existence — that is, almost 2 trillion dollars.5 This was the increase in the amount by which the checking deposits of the banks exceeded the banks’ reserves of actual money, that is, the money they have available to pay depositors who want cash. The Federal Reserve caused this increase in illusory capital by means of creating whatever new and additional bank reserves as were necessary to achieve a Federal Funds interest rate — that is, the rate of interest paid by banks on the lending and borrowing of reserves — that was far below the rate of interest dictated by the market. For the three years 2001—2004, the Federal Reserve drove the Federal Funds Rate below 2 percent and from July of 2003 to June of 2004, drove it even further down, to approximately 1 percent.

The Federal Reserve also made it possible for banks to operate with a far lower percentage of reserves than ever before. Whereas in a free market, banks would hold gold reserves equal to their checking deposits, or at the very least to a substantial proportion of their checking deposits,6 the Federal Reserve in recent years contrived to make it possible for them to operate with irredeemable fiat money reserves of less than 2 percent.

The Federal Reserve drove down the Federal Funds Rate and brought about the vast increase in the supply of illusory capital for the purpose of driving down all market interest rates. The additional illusory capital could find borrowers only at lower interest rates. The Federal Reserve’s goal was to bring about interest rates so low that they could not compensate even for the rise in prices. It deliberately sought to achieve a negative real rate of interest on capital, that is, a rate below the rate at which prices rise. This means that a lender, after receiving the interest due him for a year, has less purchasing power than he had the year before, when he had only his principal.

In doing this, the Federal Reserve’s ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large-scale unemployment.

As matters have turned out, the Federal Reserve got its wish for a negative real rate of interest, but to an extent far beyond what it wished. It wished for a negative real rate of return of perhaps 1 to 2 percent. What it achieved in the housing market was a negative real rate of return measured by the loss of a major portion of the capital invested. In the words of The New York Times, u201CIn the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion.u201D7

This vast loss of capital in the housing debacle is what is responsible for the inability of banks to make loans to many businesses to which they normally could and would lend. The reason they cannot now do so is that the funds and the real wealth that have been lost no longer exist and thus cannot be lent to anyone. The Federal Reserve’s policy of credit expansion based on the creation of new and additional checkbook money has thus served to give capital to unworthy borrowers who never should have had it in the first place and to deprive other, far more credit worthy borrowers of the capital they need to stay in businesses. Its policy has been one of redistribution and destruction.

The capital it has caused to be malinvested and lost in housing is capital that is now unavailable for such firms as Wickes Furniture, Linens ‘n Things, Levitz Furniture, Mervyns, and innumerable others, who have had to go bankrupt because they could not obtain the loans they needed to stay in business. And, of course, among the foremost victims have been major banks themselves. The losses they have suffered have wiped out their capital and put them out of business. And the list of casualties will certainly grow.

Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners’ equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment.

A discussion of the housing debacle would also not be complete if it did not mention the role of government guarantees of many mortgage loans. If the government guarantees the principal and interest on a loan, there is no reason why a lender should care about the qualifications of a borrower. He will not lose by making the loan, however bad it may turn out to be.

A substantial number of mortgage loans carried such guarantees. For example, a New York Times article describes the Department of Housing and Urban Development as u201Can agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans.u201D The article describes how HUD progressively reduced its lending standards: u201Cfamilies no longer had to prove they had five years of stable income; three years sufficed…lenders were allowed to hire their own appraisers rather than rely on a government-selected panel…lenders no longer had to interview most government-insured borrowers face to face or maintain physical branch offices,u201D because the government’s approval for granting mortgage insurance had become automatic.

The Times’ article goes on to describe how u201CLenders,u201D such as Countrywide Financial, which was among the largest and most prominent, u201Csprang up to serve those whose poor credit history made them ineligible for lower-interest ‘prime’ loans.u201D It notes the fact that u201CCountrywide signed a government pledge to use ‘proactive creative efforts’ to extend homeownership to minorities and low-income Americans.u201D8 u201CProactive creative effortsu201D is a good description of what lenders did in offering such bizarre types of mortgages as those requiring the payment of u201Cinterest only,u201D and then allowing the avoidance even of the payment of interest by adding it to the amount of outstanding principal. (Such mortgages suited the needs of homebuyers whose reason for buying was to be able to sell as soon as home prices rose sufficiently further.)

Just as vast numbers of houses were purchased based on an unfounded belief in an endless rise in their prices, so too vast numbers of complex financial derivatives were sold based on an unfounded belief that the Federal Reserve System actually had the power it claimed to have of making depressions impossible, a power which the media and most of the economics profession repeatedly affirmed.

Derivatives have received such a bad press that it is necessary to point out that the insurance policy on a home is a derivative. And many of the derivatives that were sold and which are now creating problems of insolvency and bankruptcy, namely, u201Ccredit default swaps (CDSs),u201D were insurance policies in one form or another. Their flaw was that unlike ordinary homeowners’ insurance, they did not have a sufficient list of exclusions.

Homeowners’ policies make exclusions for such things as damage caused by war and, in many cases, depending on the special risks of the local area, earthquakes and hurricanes. In the same way, the more complex derivatives should have made an exclusion for losses resulting from financial collapse brought on by Federal-Reserve-sponsored massive credit expansion. (If it is impossible actually to write such an exclusion, because many of the losses may occur before the nature of the cause becomes evident, then such derivatives should not be written and the market will no longer write them because of the unacceptable risks they entail.) But decades of brainwashing by the government, the media, and the educational system had convinced almost everyone that such collapse was no longer possible.

Belief in the impossibility of depressions played the same role in the creation and sale of u201Ccollateralized debt obligations (CDOs).u201D Here disparate home mortgages were bundled together and securities were issued against them. In many cases, large buyers bundled together collections of such securities and issued further securities against those securities. As more and more homeowners have defaulted on their loans, the result has been that no one is able directly to judge the value of these securities. To do so, it will be necessary to disentangle them down to the level of the underlying individual mortgages. Such tangles of securities could never have been sold in a market not overwhelmed by the propaganda that depressions are impossible under the government’s management of the financial system.

Finally, a discussion of the housing debacle would not be complete if it did not include mention of forms of virtual extortion that served to encourage loans to unworthy borrowers. Thus, the online encyclopedia Wikipedia writes:

The Community Reinvestment Act [CRA]…is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods… CRA regulations give community groups the right to comment or protest about banks’ non-compliance with CRA. Such comments could help or hinder banks’ planned expansions.
The meaning of
these words is that the Community Reinvestment Act gives the power
to u201Ccommunity groups,u201D to determine in an important respect the financial
success or failure of a bank. Only if they are satisfied that the
bank is making sufficient loans to borrowers to whom it would otherwise
choose not to lend, will it be permitted to succeed. The most prominent
such community group is ACORN.

Part and parcel of the environment that has made an act such as the CRA possible, is threats of slander against banks for being u201Cracistu201D if they choose not to make loans to people who are poor credit risks and also happen to belong to this or that minority group. The threats of slander go hand in glove with intimidation from various government agencies that exercise discretionary power over the banks and are in a position to harm them if they do not comply with the agencies’ wishes. The same points apply to mortgage lenders other than banks.

What this extensive analysis of the actual causes of our financial crisis has shown is that it is government intervention, not a free market or laissez-faire capitalism, that is responsible in every essential respect.

The Laissez-Faire Myth and the Marxism of the Media

The myth that laissez faire exists in the present-day United States and is responsible for our current economic crisis is promulgated by people who know practically nothing whatever of sound, rational economic theory or the actual nature of laissez-faire capitalism. They espouse it despite, or rather because of, their education at the leading colleges and universities of the country, When it comes to matters of economics, their education has steeped them entirely in the thoroughly wrong and pernicious doctrines of Marx and Keynes. In claiming to see the existence of laissez faire in the midst of such massive government interference as to constitute the very opposite of laissez faire, they are attempting to rewrite reality in order to make it conform with their Marxist preconceptions and view of the world.

They absorb the doctrines of Marx more in history, philosophy, sociology, and literature classes than in economics classes. The economics classes, while usually not Marxist themselves, offer only highly insufficient rebuttal of the Marxist doctrines and devote almost all of their time to espousing Keynesianism and other, less well-known anti-capitalistic doctrines, such as the doctrine of pure and perfect competition.

Very few of the professors and their students have read so much as a single page of the writings of Ludwig von Mises, who is the preeminent theorist of capitalism and knowledge of whose writings is essential to its understanding. Almost all of them are thus essentially ignorant of sound economics.

When I refer to the educational system and the media as Marxist, I do not intend to imply that its members favor any kind of forcible overthrow of the United States government or are necessarily even advocates of socialism. What I mean is that they are Marxists insofar as they accept Marx’s views concerning the nature and operation of laissez-faire capitalism.

They accept the Marxian doctrine that in the absence of government intervention, the self-interest, the profit motive — the u201Cunbridled greedu201D — of businessmen and capitalists would serve to drive wage rates to minimum subsistence while it extended the hours of work to the maximum humanly endurable, imposed horrifying working conditions, and drove small children to work in factories and mines. They point to the miserably low standard of living and terrible conditions of wage earners in the early years of capitalism, especially in Great Britain, and believe that that proves their case. They go on to argue that only government intervention in the form of pro-union and minimum-wage legislation, maximum-hours laws, the legal prohibition of child labor, and government mandates concerning working conditions, served to improve the wage earner’s lot. They believe that repeal of this legislation would bring about a return to the miserable economic conditions of the early nineteenth century.

They view the profits and interest of businessmen and capitalists as unearned, undeserved gains, wrung from wage earners — the alleged true producers — by the equivalent of physical force, and hence regard the wage earners as being in the position of virtual slaves (u201Cwage slavesu201D) and the capitalist u201Cexploitersu201D as being in the position of virtual slave owners. Closely connected with this, they regard taxing the businessmen and capitalists and using the proceeds for the benefit of wage earners, in such forms as social security, socialized medicine, public education, and public housing, as a policy that serves merely to return to the wage earners some portion of the loot allegedly stolen from them in the process of u201Cexploitation.u201D

In full agreement with Marx and his doctrine that under laissez-faire capitalism the capitalists expropriate all of the wage earner’s production above what is necessary for minimum subsistence, they assume that the government’s intervention harms no one but the immoral businessmen and capitalists, never the wage earners. Thus not only the taxes to pay for social programs but also the higher wages imposed by pro-union and minimum-wage legislation are assumed simply to come out of profits, with no negative effect whatever on wage earners, such as unemployment. Likewise for the effect of government-imposed shorter hours, improved working conditions, and the abolition of child labor: the resulting higher costs are assumed simply to come out of the capitalists’ u201Csurplus value,u201D never out of the standard of living of wage earners themselves.

This is the mindset of the whole of the left and in particular of the members of the educational system and media. It is a view of the profit motive and the pursuit of material self-interest as inherently lethal if not forcibly countered and rigidly controlled by government intervention. As stated, it is a view that sees the role of businessmen and capitalists as comparable to that of slave owners, despite the fact that businessmen and capitalists do not and cannot employ guns, whips, or chains to find and keep their workers but only the offer of better wages and conditions than those workers can find elsewhere.

Not surprisingly, the educational system and media share the view of Marx that laissez-faire capitalism is an u201Canarchy of production,u201D in which the businessmen and capitalists run about like chickens without heads. In their view, rationality, order, and planning emanate from the government, not from the participants in the market.

As I say, this, and more like it, is the intellectual framework of the great majority of today’s professors and of several generations of their predecessors. It is equally the intellectual framework of their students, who have dutifully absorbed their misguided teachings and some of whom have gone on to become the reporters and editors of such publications as The New York Times, The Washington Post, Newsweek, Time, and the overwhelming majority of all other newspapers and news magazines. It is the intellectual framework of their students who are now the commentators and editors of practically all of the major television networks, such as CBS, NBC, ABC, and CNN.9 And it is this intellectual framework within which the media now attempts to understand and report on our financial crisis.

In their view, laissez-faire capitalism and economic freedom are a formula for injustice and chaos, while government is the voice and agent of justice and rationality in economic affairs. So firmly do they hold this belief, that when they see what they think is evidence of large-scale injustice and chaos in the economic system, such as has existed in the present financial crisis, they automatically presume that it is the result of the pursuit of self-interest and the economic freedom that makes that pursuit possible. Given this fundamental attitude, the principle that guides contemporary journalists so-called is that their job is to find the businessmen and capitalists who are responsible for the evil and the government officials who set them free to commit it, and, finally, to identify and support the policies of government intervention and control that will allegedly eliminate the evil and prevent its recurrence in the future.

Their fear and hatred of economic freedom and laissez-faire capitalism, and their need to be able to denounce it as the cause of all economic evil, is so great that they pretend to themselves and to their audiences that it exists in today’s world, in which it clearly does not exist even remotely. By making the claim that laissez faire exists and is what is responsible for the problem, they are able to turn the full force of their hatred for actual economic freedom and laissez-faire capitalism against each and every sliver of economic freedom that somehow manages to exist and which they decide to target. That sliver, they project, is part and parcel of the starvation of the workers in the inhuman exploitation of labor that, in their ignorance, they take for granted is imposed by capitalists under laissez faire. Their brainwashed audience, as much the product of the contemporary educational system as they themselves, then quickly follows suit and obliges their efforts to arouse hatred.

The result is summed up in words such as these, which appeared in one of the same New York Times articles I quoted earlier: u201C’We now have a collective anger, disgust, over our whole financial system and it’s obvious we’re going to get a regulatory backlash…’u201D [with] u201Ca spillover effect to other industries because voters have the perception that u2018big companies are animals and they need to be put in their cages.’u201D10

In this way the enemies of capitalism and economic freedom are able to proceed in their campaign of economic destruction and devastation. They use the accusation of u201Claissez faireu201D as a kind of ratchet for increasing the government’s power. For example, in the early 1930s they accused President Hoover of following a policy of laissez faire, even as he intervened in the economic system to prevent the fall in wage rates that was essential to stop a reduced demand for labor from resulting in mass unemployment. On the basis of the mass unemployment that then resulted from Hoover’s intervention, which they succeeded in portraying as u201Claissez faire,u201D they deceived the country into supporting the further massive interventions of the New Deal.

Today, they continue to play the same game. Always it is laissez faire that they denounce, and whose alleged failures they claim need to be overcome with yet more government regulations and controls. Today, the massive interventions not only of the New Deal, but also of the Fair Deal, the New Frontier, the Great Society, and of all the administrations since, have been added to the very major interventions that existed even in the 1920s and to which Hoover very substantially added. And yet we still allegedly have laissez faire. It seems that so long as anyone manages to move or even breathe without being under the control of the government, laissez faire allegedly continues to exist, which serves to make necessary yet still more government controls.

The logical stopping point of this process is that one day everyone will end up being shackled to a wall, or at the very least being compelled to do something comparable to living in a zip code that matches his social security number. Then the government will know who everyone is, where he is, and that he can do nothing whatever without its approval and permission. And then the world will be safe from anyone attempting to do anything that benefits him and thereby allegedly harms others. At that point, the world will enjoy all the prosperity that comes from total paralysis.

Notes

1. See http://www.volunteertv.com/international/headlines/29762874.html.
2. Steve Lohr, u201CIntervention Is Bold, but Has a Basis in History,u201D October 14, 2008, p. A14.
3. Jackie Calmes, u201CBoth Sides of the Aisle See More Regulation,u201D October 14, 2008, p. A15.
4. Landon Thomas Jr. and Julia Werdigier, u201CBritain Takes a Different Route to Rescue Its Banks,u201D October 9, 2007, p. B7.
5. I arrive at these figures by calculating total checking deposits in January of 2001 and in August of 2008 as the sum of those contained in M1, the u201Csweepu201D accounts compiled by the Federal Reserve Bank of St. Louis, and money market mutual fund deposits, both retail and institutional. From these respective totals I subtract total bank reserves as of the same dates. I then subtract the result for 2001 from that for 2008 and divide the difference by the sum calculated for 2001.
6. If the creation of checkbook money in excess of currency holdings is in fact an attempt at cheating, as I described it earlier, then it follows that a free market would actually require a 100 percent reserve.
7. Joe Nocera, u201CShouldn’t We Rescue Housing?, October 18, 2008, p. B1.
8. David Streitfeld and Gretchen Morgenson, u201CThe Reckoning, Building Flawed American Dreams,u201D October 19, 2008, p. A26.
9. For a comprehensive refutation of all aspects of this intellectual framework, see George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996), chapters 11, 14, and passim.
10. Jackie Calmes, loc. cit.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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A credit crisis has been spreading through the economic system.[1] It began with the collapse of the housing bubble, which was the result of years of Federal-Reserve-sponsored credit expansion. This credit expansion poured hundreds of billions of dollars into the purchase of homes largely by sub-prime borrowers who never had a realistic capability of repaying their mortgage debts in the first place. And, not surprisingly, large numbers of them in fact stopped making the payments required by their mortgages.

At first apparently confined to the market for sub-prime mortgages, the credit crisis has spread to other portions of the mortgage market, to the usually staid municipal bond market, and within the last week or so has led to a run against a major investment bank (Bear Stearns). Along the way, triple-A rated securities have overnight turned into junk bonds, multi-billion dollar hedge funds have collapsed, and major commercial banks have lost tens of billions of dollars of capital. All this, despite massive infusions of funds into the market by the Federal Reserve System and other central banks and a reduction in the Federal Funds rate from 5.25 percent in September of 2007 to 2.25 percent currently.

In the process, the triple-A rated securities that turned out to be junk served to confirm the old truth that lead cannot be turned into gold: the alleged triple-A securities were backed by collections of mortgages that in the last analysis consisted largely or even entirely of sub-primes. An important new truth also appears to have emerged: namely, that Ph.Ds. in finance, the likely authors of the schemes for creating such securities, can turn out to be far more costly than anyone had ever dreamed possible.

Currently, untold billions more of banks’ capital now hinge on the survival of bond insurers striving to insure more than two trillion dollars of outstanding bonds on the basis of capital of their own of roughly ten billion dollars. Collapse of the bond insurers would mean that credit-rating firms, such as Moody’s and Standard and Poor’s, would reduce the ratings of all the bond issues that would consequently be deprived of insurance coverage. This in turn would serve to reduce the prices of those bonds, because lower credit ratings would make them ineligible for purchase by numerous investors, such as many pension funds. To the extent that the bonds were owned by banks, the value of the banks’ assets would be correspondingly reduced and with it the magnitude of the banks’ capital.

The decline in the assets and capital of banks that has already taken place has served to reduce the ability of banks to lend money to borrowers to whom they would otherwise normally lend. To the extent, for example, that sub-prime mortgage borrowers have stopped paying interest and principal on their loans, the banks do not have those funds available to make loans to other borrowers.

The effects of such credit contraction can already be seen in business bankruptcies precipitated by an inability of firms to obtain refinancing of debts coming due. It can also be seen in the growing difficulty even of sound firms to obtain financing required for expansion.

The Role of Leverage

Our present circumstances follow decades, indeed, generations of almost continuous inflation and credit expansion, in which almost everyone has become accustomed to assume that asset values will always rise or at least will quickly resume their rise after any pause or decline. This assumption not only played an important role in the eagerness with which people lent and borrowed in the mortgage market, but also in bringing about the very high degree of financial leverage that has come to characterize practically all areas of our financial system. (Leverage is the use of borrowed funds to increase the returns that can be earned with a given sized capital. It equivalently increases the losses that can be incurred on that capital.)

Unduly high leverage explains the failure of major lenders in the prime portion of the real estate market. As the result of losses sustained in sub-prime mortgages, banks and other lenders could no longer provide funds as readily for the purchase of prime mortgages. The resulting few percent drop in the value of prime mortgages has served to wipe out the entire capital of prime mortgage lenders whose capital was so highly leveraged that it constituted an even smaller percentage of the value of their assets than the few percent drop in the price of those assets. For example, if a mortgage lender initially had assets worth $103 and debts of his own of $100 incurred in order to finance the purchase of those assets, a mere 4 percent decline in the value of his assets would wipe out his entire capital and then some. Multiply these numbers by many billions, and the example corresponds exactly to the real-world cases of Thornburg Mortgage and Carlyle Capital reported on the front page of The New York Times of March 8, and to that of Bear Stearns reported on the front page of The New York Times just one week later.

The liquidation of the assets of such lenders, which consisted mainly of prime mortgages, has meant a further fall in the price of prime mortgages, to the point where the credit even of the government-sponsored mortgage lenders Fannie Mae and Freddie Mac has come into question. These two lenders have outstanding mortgage-backed obligations of more than $4 trillion, which sum until recently was assumed also to be an obligation of the US government. Now it has become uncertain whether the actual obligation of the US government extends beyond the less than $5 billion in lines of credit these lenders have with the US Treasury.

The Federal Reserve’s rescue of Bear Stearns can be understood in part in the light of its desire to avoid further declines in the assets and capital of Fannie Mae and Freddie Mac, which would have resulted if Bear had had to sell off its holdings of mortgages. The likelihood that the failure of Bear would have triggered the failure other major Wall Street firms and thereby have resulted in even more massive sell offs of mortgages, along with other assets, was a related important consideration.

Remarkably, at the very same time that the Federal Reserve has been striving to cope with the consequences of excessive leverage and possibly thereby help to prevent the collapse of Fannie Mae and Freddie Mac, the government regulator of these institutions — the Office of Federal Housing Enterprise Oversight — is not content with the fact that they are already skating on dangerously thin ice. Thus, The New York Times of March 20 reports that the regulator has just decided to reduce their capital requirements, for the purpose of enabling them to take on still more leverage. The effect of this will be that an even more modest decline in home prices and mortgage values will be sufficient to drive Fannie Mae and Freddie Mac into bankruptcy than is now the case.

As these examples illustrate, the failure of debtors can serve to wipe out the capital of highly leveraged creditors, who then become unable to pay their debts, perhaps causing the failure of their creditors, and so on. In other words, one failure can set off a domino effect of a chain of failures. What serves to end the process is when someone in the chain finally accumulates enough salvageable assets from those earlier in the chain to be able to satisfy his creditors.

Leverage and Bank Capital

Operating alongside the process of chains of failures is another, even more important aspect of the leverage present in today’s financial system. This is the fact that reductions in the capital of banks can result in multiple contractions of credit. As a rough average, banks are normally required to possess capital equal to five percent of their outstanding loans and investments. (Investments are purchases of securities.) The implication of this is that reductions in banks’ capital below the five percent level have the potential to result in contractions of credit twenty times as large, in efforts to reestablish the five percent ratio.

For example, a bank with an initial capital of $5 billion could support $100 billion in outstanding loans and investments, based on the requirement that its capital be at least 5 percent of the credit it has granted. But if its capital falls to $4 billion, it must reduce its outstanding loans and investments to $80 billion to be in compliance with that requirement. In other words, a $1 billion reduction in bank capital can cause a $20 billion reduction in outstanding bank credit.

Such announcements as that recently made by Citibank, that it would reduce its holdings of home loans by 20 percent, are entirely consistent with this phenomenon, as are the recent failures of banks and brokers to make bids in markets for so-called auction-rate notes. (These are credit instruments whose interest rates are set periodically on the basis of auctions and that until recently were billed as the equivalent of cash. Bidding for them would have placed banks at risk of acquiring additional assets and indebtedness when they urgently needed to reduce their assets and indebtedness.)

Credit Contraction and Deflation

Of the greatest importance is the further fact that credit contraction by banks has the effect of reducing the outstanding volume of checking deposits in the economic system and to that extent the quantity of money in the economic system. This result follows from the fact that when debtors repay their loans, they do so by means of writing checks, the proceeds of which are subtracted not only from their accounts but also from the balance sheets of the banks on which the checks are drawn. If those banks do not then make equivalent new loans, accompanied by the creation of equivalent fresh checking deposits for new borrowers, the amount of the checking deposits used to repay the loans simply disappears. (The same result occurs when banks sell portions of their securities holdings to members of the public. The buyers of the securities pay for them by means of writing checks, and the proceeds of those checks then disappear not only from the checking accounts of the purchasers but also from the balance sheets of the banks on which the checks are drawn.)

Such contraction of credit and money operates to reduce the amount of spending in the economic system. The money that is no longer present in the economic system, because the credit that would have provided it has disappeared, is money that can no longer be spent. Money no longer spent is business sales revenues no longer earned. A drop in business sales revenues, in turn, causes a drop in spending by the firms that would have earned those sales revenues.

This further drop in spending reduces both the sales revenues of other firms, namely, those that would have supplied the firms in question, and wage payments to workers, as employees are laid off in the face of declining sales. And, of course, as wage payments fall, so too does the spending of wage earners for consumers’ goods. The decline in spending, sales revenues, and wage payments is repeated again and again throughout the economic system, as many times in a year as the vanished sum of money would have been spent and respent in that year.

Of no less importance is the fact that a decline in the quantity of money and volume of spending can itself cause further declines in the assets and capital of banks. This is because as the sales revenues of business firms decline, so too do their profits and their ability to repay debts, including debts to banks. The resulting further declines in the value of bank assets further reduce the capitals of banks, causing more credit contraction, further reductions in the quantity of money and volume of spending, and still more reductions in the asset values and capitals of banks, on and on in a self-reinforcing vicious circle.

Bank Failures and Bank Runs

Historically, processes such as those just described have not taken place smoothly and gradually, in a manner akin to the air slowly leaking from some kind of giant inflated balloon. To the contrary, they have been characterized by sudden massive ruptures in the fabric of the system, namely, by bank failures, often precipitated by bank runs.

Sooner or later, the erosion of its capital makes a bank actually fail. What is meant in saying that bank failures were often precipitated by bank runs is merely that at some point depositors woke up to the fact that a bank’s assets were no longer sufficient to guarantee the repayment of its deposits, and so raced to withdraw their funds while it was still possible to do so.

Bank failures, and even bank runs, are by no means a phenomenon confined to history. Intermittent bank failures continued to occur through the entire 20th century. And the present Chairman of the Federal Reserve System has said that some bank failures are to be expected in our present crisis. Only late last summer there was not only a failure but also an actual run on a major British bank, Northern Rock. If our own credit crisis continues and deepens further, it should not be surprising to start seeing bank runs here in the United States as well. Indeed, what happened to Bear Stearns — which is an investment bank — on March 13 and made it seek the help of the Federal Reserve System was precisely a run, as large numbers of its clients sought to withdraw their funds all at once. It is very possible that what has just happened at Bear Stearns will also happen at one or more major commercial banks, whose customers hold checking or savings accounts. (In this connection, it should be kept in mind that federal deposit insurance is limited to a maximum of $100,000 per account. The run would be on the part of those whose accounts are larger than $100,000.)

When a bank fails, unless it is immediately taken over by another, still solvent bank, its outstanding checking deposits lose the character of money and assume that of a security in default. That is, instead of being able to be spent, as the virtual equivalent of currency, they are reduced to the status of a claim to an uncertain sum of money to be paid at an unspecified time in the future, i.e., after the assets of the bank have been liquidated and the proceeds distributed to the various parties judged to have legitimate claims to them. Thus, what had been spendable as the equivalent of currency suddenly becomes no more spendable than any other security in default.

This change in the status of a bank’s checking deposits constitutes a fully equivalent reduction in the quantity of money in the economic system. Thus, for example, if a bank were to fail with outstanding checking deposits of $100 billion, say, and not be taken over immediately by another, still-solvent bank, the quantity of money in the economic system would also immediately fall by $100 billion.

As a result of this fact, bank failures have the potential greatly to accelerate and deepen the descent into deflation and economic depression. For they represent much larger, more sudden reductions in the quantity of money and volume of spending in the economic system. And, just like lesser reductions, their effect, unless somehow checked or counteracted, is to launch a vicious circle of contraction and deflation. The period 1929—1933 provides the leading historical example.

In 1929, the quantity of money in the United States was approximately $26 billion and the gross national product (GNP/GDP) of the country, which provides an approximate measure of consumer spending, was $103 billion. By 1933, following wave after wave of bank failures, the quantity of money had fallen to approximately $19 billion and the GNP to less than $56 billion. The failure of wage rates and prices to fall to anywhere near the same extent resulted in mass unemployment.

The Potential for Deflation Today

In order to understand the potential for deflation today, in 1929, or at any other time, it is necessary to understand the concepts u201Cstandard moneyu201D and u201Cfiduciary media.u201D Standard money is money that is not a claim to anything beyond itself. It is money the receipt of which constitutes final payment. Under a gold standard, standard money is gold coin or bullion. Paper currency under a gold standard is not standard money. It is merely a claim to standard money, i.e., gold.

Since 1933, paper currency in the United States has been irredeemable. It has ceased to be a claim to anything beyond itself. Its receipt constitutes final payment. Thus, since 1933, the standard money of the United States has been irredeemable paper currency.

Most of the money supply of the United States, today as in 1929, is not standard money of any kind, but rather fiduciary media. Fiduciary media are transferable claims to standard money, payable on demand by their issuers, accepted in commerce as the equivalent of standard money, but for which no standard money actually exists.

What precisely fits the description of fiduciary media are checking deposits insofar as they exceed the reserves of standard money held by the banks that issue them. Checking deposits are, first of all, transferable claims to standard money, payable on demand by the banks that issue them, and accepted in commerce as the equivalent of standard money. To the extent that they exceed the currency reserves owned by the banks that issue them, they are fiduciary media.

At the present time, there are approximately $2.5 trillion of checking deposits in one form or another. These checking deposits are those reported as part of the M1 money supply ($625 billion), plus those reported as so-called sweep accounts by the Federal Reserve Bank of St. Louis ($765 billion),[2] and those reported as retail money fund accounts ($1078 billion).[3]

In addition to these checking deposits, our present money supply consists of approximately $800 billion in currency outside the banking system. Our total money supply is thus currently $3.3 trillion. Of these $3.3 trillion, the quantity of standard money is approximately $840 billion: the currency outside the banks plus $40 billion of currency reserves of the banking system.[4]

There are no reserve requirements on either sweep accounts or retail money fund accounts. Supposedly there is a basic 10 percent reserve requirement against the checking deposits counted under M1. Nevertheless, the actual reserves held against these checking deposits are not $62 or $63 billion, but merely on the order of $40 billion, which implies an overall effective reserve requirement of less than 7 percent against these checking deposits. When compared to the total checking deposits of the economic system, the roughly $40 billion of reserves constitute a reserve on the order of less than 2 percent. This is the measure of the leverage of today’s banking system with respect to reserves.

In an ongoing process of a vicious circle of bank failures, a falling quantity of money and volume of spending, and thus falling business sales revenues, mounting business losses and business failures, resulting in still more bank failures, the volume of checking deposits might ultimately be reduced all the way down to the system’s $40 billion of standard money reserves. This last is the actual currency either in the possession of the banks or belonging to them while held by the Federal Reserve System. This currency is the only asset of the banks whose value cannot be reduced by the failure of debtors.

The potential deflation of checking deposits, if nothing were done to stop it, is the difference between their present amount of $2.5 trillion and the $40 billion of reserves that stand behind them. The potential deflation of the money supply as a whole, if nothing were done to stop it, is the difference between $3.3 trillion and $840 billion, i.e., approximately 75 percent.

Why Massive Deflation Must Be Prevented

Massive deflation is always something that should be avoided if it is humanly possible to do so. The surest and best way to avoid it is to avoid the prolonged credit expansions that set the stage for it.

The only way that the economic system can adjust to deflation once it has occurred is by means of corresponding reductions in wage rates and prices. These serve to increase the buying power of the reduced quantity of money and the reduced volume of spending that it supports. If they were sufficient, they would enable the reduced quantity of money and volume of spending to buy all that the previously larger quantity of money and volume of spending had bought.

Yet there are powerful obstacles in the way of wage rates and prices falling. Not the least of these is the prevailing belief that rather than it being the reduction in the quantity of money and volume of spending that is deflation, it is the fall in wages rates and prices that is deflation. This incredible confusion leads to misguided attempts to combat deflation by means of preventing the only thing that would make possible a recovery from deflation, namely, a fall in wage rates and prices.

This confusion is joined by the even more influential errors of the Marxian exploitation theory, which claims that employers would arbitrarily set wage rates at the level of minimum subsistence if not prevented from doing so by government intervention. The result of this stew of ignorance is the existence of laws such as pro-union and minimum-wage legislation, which make it extraordinarily difficult or plain impossible for wage rates to fall. These laws are tantamount to simply making it illegal for the process of recovery to proceed.

To these laws must be added the virtual paralysis of our present-day judicial system. Not only do convicted murderers often sit on death row for years or even decades before their sentences are carried out or finally set aside, but ordinary law suits now normally take years to wind their way through our court system. A leading consequence of a massive deflation would be millions upon millions of business and personal bankruptcies, which our court system is simply not equipped to handle. The functioning of an economic system depends on clear knowledge of who owns what and who has the legal right to do what with what property. It cannot wait years for judges to make clear and final decisions about such matters, which is the likely period of time it would take them if the present typical performance of our judicial system is any guide.

Given these legal obstacles, the effect of massive deflation would be long-term mass unemployment and economic paralysis. Literally tens of millions would be unemployed, with no way to find new employment. Such conditions, in combination with the massive economic illiteracy that prevails in our culture, would likely result in the adoption of many new and additional acts of destructive government interference. It would not by any means be out of the question that the likes of a native-born Hugo Chavez could be elected president of the United States.

True and False Remedies

It should be obvious from much of what has been said in this article that what is driving our impending deflation is the lack of capital on the part of the banks, resulting from the losses they have thus far sustained on their assets. This is what has been impelling them to contract credit, and which, if unchecked will serve to reduce their assets and capital further and further, until much or all of the banking system and the checking deposit money it has created collapses under its own weight for a sheer lack of monetary reserves.

In the light of this knowledge, such solutions as the recently enacted u201Cstimulus packageu201D designed to promote consumer spending should be dismissed as laughably nave. The economic system is not going to be rescued by consumers, let alone by consumers so incapable of producing that they require government handouts in order to consume. No one benefits by giving people the money with which to buy his products. Yet this is the position such programs force taxpayers to assume.

Likewise, when one keeps in mind that the problem is a lack of capital, such alleged solutions as the Federal Reserve’s current policy of reducing interest rates must appear as clearly counterproductive. Reductions in interest rates in the United States relative to those in Europe and elsewhere serve to keep badly needed capital out of our country by making investment there more profitable than investment here. In keeping down the overall supply of capital in the United States, they contribute to the lack of credit and to making it more difficult for banks to obtain the additional capital they need. The Federal Reserve has carried this policy a large step further, with its most recent reduction in the Federal Funds rate from 3 percent to 2.25 percent.

Similarly, the rescue measure proposed for homeowners faced with foreclosure, namely, forcibly reducing interest rates on sub-prime mortgages in violation of the contractual terms of the mortgages and against the will of the mortgage holders, would serve further to reduce the earnings, assets, and capital of the banks. Decisions of judges to place obstacles in the way of the foreclosure process, such as insisting on the presentation of the original mortgage documents, even though it is undisputed that the borrower is in default, also serve to weaken the financial position of banks. It can do so not only directly but also indirectly, by contributing to the bankruptcy of non-bank mortgage lenders with debts to banks.

The sympathy expressed for the families threatened with foreclosure is very largely misplaced. It is forgotten how many of them purchased their homes without making any down payment of any kind, and often without being obliged to make any payments of principal on their mortgages. Many of the homes now being foreclosed were purchased by such buyers not for the purpose of having a place to live, but for the purpose of profiting from a speculative investment.

Of course, there are also some homeowners who did make substantial down payments in purchasing their homes, even during the housing bubble. But there are many more who purchased their homes before the bubble began but who in recent years foolishly chose to consume their equity, by incurring additional debt to finance consumption in excess of their incomes. At the time, these people were lauded as pillars of the economy’s strength, on the basis of the same ridiculous beliefs that underlie the proposals to rescue the economy now by still more consumption on the part of people who can’t afford it.

The effect of the years of Federal-Reserve-sponsored credit expansion and the resulting spending binge on housing that people could not afford was to make housing unaffordable by millions of other people. It was to raise median house prices in many places to the point where only the top 15 or 20 percent of income earners in the area could afford the median priced home. To make housing affordable once again by the mass of people who normally could afford to buy a home, housing prices need to fall to whatever extent their rise in recent years has exceeded the rise in median family incomes. The foreclosure process is an essential step in bringing that about. It should not be prevented in any way from taking place.

How to Increase the Capital and Reserves of the Banking System

Since the problem behind our impending deflation is the lack of capital on the part of the banks, and beyond that the lack of monetary reserves to maintain the supply of checkbook money when banks fail, it should be obvious that what is needed to avoid the threat of deflation is an increase in the capital and reserves of the banks.

When the problem is stated this way, a thought that is likely to occur to many people is that the banks should simply go out and raise additional capital. They should sell stocks and bonds, for example. And, in fact, that has actually happened in some cases, for example, that of Citibank, which raised $14.5 billion in new capital from foreign investors this last February.

One problem with such a procedure is how much of the bank’s ownership has to be given to the new investors to make their investment worthwhile for them. And, as indicated, raising the necessary capital is made more difficult by Fed’s policy of low interest rates, which keeps down the supply of capital by discouraging foreign investment in the United States. Another, deeper problem for many banks is that in the minds of potential investors the bank’s actual capital may be negative, requiring investors to put up not only new and additional capital but also capital required to overcome the bank’s negative capital. (Negative capital can easily result when on the left-hand side of a bank’s balance sheet there are tens or hundreds of billions of dollars of assets whose value can decline, while on the right-hand side there are tens or hundreds of billions of dollars of deposits whose value is fixed. As we saw earlier, when capital is only a very few percent of assets to begin with, even a modest decline in the value of assets can turn it negative.)

The existence of negative capital entails requiring first an investment sufficient to reach the point of zero capital. And only then the investment of the capital that will enable the bank to maintain and increase its operations. Moreover, the extent of the capital deficiency may not even actually be knowable. Such considerations make the raising of additional capital by conventional means extremely difficult or altogether impossible. It’s a case simply of having to invest too much in order to receive too little.

In these circumstances the only party willing to provide the needed capital funds is the government, i.e., the Federal Reserve System, which has the power simply to print them if necessary.

At present, the Federal Reserve is already supplying the banking system (and the major investment banks as well) with capital. But it is doing so only to the extent of overcoming negative capital, and perhaps doing that less than fully. This is the essential meaning of the Fed’s acceptance of billions of dollars of assets of dubious value in exchange for its own assets of relatively secure value, i.e., US government bonds and Treasury bills. (The Fed now even accepts assets for which there is no market because finding a market would require a radical reduction in the price of the assets compared to what was originally paid for them, and correspondingly wipe out capital on the books of the banks.)

The Fed has committed almost half of its own principal assets to this project: $400 billion out of its most recently reported total holdings of government securities of $828 billion. It will not be able to commit much more of those securities. Indeed, however ironic it may be, the Federal Reserve — the u201Clender of last resort,u201D the alleged bailer-outer of the banking system and of the whole economy — is or may fairly soon be itself technically bankrupt as the result of this operation. (This would be clear if the assets it receives had to be valued at their actual market value. The result would be that the assets of the Fed would be less than the face value of its outstanding US currency and other liabilities.)

Unless the Fed’s actions up to now prove sufficient to end the financial crisis, its next step will be the printing of money to prop up the banking system. Indeed, even if the crisis were to end as of now, there would still be the problem that the Fed’s infusion of capital has thus far been only on a temporary basis. The banks are supposed to take back their low-grade and non-performing assets within a month or so and return the Fed’s securities. Clearly, a solution to the problem of a lack of bank capital needs to be long-term, not something that must be renewed month by month.

Moreover, a proper solution to our present crisis should do more than merely overcome the difficulties of the moment. It should, in addition, provide a guarantee against the recurrence of such crises in the future. Above all, a proper solution to this or any other economic or political crisis should also meet the criterion of serving to advance the cause of economic freedom and should be designed with that objective in mind.

There is a means of accomplishing all three of these objectives.

That means is
the use of gold as a major asset of the banking system.

Despite the certainty that a proposal of this kind will be almost completely ignored and has virtually no chance of being enacted in the foreseeable future, it still must be made. This is because the most fundamental and important consideration is not what people are willing to accept or reject at the moment but what would in fact accomplish the objectives that need to be accomplished. Using gold as a major asset of the banking system, in the way set forth below, would in fact safeguard the banking system from possible deflationary collapse, prevent the recurrence of any such threat, and do so in a way that substantially advanced the cause of economic freedom. Making the proposal is necessary in order to uphold the philosophy of economic freedom, by providing a demonstration that that philosophy offers the solution to the growing monetary problems we face and is not their cause.

Gold as the Source of New Bank Capital and Reserves

The Federal Reserve System holds approximately 260 million ounces of gold. The market price of gold recently reached $1,000 per ounce. This means that the Fed’s gold can easily be thought of as an asset with a market value of roughly $260 billion.

As an initial approach to understanding the solution to our problem, let us assume that the Federal Reserve declared its gold holding as being held in trust for the benefit of the American banking system, and proceeded to allow every bank to enter on the asset side of its balance sheet a portion of this gold corresponding to its share of the total of the $2.5 trillion of checking accounts presently in the economic system. The banks would not physically possess the gold but only book entries corresponding to it.

The gold entered on banks’ balance sheets could also count as equivalent new and additional bank reserves. Thus the measure would simultaneously add $260 billion of new and additional bank reserves in the form of gold as well as $260 billion of new and additional bank capital. The reserves and the capital would both be essentially permanent.

In order to prevent the monetization of the gold reserves, the Fed could mandate a permanent required gold reserve against all checking deposits — those counted in M1, those counted as u201Csweeps,u201D and those counted as retail money funds — in the ratio of $260 billion to $2.5 trillion, i.e., a little over 10 percent.

A major shortcoming of this very simple solution is that the addition of $260 billion in gold to bank assets would probably be insufficient. It almost certainly would be if the Fed decided, as it should, to take back its government securities from the investment banks and give them back their securities of far less value. That would probably bankrupt most or all of the investment banks. Furthermore, because the commercial banks are their main creditors, the assets of the investment banks would move into the possession of the commercial banks and do so, of course, at a far lower value than the loans that had been made to the investment banks. Thus, the present capital of the commercial banks and much more would be wiped out.

Accordingly, the book value placed on the Fed’s gold holding needs to be substantially higher than $1,000 per ounce, if it is to result in the creation of sufficient bank capital and reserves. The question is, how much higher?

The most logical answer to this question was supplied as far back as the 1950s by the late Murray Rothbard, who argued for the establishment of a 100-percent-reserve gold standard by means of pricing the Fed’s gold stock at whatever price was necessary to make it equal the outstanding supply of money.

Taking the outstanding supply of money today as being $3.3 trillion, Rothbard’s proposal implies a gold price of approximately $12,700 per ounce. At such a price, the Fed’s gold stock would be sufficient to provide a 100 percent reserve against both all US checking deposits and all US currency.

The provision of a 100 percent reserve would be an immediate guarantee against any reduction in the supply of checkbook money. This would obviously be the case if the banks simply paid out gold in response to customers’ demands for the redemption of their checking deposits. At $12,700 per ounce, the banks and the Fed would have enough gold to redeem every single dollar of checking deposits and currency in the economic system. (That’s the meaning of a 100 percent reserve.)

Of course, in the circumstances envisioned here, the banks would not pay out physical gold. But they would have the ability to pay out paper currency to the full extent of outstanding checking deposits, and that currency would have an undiminished gold backing at the price of gold of $12,700 per ounce. Thus whatever the recession that might develop in the months ahead, it would be contained, insofar as the money supply of the country would not be reduced. That would guarantee a major reduction in the possible severity of what might otherwise develop.

This 100-percent-reserve gold standard as thus far described would obviously be a long way from the full-bodied 100-percent-reserve gold standard that Rothbard envisioned, and which I myself have elaborated upon and advocated. It would be a standard that for some time was largely just nominal, in that the actual gold of the monetary system would still be in the possession of the Federal Reserve System. Nor would there yet be any obligation of the Fed to buy or sell gold at the price of $12,700 per ounce or at any other price. The purpose of the system I have described would simply be the twofold one of providing reserves sufficient to prevent any possible reduction in the supply of checkbook money and also of providing capital to banks sufficient to substantially more than offset the losses otherwise resulting from a decline in the value of banks’ assets.[5]

Indeed, given that what would be present is an addition to the assets of the banking system in an amount equal to the full magnitude of outstanding fiduciary media, i.e., of $2.5 trillion of checking deposits minus $40 billion of presently existing standard money reserves, the overwhelming likelihood is that the banks would be handed far too much capital. Even with losses of $1 trillion on their existing assets, they would still stand to gain practically $1.5 trillion in new and additional capital. Such a bonanza would not be justifiable. The solution would be to pass most of it on to the banks’ depositors in the form of bank stock or bonds paid as a dividend on their accounts.

It is not possible in the space of one article to explore, beyond the very limited extent to which I’ve done so,[6] the problems and the solutions entailed in moving on to the full-bodied 100-percent-reserve gold standard that is the ultimate objective of my proposal. Under such a gold standard, paper currency and checking deposits will, of course, be fully convertible into gold, physical gold coin will enjoy wide circulation, and the supply of gold in the country will be free to increase or decrease simply in response to market forces.

All I have tried to show here is how the twin problems of a lack of bank capital and of bank reserves, which are the core of the threat of deflation, could be solved by means of establishing the framework of a 100-percent-reserve gold monetary system.

Needless to say, such a system would not only end the threat of deflation, but, equally important, it could end the threat of inflation as well. For if it were actually followed, the increase in the quantity of money would be limited to the increase in the supply of gold, which is extremely modest compared with increases in the supply of irredeemable paper money. This is because gold is rare in nature and costly to extract. Irredeemable paper money in contrast is virtually costless to produce and is potentially as abundant as the supply of currency-sized sheets of paper, indeed, as abundant as the size of the largest number that can be printed on all such sheets of paper.

Above all, the solution I have proposed would constitute a major step toward the establishment of a full-bodied precious metal monetary system and thus toward ultimately eliminating the government’s physical control over the money supply and all of the violations of individual freedom that that control represents and makes possible.

And what is more, it could be accomplished at a cost to the Federal Reserve not of hundreds of billions of dollars — the sums the Fed is risking in exchanging its government securities for bank assets of vastly lower value — not for the $30 billion it has risked to bail out just Bear Stearns, but for a little more than $11 billion! Just $11 billion is the value at which the Fed carries its gold stock on its balance sheet, at a price of gold of approximately $42 per ounce.

Thus, to say it all in one sentence, the threat of massive deflation can be eliminated, the threat of inflation ended, and the actual and potential domain of economic freedom greatly expanded, for $11 billion — an $11 billion that would not even be an out-of-pocket expense to anyone but merely a balance-sheet charge on the books of the Federal Reserve System when it deducted its gold holding from its balance sheet and added it to the balance sheets of the banks.

Notes

[1] I am indebted to Prof. William Barnett, II, of Loyola University, New Orleans. His recent internet postings on the mises@yahoogroups list made me aware of the fact that the capital requirements of banks under the Basel II Capital Accord, rather than official reserve requirements imposed by the Federal Reserve System, is all that has served to constrain the increase in the quantity of money in the United States in recent years. His comments also served to provide important insight into understanding the role of banks’ capital requirements in explaining essential aspects of their recent behavior as well as their likely behavior in the weeks and months ahead.

[2] Sweep accounts are checking deposits that banks transfer into savings deposit accounts overnight, on weekends, and on holidays, in order to reduce their required reserves and thus be able to use any given amount of reserves to support a larger volume of checking deposits.

[3] Inasmuch as the accounts subsumed under this last head generally allow the writing only of a limited number of checks per month, and sometimes impose limits on the minimum dollar amount of the checks that may be written, they probably should not be counted as part of the money supply to their full extent. To precisely what extent they should be counted is an open question. Nevertheless, it may be that counting them to their full extent represents a lesser error than attempting to adjust them downward. This is because doing so makes allowance for the extent to which roughly $2.1 trillion of institutional money funds may also actually serve as money.

[4] The $800 billion of currency outside the banks is counted as part of the M1 money supply along with the checking deposit component of $625 billion previously referred to. Thus, at present, M1 is approximately $1.4 trillion.

[5] It should be realized that in the absence of any commitment of the Fed to buy gold at $12,700 per ounce, the market price of gold would almost certainly be radically lower. To the extent that additional gold could be purchased at lower prices, the possibility would exist of increasing gold reserves relative to outstanding checking deposits and currency and thus of ultimately having a 100-percent reserve at a price of gold less than $12,700 per ounce. Furthermore, it should be kept in mind that the Fed would need to proceed with great caution in purchasing additional gold. The danger to be avoided is that of initially drawing a disproportionate share of the world’s gold to the United States, when it alone was in process of remonetizing gold. If the US economy became accustomed to such a large gold supply, and then, later on, if and when the rest of the world remonetized gold and drew much of that gold back out, the US would be in the position of experiencing first a virtual inflation in terms of gold and then a virtual deflation in terms of gold, the very kind of sequence of phenomena that a properly established 100-percent-reserve gold standard would permanently prevent.

[6] See above, the preceding note.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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The “extremists” among you openly call for the death of 1 to 6.4 billion human beings. The “moderates” among you openly call for the forced reduction in carbon dioxide emissions of 90 percent within a few decades, which would serve to reduce energy use almost to the same extent. Such a severe reduction in energy use follows from the fact that there are no presently existing large-scale viable alternatives to fossil fuels other than atomic power, which is regarded by most members of your movement as a death ray and is opposed more vehemently than fossil fuels. Furthermore, the likelihood of ever finding and developing such alternatives will be greatly reduced by destroying the energy sources we do have and need to increase. So what your movement advocates is mass death or, at the very least, dreadful mass impoverishment whose outcome will be tens or hundreds of millions of unnecessary deaths and a life of misery for those who survive.

If your motivation in calling yourself an environmentalist is merely such things as that you like to see flowers bloom on open meadows, and love trees, whales, and polar bears, and the like, then you owe it to yourself to put as much intellectual and moral distance as possible between you and those who advocate mass impoverishment and mass death.

The first step you need to take is to stop using the same word “environmentalist” to describe both them and you. So long as you do use the same word, people cannot help but think of you all in the same terms.

Don’t think you can solve the problem by calling yourself a “free-market environmentalist.” That’s like calling yourself a “free-market Communist” or a “free-market Nazi.” They’re contradictions in terms.

The free market exists to promote prosperity and human life, and that is what it has accomplished, splendidly, with breathtaking brilliance. In the industrialized world, the average person today enjoys a standard of living superior to that of kings and emperors of the past. The whole world’s population is capable of enjoying the same marvelous results, if it adopts economic freedom. But if you call yourself an “environmentalist,” you mark yourself as sharing the goals of mass destruction and death. A socialist dictatorship is the vehicle for achieving those goals, not a free market.

It is true that many American businessmen, some of them extremely talented and successful, now call themselves “environmentalists” and are stumbling over themselves in a race to prove how “green” they are. In the early 1930s, many talented and successful German businessmen did essentially the same thing when they began to call themselves “Nazis” and raced to prove their devotion to National Socialism. It’s possible for people to be geniuses in one area of their lives and fools, or worse, in other areas. In any event, the outcome for the German businessmen, and for all other talented individuals who joined either the Nazis or the Communists, was that they ended up as accomplices of mass murderers. The same will be true in the United States, if the environmentalists succeed in imposing their agenda.

If you care about your moral character, don’t place an indelible stain on it by supporting a movement that seeks to destroy Industrial Civilization and all the human lives and human well-being that depend on it. Accept moral responsibility for the ideas you propound and stop standing in the service of mass destruction and death.

Do not come back with the argument that if we uphold individual freedom, our great grandchildren will have to live in an uninhabitable planet, one that is either too hot or too cold. Sooner or later Nature itself will make the climate considerably warmer or considerably colder than it is today (most likely colder). The only significant question is what is the best method of coping with such change? Is it the free market or a centrally planned dictatorship that reaches down into every detail of everyone’s personal life and productive activities, that, indeed, wants to control the carbon content practically of every breath that anyone draws?

Even if you are absolutely convinced that human activities are responsible for global warming and, if nothing is done, will ultimately result in an intolerable rise in temperature, there is a very simple test that you need to apply. Pretend, for just a moment, that that same global warming is coming about independently of human activities, that it is strictly the product of natural forces. Then ask yourself, what would be the best fundamental method of coping with it? Maintaining a free market or establishing a centrally planned socialist system?

More fundamentally, what is the appropriate method for Man to use in dealing with Nature in general? Is it the motivated and coordinated human intelligence of all individual market participants that is provided by a free market and its price system? Or is it the unmotivated, discoordinated chaos in which one man, the Supreme Dictator, or a handful of men, the Supreme Dictator and his fellow members of the Central Planning Board, claim a monopoly on human intelligence and on the right to make fundamental decisions?

Suppose even that the warming caused by Nature were such that what was required to deal with it was some sort of space program, perhaps emitting thousands of tiny mirrors that would prevent some sunlight from reaching the earth by reflecting it back into space. Suppose further that as a practical matter, given our present state of social organization, the only realistic means of carrying out such a program was through governmental action — a kind of public works project, as it were. In which circumstances, would such a program be more likely to be feasible: in those of the primitive economies characteristic of third world countries or in those of advanced industrial economies? And would they not be more likely to be feasible in an economy substantially more advanced than our own is at present?

The answer to the question of how best to cope with intolerable global warming caused by Nature is obviously the maintenance of the free market, not its replacement by Socialist central planning. Indeed, the answer is to make the free market freer than it now is — as much freer as is humanly possible. This is because while the primary reason for advocating a free market is the greater prosperity and enjoyment it brings to everyone in the course of his normal, everyday life, a major, secondary reason is to have the greatest possible industrial base available for coping with catastrophic events, whether those events be war, plague, meteors from outer space, intolerable global warming, or a new ice age.

In effect, what the environmentalists would have us do as the means of preparing for coping with a coming global warming is analogous to the imaginary absurdity of the United States in the 1930s having reduced its economy to the level, say, of Poland’s economy. Then, when World War II came, our country would have had to fight the war with horses instead of tanks and planes. In the same way, the environmentalists would have us cope with global warming by waving little fans instead of using air conditioners, refrigerators, and freezers.

Now what, if anything, changes if we assume that global warming is an unintended by-product of the human productive activities that make life possible and enjoyable? How does it possibly follow from this that the only means of stopping this much-less-than-certain outcome is by suffering the absolutely certain impoverishment and death that will come from the destruction of most of our present sources of energy?

Is there absolutely no other way to deal with global warming than the destruction of our economic system? Is that how we would deal with it if global warming were the product of Nature, and not the by-product of our activities? Would the environmentalists then ask us to engage in what in the circumstances would be a merely ritual sacrifice incapable of accomplishing anything beyond itself?

If they would not do that, then they would have to look for other alternatives as the means of coping with global warming. Why aren’t they looking for those other alternatives now? Why on earth should the first and only solution for global warming as a by-product of human activity be the scuttling of our energy base? Do we deserve to be exterminated for our unintended by-products? Must we really choose to live in poverty and misery, surrounded by death, in order to avoid excessive heat? Can absolutely no other way be found? (The likely answer is actually no more complicated than having the greater energy base required to build and power bigger and better air conditioners.)

Do you environmentalists who do not want to think of yourselves as misanthropes, as recycled Communists or Nazis, do you really want to entrust your lives and material well being, and the lives and material well being of everyone who may matter to you, to the power of government officials to tax carbon emissions and to limit the total of such emissions? Are you willing to entrust this power to today’s President (who at least has the good sense not to want it)? Do you want to entrust it to any of the candidates with a realistic chance to succeed him (who do want this power and may even crave it)? Do you want to entrust it to the members of the United States Congress? To the members of the United Nations General Assembly?

Do you want them to decide how much man-made energy is to be available to you in every aspect of your life, by their imposing carbon taxes and carbon caps? These will be taxes and constraints on you that are tantamount to adding extra dead weight to your body and to restricting your power to move your own limbs. And they will go on increasing in severity, to the point that you, or your children or grandchildren, will drop from exhaustion. For the effect of every loss of energy use is a corresponding imposition on the meager power of human muscles and the human frame. And if the impositions cannot be borne, the products that depended on the lost energy use can no longer be produced. If the environmentalist agenda is imposed, the day will come when your descendants, if they have any awareness of it at all, will look back on our time as a mythical Golden Age never to be achieved again.

Is that what you want?

It’s not too late for you to change your mind, abandon any support you may have been giving to environmentalism’s program of impoverishment and death, and come over to the side of the values of human life, wealth, and happiness — the values Mises fought for under the banner of genuine Liberalism.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Here’s the essential common core of hatred and destruction in the doctrines of Communism, Nazism, and Environmentalism. Only the concretes differ, not the fundamental principle of hatred for human life and happiness.

Communism: The pursuit of individual self-interest causes monopolies, depressions, and exploitation of workers by capitalists. It must be replaced by self-sacrifice for the benefit of the working class and the Socialist State. Capitalists and landowners must be exterminated for the benefit of the proletariat.

Nazism: The pursuit of individual self-interest causes racial impurity, national decline, and exploitation of German workers by Jewish capitalists. It must be replaced by self-sacrifice for the good of the Aryan master race and the National Socialist State. Jews, Gypsies, and Slavs must be exterminated for the benefit of the German Nation.

Environmentalism: The pursuit of individual self-interest causes global warming, acid rain, and ozone depletion. It must be replaced by self-sacrifice for the good of other species — our "fellow biota" — and for the good of the planet, under the auspices of international treaties and a nascent Global Socialist State: the UN. Most of the human race must be exterminated for the benefit of exploited species and the planet. (This is what the environmentalist “extremists” already openly say. The “moderates” merely want to reduce carbon dioxide emissions by 90 percent and thereby reduce the American standard of living to that of a third world country, with a third world country’s infant mortality and life expectancy.)

SAY NO TO RECYCLED COMMUNISM AND NAZISM. SAY NO TO ENVIRONMENTALISM.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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This article is based on a portion of Chapter 15 of the author’s Capitalism: A Treatise on Economics.

According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere non-spending and thus a u201Cleakageu201D from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving. I prove my claims by starting with the very formulations of the expenditure aggregates presented by the Keynesian doctrine itself.

Thus, the simplest, core accounting relationship of Keynesian economics is that national income, which is essentially the sum of profits plus wages, is equal to the sum of consumption expenditure plus net investment.

It is only a small step from national income to gross domestic product (GDP). Essentially all one does is add business depreciation allowances to profits on the left-hand side of the equation and to net investment on the right-hand side. This last raises net investment to what contemporary economics calls gross investment. The sum of consumption plus gross investment is held to equal GDP.

In a slightly more complex formulation, government expenditure is stated as a third component of expenditure, alongside of consumption and investment. In yet a still more complex formulation, net exports are also included. These expenditure items, whether two, three, or four, are understood as paying the national income or GDP.

For the sake of simplicity, I’ll ignore net exports, which, rounded off at minus $1 trillion, represents the smallest of the four items. By far the largest single item of expenditure reported is personal consumption expenditure, which is currently running at an annual rate of about $10 trillion. The next largest item is government expenditure, currently running at roughly $3 trillion. Gross private domestic investment is reported as slightly more than $2 trillion.

These numbers add up to approximately $15 trillion, which is a rough approximation of today’s annual rate of GDP. Business depreciation allowances of roughly $1 trillion, imply net investment in the amount of approximately $1 trillion and a national income on the order of $14 trillion.

Now government expenditure is itself a species of consumption expenditure. But with or without the inclusion of government expenditure, consumption spending appears as the overwhelming source of GDP and national income: $10 trillion out of $15 trillion and $10 trillion out of $14 trillion respectively. Count government spending in with private consumption, and the figures rise to $13 trillion out of $15 trillion and $13 trillion out of $14 trillion.

It is data such as these that lead commentators routinely to make such statements as u201Cconsumption accounts for two-thirds of GDP.u201D The clear implication of such statements is that consumption expenditure, private or private plus government, is what constitutes the overwhelming bulk of spending in the economic system and pays the overwhelming bulk of the incomes of the economic system.

Nevertheless, this proposition is not in fact supported by the various formulas used in aggregate economic accounting. The formulas are all mathematically correct. For example, national income does in fact equal consumption plus net investment. And it is true that consumption spending almost always dwarfs net investment. Indeed, on occasion, net investment might even be zero or, still more extreme, a negative number. Yet in no case is it true in a modern economic system that consumption is the main form of spending and pays most of the incomes. The belief that it does rests on a radically incomplete, highly superficial understanding of the formulas.

Most Spending in the Economic System Is Concealed Under Net Investment

The truth is that the great bulk of spending and income payments in the economic system is concealed under net investment! Net investment is analogous to an iceberg, nine-tenths of whose volume is concealed beneath the surface. Only in the case of net investment, what is concealed can easily be much more than nine-tenths.

Net investment is the difference between two enormous monetary magnitudes, which are never radically different from one another in size and sometimes may even be approximately equal. Indeed, occasionally the one that is subtracted may even be larger than the magnitude it is subtracted from, which gives rise to negative net investment.

The monetary magnitude that is subtracted in the determination of net investment is the aggregate of all of the costs that business firms report in their income statements as subtractions from their sales revenues in calculating their profits, namely, depreciation cost, cost of goods sold, and selling, general, and administrative expenses. The monetary magnitude from which the costs are subtracted has no name in contemporary economics. I call it productive expenditure.

Productive expenditure is expenditure for the purpose of making subsequent sales. It is the expenditures made by business firms in buying capital goods of all descriptions and in paying wages. Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure. Productive expenditure could be termed intermediate expenditure. Implicitly or explicitly, productive expenditure is always made for the purpose of earning sales revenues greater than itself, i.e., is made for the purpose of earning a profit.

I now must demonstrate just why net investment is in fact the difference between productive expenditure and business costs. My demonstration consists of two parts. First, a demonstration that the definition of national income as the sum of profits plus wages implies that national income also equals the sum of consumption and productive expenditures minus business costs. Second, a demonstration that the difference between productive expenditure and business costs is in fact net investment.

Let me begin with the proposition that national income equals the sum of profits plus wages. This proposition can be taken as true simply as a matter of definition. There are profits, there are wages, and the sum of the respective aggregates of each across the entire country is what we call national income.

Restatement of National Income as Sales Minus Costs Plus Wages

Now a simple but critical step is to recognize that profits are the difference between the sales revenues and the costs of business firms. The aggregate profit earned in an entire country in a year is equal to the sum of the sales revenues of all the business firms of the country for the year minus the sum of all of the costs that those business firms subtract from their respective sales revenues in calculating their respective profits.

Stating profits as sales revenues minus costs allows us to reformulate national income as the sum of sales revenues minus costs plus wages.

The next step in my demonstration is based on the realization that every dollar of business sales revenues and every dollar of wages received represents an identical dollar of expenditure by those who pay the sales revenues or wages. Thus the sales revenues of a steel company, say, represent expenditures on the part of such buyers as automobile companies. Wages received are wages paid by employers of one description or other.

From this point forward, we must look at sales revenues and wage incomes from the perspective of the buyers who pay them. In paying sales revenues or wages, the buyers can have only one or the other of two basic purposes in mind. They can be paying the sales revenues or wages for the purpose of themselves making subsequent sales. Or they can be paying the sales revenues or wages not for the purpose of themselves making subsequent sales.

Sales revenues and wages paid for the purpose of the buyer himself making subsequent sales constitute productive expenditure. Sales revenues and wages paid not for the purpose of the buyer himself making subsequent sales constitute consumption expenditure.

Examples of sales revenues constituted by productive expenditure are all the sales revenues paid by one business firm to another. It is the receipts from the sale of steel to automobile companies and of iron ore to steel companies, receipts from the sale of flour to baking companies and of wheat to flour millers. It is receipts from the sale of all goods purchased by retailers at wholesale, And, of course, it is receipts from the sale of all newly produced machines and equipment purchased by one business from another.

Examples of sales revenues constituted by consumption expenditure are the sales revenues of grocery stores, clothing stores, movie theaters, restaurants, and the like. However, even here, some portion of the sales revenues may be productive expenditures, as when a restaurant buys supplies in a supermarket or a business buys work clothes for its employees.

Examples of wage payments that are productive expenditures are all of the wages paid to the employees of business firms, from the wages of field hands, miners, and factory workers, to the wages of office secretaries, advertising executives, bank tellers, and sales clerks — the wages of all workers paid for the purpose of the employer making subsequent sales. (All wage payments and purchases of goods that are necessary to the existence or functioning of a business enterprise are to be conceived of as made for the purpose of making subsequent sales, for that is the purpose of the business enterprise itself.)

Examples of wage payments that are consumption expenditures are the wages paid to maids and baby sitters by housewives, and, among the very rich, the wages paid to butlers, personal cooks, and chauffeurs. These wages, of course, are obviously trivial in comparison with the wages paid by productive expenditure. The one substantial example of wage payments constituted by consumption expenditure are the wages of government employees. Those wages are not paid for the purpose of the government making subsequent sales.

Revenue/Expenditure Subcomponents

What we’ve done at this point is conceptualize national income in terms of its revenue/expenditure subcomponents. We’ve seen that profits plus wages equals not only sales revenues minus costs plus wages, but also, and more precisely, that it equals the sum of that part of sales revenues that is constituted by productive expenditure plus that part of sales revenues that is constituted by consumption expenditure, minus costs, plus that part of wages that is constituted by productive expenditure plus that part of wages that is constituted by consumption expenditure. The revenue/expenditure subcomponents are, of course, the two constituent parts both of sales revenues and of wages from the perspective of their respective types of expenditure, i.e., productive expenditure or consumption expenditure.

At this point, the revenue/expenditure subcomponents are grouped according to the type of revenue they represent, i.e., sales revenue or wages. National income is conceived as representing the addition of all four revenue expenditure/subcomponents, with costs subtracted from the two that are grouped together as business sales revenues.

What we need to do now is simply regroup the revenue expenditure subcomponents according to expenditure type rather than revenue type. Thus we will add that part of business sales revenues constituted by consumption expenditure to that part of wages paid by consumption expenditure. When we do this, we obtain total consumption expenditure, i.e., the u201CCu201D in the equation u201CNational Income Equals C + I.u201D

We must also regroup that part of business sales revenues constituted by productive expenditure with that part of wage payments constituted by productive expenditure. When we do this, we obtain total productive expenditure, which, as I’ve said, has no designation in contemporary economics.

If we now subtract from productive expenditure the same costs that up to now we’ve subtracted from business sales revenues, the result will be net investment, the u201CIu201D in the equation u201CNational Income Equals C + I.u201D

Why Net Investment Equals Productive Expenditure Minus Costs

All that remains to be shown is why productive expenditure minus costs does in fact equal net investment. At a superficial level we already know that it must if we’ve accepted the proposition that national income equals consumption plus net investment in the first place. This is because we began with what was unquestionably national income (the sum of profits plus wages) and have shown that that sum can logically be reformulated exactly as we’ve reformulated it. Thus if it’s true that national income equals consumption plus net investment and also true that it equals consumption plus productive expenditure minus costs, it follows inescapably that productive expenditure minus costs equals net investment.

However, we can do much better than this and show that the very nature of net investment implies that it equals productive expenditure minus costs. All we need do is break down productive expenditure and costs into three exhaustive subcategories respectively. Thus, we will have that part of productive expenditure which is capitalized into plant and equipment accounts, that part of productive expenditure which is capitalized into inventory/work in progress accounts, and finally that part of productive expenditure which is not capitalized but deducted as a cost from sales revenues immediately.

With respect to costs, we will have that part of costs which is depreciation cost, that part of cost which is cost of goods sold, and that part of costs which represents productive expenditure that is deducted as a cost from sales revenues immediately. Obviously the difference between this third component of cost and the third component of productive expenditure must always be zero, since they are necessarily identical.

At least for some readers, a few words are necessary about the meaning of capitalizing productive expenditures and the relationship of such capitalized expenditures to costs. When productive expenditures are made for plant and equipment, they do not immediately appear as a cost deducted from sales revenue. Instead, they are added into a balance sheet account usually described as u201Cgross plant and equipment,u201D or something very similar. A $1 million expenditure for new computers, say, is treated as a $1 million addition to this account. The computers may be depreciated over a three-year period. In this case, one-third of a million dollars will appear as depreciation cost in the firm’s income statement for each of three years.

As depreciation cost is incurred in the firm’s income statement, the same amount of depreciation is added into another balance sheet account, known as u201Caccumulated depreciation reserve,u201D or something very similar. Yet a third balance sheet account appears as the result of the subtraction of accumulated depreciation from gross plant. This account is the u201Cnet plant and equipmentu201D account.

At the beginning of the first year of the computers’ depreciable life, the value of the net plant account, as far as these computers are concerned, is $1 million, representing $1 million of gross plant minus zero of accumulated depreciation. At the end of the first full year of the computers’ depreciable life, however, the net plant account will be down to $666,6667, owing to the subtraction of $333,333 of accumulated depreciation from the $1 million of gross plant. At the end of the second year, the net plant account will be down to $333,333, owing to the subtraction of twice as much accumulated depreciation from the gross plant account. At the end of the third year of the computers’ depreciable life, the value of the net plant account, as far as these computers are concerned, will be zero, because the accumulated depreciation reserve will then equal the part of the gross plant account that represents the purchase price of the computers.

The essential point here is to recognize that, other things being equal, productive expenditure for plant and equipment represents additions to the net plant accounts of business, while depreciation cost represents subtractions from the net plant accounts of business. To the extent that in the economic system as a whole the totality of such additions exceeds the totality of such subtractions, there is an increase in the aggregate value of net plant and equipment accounts. This increase is net investment in plant and equipment.

Of course, it is possible that in a given year, productive expenditure for plant and equipment might be less than the depreciation cost incurred in that year. In that case, net investment in plant and equipment would be a negative number, just as it is a negative number in the second and third years of our example concerning the purchase of computers.

The case of inventory/work in progress is similar. When expenditures are made on account of inventory, the sums in question are added into yet another balance sheet account, known as u201Cinventory/work in progressu201D or something similar. Thus, for example, when a furniture retailer purchases furniture from a furniture manufacturer and brings that furniture into his warehouses or showrooms, the purchase price of that furniture is added into the retailer’s inventory account. Only as and when the furniture is sold and leaves the premises of the retailer, does a cost item appear in the retailer’s income statement. It appears as u201Ccost of goods sold,u201D which is an excellent, literal description of it.

Just as purchases on account of inventory add to the inventory account, so cost of goods sold represents subtractions from the inventory account. A furniture retailer who has purchased, say, 100 sofas at a price $1,000 per sofa adds $100,000 to his inventory account. Each time he sells a sofa, he subtracts $1,000 from his inventory account and deducts that $1,000 as a cost of goods sold in his income statement. (The same principle applies to more complex cases, such as General Motors’ purchases of steel sheet. The purchase price of the steel sheet is added to GM’s inventory/work in progress account and only as the automobiles into which that steel sheet enters are sold, does GM incur cost of goods sold and make an equivalent deduction from its income statement.)

Here the essential point is to recognize that, other things being equal, productive expenditure on account of inventory/work in progress constitutes an addition to the balance sheet account u201Cinventory/work in progress,u201D while cost of goods sold constitutes a subtraction from that account. To the extent that productive expenditure on account of inventory et al. exceeds cost of goods sold, the value of the inventory account is correspondingly increased and there is thus net investment in inventory (or inventory/work in progress). To the extent that productive expenditure on account of inventory et al. falls short of cost of goods sold, the value of the inventory account is correspondingly reduced and there is thus negative net investment in inventory (or inventory/work in progress).

So, hopefully, it is now clear to every reader why productive expenditure minus costs does in fact equal net investment: net investment in plant and equipment plus net investment in inventory.

Productive Expenditure Exceeds Consumption Expenditure

Productive expenditure, the sum of the expenditures for capital goods and labor by business firms, almost certainly not only exceeds consumption expenditure but does so by a wide margin. The truth of this proposition can be inferred from common knowledge about the size of business profit margins. A profit margin, of course, is the ratio of profit to sales revenues.

In the case of supermarkets, profit margins are often as low as just 2 percent. In instances of highly capital-intensive investments, such as electric utilities, they may be as high as 20 percent. We will not go far wrong if we assume that on the average profit margins are 10 percent.

If profit margins are 10 percent of sales, it follows that costs are 90 percent of sales and thus that the productive expenditures that gave rise to these costs are also 90 percent of the sales. If we assume that those productive expenditures on average were divided between capital goods and labor in the ratio of 5 to 4, then for every $1 spent in buying a consumers’ good, there were 50 expended in buying the capital goods needed to produce it, and 40 expended in paying the wages of the workers needed to produce it.

However, the same story is repeated in the production of the capital goods that sold for 50 of productive expenditure. They will have a cost of production of 45, broken down into 25 of productive expenditure for earlier capital goods and 20 of productive expenditure for earlier labor. As we trace the process further and further, we reach a point at which the cumulative expenditure for capital goods itself approaches $1 and the cumulative expenditure for labor approaches 80 (i.e., 50 + 25 + 12.5 … = $1, and 40 + 20 + 10 … = 80).

These expenditures can be taken as representing not only the productive expenditures of earlier years but also as indicating the productive expenditures of the present year. Some part of today’s productive expenditures is devoted to producing consumers’ goods. Another part is devoted to the production of the capital goods that will produce consumers’ goods at a later date. A third part of today’s productive expenditure is devoted to producing the capital goods that will serve in the production of the capital goods that will serve in the production of consumers’ goods, and so on.

In any event, what we have in the present case is $1.80 of productive expenditure for every $1 of demand for consumers’ goods. And, for the reasons explained, such a relationship must be considered as typifying the economic system in any given year.

Keynesian Macroeconomics Plays with Half a Deck: Inadequacy of GDP

What all of the preceding discussion implies is that Keynesian macroeconomics is literally playing with half a deck. It purports to be a study of the economic system as a whole, yet in ignoring productive expenditure it totally ignores most of the actual spending that takes place in the production of goods and services. It is an economics almost exclusively of consumer spending, not an economics of total spending in the production of goods and services.

An accounting aggregate that would be far more appropriate to a genuine macroeconomics is what I have called gross national revenue (GNR). This is the sum of all business sales revenues plus wage payments. It also equals the sum of the consumption and productive expenditures that actually pay it.

Imagine an equation in which the sales revenues and wage incomes that constitute GNR appear on the left-hand side, while the consumption and productive expenditures that actually pay those sales revenues and wages appear on the right-hand side. If one then subtracts the aggregate of the costs that appear in business income statements from the left-hand side of the equation, sales revenues reduce to profits, and GNR thus reduces to national income. If one subtracts these costs from the right-hand side, productive expenditure reduces to net investment, and consumption expenditure plus productive expenditure reduce to consumption plus net investment.

Now if, instead of subtracting all costs on both sides, one subtracts all costs with the exception of depreciation, GNR reduces to GDP. That is, on the right-hand side, it will reduce to consumption expenditure plus what contemporary economics terms gross investment (a u201Cgrossu201D investment, incidentally, one of whose components is explicitly described as the net change — the net investment — in inventories).

Thus, it turns out that GDP falls far short of a measure of the aggregate expenditure for goods and services. If falls short by an amount equal to the sum of all costs of goods sold in the economic system plus all of the expensed productive expenditures in the economic system. It is these costs which must be added to GDP to bring it up to a measure of the actual aggregate amount of spending for goods and services in the economic system.

Adding cost of goods sold to contemporary economics’ u201Cgross investmentu201D would bring it up to true gross investment: that is, not only gross investment in plant and equipment but also gross investment in inventory as well. Adding expensed productive expenditures to this true gross investment would raise the latter up to productive expenditure.

Saving as the Source of Most Spending

My substitution of a radically new approach to aggregate economic accounting for that of the Keynesian approach, has numerous major implications. One of them pertains to the role of saving in the economic system. In Keynesian economics, saving appears as mere non-spending. This is because essentially the only spending that Keynesian economics recognizes is consumer spending. Thus, if funds are earned and are saved rather than consumed, it appears to Keynesians that they are simply not spent, i.e., are hoarded. It is on this basis that Keynesian economics describes saving as a u201Cleakage.u201D

Yet the truth is that the only way that funds expended in the purchase of consumers’ goods can ever subsequently show up as productive spending for capital goods and labor is if and to the extent that the business recipients of those funds do not consume them. Only by saving the funds in question can they have them available to make productive expenditures of any kind. Productive expenditure depends on saving.

And because productive expenditure is the main form of spending, most spending in the economic system depends on saving. Even consumption expenditure depends on saving, inasmuch as saving is the basis of the payment of the wages out of which most consumption takes place.

The purchase of expensive consumers’ goods, such as homes, automobiles, major appliances, vacations, indeed, anything whose price exceeds more than a significant fraction of the income earned in one pay period, can be purchased only on a foundation of saving. Virtually no one buys a home out of current income, not even the income of an entire year. Likewise, very few people can buy a new automobile out of a year’s income, let alone out of the proceeds of just one pay check. And the same is true of many other goods. Saving is essential to the purchase of all such goods — if not the saving of the purchaser himself, then the saving of those from whom the purchaser borrows.

Implications for the u201CEconomic Stimulus Packageu201D

The dependence of productive expenditure on saving in turn has major implications for the so-called economic-stimulus package that has just been enacted. So too does the understanding we have developed of net investment and the role of cost of goods sold in connection both with net investment and with profits.

The supporters of the stimulus package assume that all that is necessary to increase the demand for goods and services all up and down the line, that is, at all stages of production from retailing to wholesaling, through manufacturing, to mining and agriculture, is to increase the demand for consumers’ goods — essentially by printing money and giving it to various consumers to spend. Yet if all that happened were that people spent the new and additional money in purchasing consumers’ goods, there would not be any additional demand for capital goods and labor whatever based on that new and additional money.

To demonstrate this, imagine that, precisely in accordance with the wishes of the supporters of the stimulus package, some consumer somewhere receives a thousand-dollar tax refund that is financed by the government’s creation of new and additional money. He cashes his refund check and proceeds to a nearby large shopping mall, where he buys $1,000 worth of furniture, say.

The owner of the furniture store happens to be on the premises, and, like a model Keynesian consumer, with a u201Cmarginal propensity to consume of 2/3,u201D he proceeds to withdraw $666.67 from his till and walks down the hall to a nearby men’s clothing store, where he spends that amount for new clothes.

The owner of the clothing store also happens to be on the premises, and he too, like another perfect Keynesian consumer with a marginal propensity to consume of 2/3, takes $444.44 out of his till and walks to a third store in the mall, where he spends that sum in buying a new television set. The owner of this store, in turn, removes two-thirds of his additional receipts and telephones his wife and in-laws to come and have dinner at a restaurant in the mall.

If this process kept on going, over and over again, there would ultimately be $3,000 of additional consumer spending. The Keynesians believe that this $3,000 would constitute new and additional net income and would increase the demand for labor and employment to that extent back though all of the stages of production leading up to the presence of consumers goods on the shelves of retailers

The spending multiplier and the alleged benefits to the demand for labor and thus employment would be even greater, according to the Keynesians, if the marginal propensity to consume were three-fourths instead of two-thirds, and greater still if it were nine-tenths instead of three-fourths. The multiplier and its benefits are allegedly restrained only by the disappearance of funds into the u201Cleakageu201D constituted by saving.

Now the truth is that in order for additional consumer spending to constitute equivalent additional income, as the Keynesians believe, the only type of additional income that it could possibly constitute would be business profits, specifically the profits of the sellers of the various consumers’ goods. It would not constitute any additional wage income or the employment of any additional workers. This is because all that is present is additional business sales revenues. The income earned on sales revenues is profit, and if the additional income is to equal the additional sales revenues, it means that there will be additional profits equal to the additional sales revenues.

A further implication is that the prices of the consumers’ goods must rise, thereby depriving other buyers of consumers’ goods of the ability to buy them. This follows from the fact of more money being spent to buy the same quantity of goods.

Of course, the Keynesians will be quick to object that more goods will be sold, not the same quantity. Sellers will reduce their inventories to meet the additional demand. To the extent that this happens, prices need not immediately rise. But the reduction in inventories implies an increase in cost of goods sold and thus profit income rising at each point of additional consumer spending by equivalently less than the increase in such spending.

Thus, for example, if the seller of the furniture incurs $500 of additional cost of goods sold when a purchaser spends $1,000 in his store, his additional profit income will be only $500, not $1,000. His consumption, as a model Keynesian consumer, will therefore be only two-thirds of that amount. And similarly for all other sellers in the chain of spending and respending. The alleged u201Cstimulusu201D will be radically less than the Keynesians expect and desire, e.g., not only $333.33 instead of $666.67 but also $111.11 instead of $444.44, and so on, with each subsequent round of spending reflecting not only the alleged u201Cleakage” of funds into saving but the effects on profit income of having to subtract cost of goods sold.

If the sellers practiced Keynesianism to the hilt, they would ignore the little matter of additional cost of goods sold and accompanying inventory depletion and simply consume in proportion to their additional sales proceeds, as though it were additional income, as Keynesianism assumes and teaches. In that case there would be $3,000 of consumption, and $1,500 of inventory decumulation.

Such behavior would set the stage not only for there being no additional demand for capital goods and labor but for there being less such demand than there was before, with the result of an actual increase in unemployment.

This is because if at some point the sellers wanted to replace the goods they had sold, they would find that their ability to do so would be diminished, because they had consumed part of their capital. To replace that capital they would need either to raise additional capital from outside or to withdraw capital that they themselves had been advancing to others. Either way less capital would be available somewhere in the economic system and where less capital is available, business activity must shrink. The consequence is more unemployment not less.

In order for the new and additional money injected into the economic system through additional consumption expenditure to find its way back to earlier stages of production, the sellers must not consume their additional sales proceeds to any great extent. To the contrary, they need to save them to the greatest extent possible. If the furniture store owner saves and productively spends his $1,000 of additional sales revenues, he will be able to give some u201Cstimulusu201D to his suppliers. If they in turn save and productively expend the great bulk of their additional sales revenues, they will be able to give some stimulus to their suppliers, and so on back. Along the way, the demand for labor and employment may increase. But any such result will depend on additional saving and productive expenditure, not consumption expenditure.

The fact that if accompanied at all stages of production by heavy saving out of sales revenues, an increase in consumer spending financed by inflation can serve to increase the demand for capital goods and labor at all the stages is not a sufficient basis for recommending such a policy. In fact, what it represents is an effort to reestablish the same kind of misdirected, wasteful production that leads to a recession or depression in the first place and which then creates the appearance of a need for stimulus.

It should never be forgotten that our present problems originated in an arrangement whereby a very large amount of production, i.e., the construction of hundreds of thousands of new houses, was taking place for the benefit of people whose own production was grossly insufficient ever to allow them to pay for those houses. It is a positive good thing that that wasteful, inherently loss-making production has now ceased.

The solution is not to now attempt to create another such loss-making arrangement to take its place. Another arrangement under which producers will produce goods for the benefit of people whose own production is insufficient to enable them to afford the goods in question — people who will buy the producers’ output only with u201Crefundsu201D of taxes they never even paid. The problems created by building houses for u201Csub-primeu201D borrowers cannot be corrected by now producing goods of all descriptions for u201Csub-primeu201D consumers in general.

A real solution requires making it possible for production to be directed to the needs and wants of those whose own production is sufficient to enable them to pay for the production of others.

Summary and Conclusions

I’ve shown that contrary to superficial appearance, in the most literal sense of the word u201Csuperficial,u201D consumption expenditure is not the main form of spending in the economic system and does not pay the national income or gross domestic product. I’ve shown that most spending in the economic system is in fact concealed under the head of net investment. However modest in size, including possibly being actually negative, net investment represents the true source of most revenue and income. That source is productive expenditure, which, I showed, is expenditure for the purpose of making subsequent sales and is represented by the spending of business firms for capital goods of all descriptions and for labor. (Consumption expenditure, in contrast, I showed is expenditure not for the purpose of making subsequent sales.)

The role of productive expenditure is concealed because net investment is the difference between it and business costs, the same costs that appear in business income statements in calculating business profits, and which do not differ very greatly from productive expenditure in size. Thus only a very small portion of the actual magnitude and importance of productive expenditure is ever revealed in conventional, Keynesian national income accounting.

I demonstrated the presence of productive expenditure behind net investment by means of a step-by-step logical demonstration of the equality between profits plus wages on the one side, and consumption plus net investment on the other. The crux of the demonstration was the restatement of profits as sales revenue minus costs, and then the breakdown both of sales revenues and wage incomes into productive expenditure and consumption expenditure. I called the resultants of the breakdown u201Crevenue/expenditure subcomponentsu201D and showed how the equality of profits plus wages and consumption plus net investment resulted simply from changing the order of addition of those subcomponents, from one based on revenue and income type to one based on expenditure type.

I showed on the basis of elementary business accounting principles why productive expenditure minus costs is the sum of net investment in plant and equipment and net investment in inventory. I then demonstrated why and how productive expenditure exceeds consumption expenditure and does so by a wide margin.

I presented gross national revenue (GNR) as the appropriate measure of total spending that constitutes revenue or income payments in the economic system. I showed GNR as equal to sales revenues plus wages on the left and consumption expenditure plus productive expenditure on the right. I showed how by means of the subtraction of business costs from sales revenues on the left and productive expenditure on the right, GNR reduces to national income on the left and consumption plus net investment on right. I showed the deficiencies of GDP as a measure of total spending in comparison to GNR.

And finally, I’ve shown the radical difference between my analysis and the conventional, Keynesian analysis for understanding the role of saving as a source of spending in the economic system, and have shown its relevance to the so-called economic stimulus package that has just been enacted.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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In his July 1, 2007, New York Times Op-Ed piece, (“Moving Beyond Kyoto,” Al Gore states:

Consider this tale of two planets. Earth and Venus are almost exactly the same size, and have almost exactly the same amount of carbon. The difference is that most of the carbon on Earth is in the ground — having been deposited there by various forms of life over the last 600 million years — and most of the carbon on Venus is in the atmosphere.

As a result, while the average temperature on Earth is a pleasant 59 degrees, the average temperature on Venus is 867 degrees. True, Venus is closer to the Sun than we are, but the fault is not in our star; Venus is three times hotter on average than Mercury, which is right next to the Sun. It’s the carbon dioxide.

No, Mr. Gore, it’s not the carbon dioxide. If you take the trouble to do an internet search on Google for “carbon dioxide” + “Martian atmosphere,” you will learn that the Martian atmosphere is 95 percent carbon dioxide, yet the average surface temperature on Mars is —63° C (—81° F).

But even putting this decisive objection aside, there is simply no informed or honest way for you to suggest that the amount of atmospheric carbon dioxide on Earth is or ever will be comparable to the amount on Venus. According to The Encyclopedia Britannica, the atmosphere of Venus is 96 percent carbon dioxide. The atmosphere of the Earth, in contrast, is less than .04 percent carbon dioxide. That’s not .04, but .0004, i.e., four one-hundredths of one percent. To be precise, carbon dioxide is presently 383 parts per million of the Earth’s atmosphere. All of the brouhaha going on about the subject is over a projected increase to perhaps as much as 1000 parts per million by the year 2100, i.e., to .001 percent, which is 10 one-hundredths of one percent.

It is on the basis of such ignorance or dishonesty that you declare that

we should demand that the United States join an international treaty within the next two years that cuts global warming pollution by 90 percent in developed countries and by more than half worldwide in time for the next generation to inherit a healthy Earth. (Italics added.)

The “global warming pollution” you talk about is the production of the energy that lights, heats, and air conditions our homes, powers our automobiles, trucks, trains, airplanes, and ships, runs our refrigerators, television sets, computers, and all other electrical appliances, and powers the machinery and equipment that produces all of the goods we buy. You want to cut this by a staggering percentage!

You conclude by describing this suicidal program as one of a “privilege”:

The climate crisis offers us the chance to experience what few generations in history have had the privilege of experiencing: a generational mission; a compelling moral purpose; a shared cause; and the thrill of being forced by circumstances to put aside the pettiness and conflict of politics and to embrace a genuine moral and spiritual challenge.

Such mindless, rabid enthusiasm for a cause so self-destructive calls to mind the equal moral fervor and rising to “spiritual challenges” of the generations led by such madmen as Lenin and Hitler. It is also very much in the spirit in which suicide bombers depart on their missions.

You feel free to make your calls for unprecedented economic destruction from the comfort of a home that consumes more than 20 times the electricity of the average American home. You apparently have no awareness of the extent of your hypocrisy because you have purchased u201Ccarbon offsets,u201D in such forms as paying for the planting of a few trees here and there that will supposedly absorb carbon dioxide equivalent to that emitted in powering your home. (Mark Steyn, u201CRev. Gore Doesn’t Practice What He Preaches,u201D The Bulletin, March 8, 2007.) Yet your u201Cspiritual challengeu201D does not include such offsets for the rest of the American people, so that they too might go on enjoying their lives.

If you understood in personal terms what you are talking about, you would know that your supposedly glorious u201Cspiritual challengeu201D is a call for Mrs. Gore to scrub your laundry (if you would still have any) against a rock on the bank of a river, the way women do in Third World countries. That’s the actual meaning and measure of your u201Cspiritual challenge.u201D You want to turn our glorious economic system into a poverty-stricken hell-hole.

You need to calm down, Mr. Gore, and give yourself and the world a rest. Along the way, you should try to understand the extent and depth of the horrors you want to unleash.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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This is a more complete version of an article with the same title that previously appeared on this web site.

Global Warming Does Not Imply a Carbon Cap

Early this winter, the UN’s Intergovernmental Panel on Climate Change released the summary of its latest report on global warming. It’s most trumpeted finding was that the existence of global warming is now "unequivocal."

Although such anecdotal evidence as January’s snowfall in Tucson, Arizona and freezing weather in Southern California, and February’s more than 100-inch snowfall in upstate New York, might suggest otherwise, global warming may indeed be a fact. It may also be a fact that it is a by-product of industrial civilization (despite two ice ages having apparently occurred in the face of carbon levels in the atmosphere 16 times greater than that of today, millions of years before mankind’s appearance on earth).

If global warming and mankind’s responsibility for it really are facts, does anything automatically follow from them? Does it follow that there is a need to limit and/or reduce carbon emissions and the use of the fossil fuels — oil, coal, and natural gas — that gives rise to the emissions? The need for such limitation and/or rollback is the usual assumption.

Nevertheless, the truth is that nothing whatever follows from these facts. Before any implication for action can be present, additional information is required.

One essential piece of information is the comparative valuation attached to retaining industrial civilization versus avoiding global warming. If one values the benefits provided by industrial civilization above the avoidance of the losses alleged to result from global warming, it follows that nothing should be done to stop global warming that destroys or undermines industrial civilization. That is, it follows that global warming should simply be accepted as a byproduct of economic progress and that life should go on as normal in the face of it.

(Of course, there are projections of unlikely but nevertheless possible extreme global warming in the face of which conditions would be intolerable. However, as I explain below, to deal with such a possibility, it is necessary merely to find a different method of cooling the earth than that of curtailing the use of fossil fuels….)

In fact, if it comes, global warming, in the projected likely range, will bring major benefits to much of the world. Central Canada and large portions of Siberia will become similar in climate to New England today. So too, perhaps, will portions of Greenland. The disappearance of Arctic ice in summer time, will shorten important shipping routes by thousands of miles. Growing seasons in the North Temperate Zone will be longer. Plant life in general will flourish because of the presence of more carbon dioxide in the atmosphere.

Strangely, these facts are rarely mentioned. Instead, attention is devoted almost exclusively to the negatives associated with global warming, above all to the prospect of rising sea levels, which the report projects to be between 7 and 23 inches by the year 2100, a range, incidentally, that by itself does not entail major coastal flooding. (There are, however, projections of a rise in sea levels of 20 feet or more over the course of the remainder of the present millennium.)

Yes, rising sea levels may cause some islands and coastal areas to become submerged under water and require that large numbers of people settle in other areas. Surely, however, the course of a century, let alone a millennium, should provide ample opportunity for this to occur without any necessary loss of life.

Indeed, a very useful project for the UN’s panel to undertake in preparation for its next report would be a plan by which the portion of the world not threatened with rising sea levels would accept the people who are so threatened. In other words, instead of responding to global warming with government controls, in the form of limitations on the emission of carbon dioxide and other greenhouse gases, an alternative response would be devised that would be a solution in terms of greater freedom of migration.

In addition, the process of adaptation here in the United States would be helped by making all areas determined to be likely victims of coastal flooding in the years ahead ineligible for any form of governmental aid, insurance, or disaster relief after the expiration of a reasonable grace period. That would spur relocation to safer areas in advance of much of any future flooding.

What Depends on Industrial Civilization and Man-Made Power

As the result of industrial civilization, not only do billions more people survive, but in the advanced countries they do so on a level far exceeding that of kings and emperors in all previous ages — on a level that just a few generations ago would have been regarded as possible only in a world of science fiction. With the turn of a key, the push of a pedal, and the touch of a steering wheel, they drive along highways in wondrous machines at seventy miles an hour. With the flick of a switch, they light a room in the middle of darkness. With the touch of a button, they watch events taking place ten thousand miles away. With the touch of a few other buttons, they talk to other people across town or across the world. They even fly through the air at six hundred miles per hour, forty thousand feet up, watching movies and sipping martinis in air-conditioned comfort as they do so. In the United States, most people can have all this, and spacious homes or apartments, carpeted and fully furnished, with indoor plumbing, central heating, air conditioning, refrigerators, freezers, and gas or electric stoves, and also personal libraries of hundreds of books, compact disks, and DVDs; they can have all this, as well as long life and good health — as the result of working forty hours a week.

The achievement of this marvelous state of affairs has been made possible by the use of ever improved machinery and equipment, which has been the focal point of scientific and technological progress. The use of this ever improved machinery and equipment is what has enabled human beings to accomplish ever greater results with the application of less and less muscular exertion.

Now inseparably connected with the use of ever improved machinery and equipment has been the increasing use of man-made power, which is the distinguishing characteristic of industrial civilization and of the Industrial Revolution, which marked its beginning. To the relatively feeble muscles of draft animals and the still more feeble muscles of human beings, and to the relatively small amounts of useable power available from nature in the form of wind and falling water, industrial civilization has added man-made power. It did so first in the form of steam generated from the combustion of coal, and later in the form of internal combustion based on petroleum, and electric power based on the burning of any fossil fuel or on atomic energy.

This man-made power, and the energy released by its use, is an equally essential basis of all of the economic improvements achieved over the last two hundred years. It is what enables us to use the improved machines and equipment and is indispensable to our ability to produce the improved machines and equipment in the first place. Its application is what enables us human beings to accomplish with our arms and hands, in merely pushing the buttons and pulling the levers of machines, the amazing productive results we do accomplish. To the feeble powers of our arms and hands is added the enormously greater power released by energy in the form of steam, internal combustion, electricity, or radiation. In this way, energy use, the productivity of labor, and the standard of living are inseparably connected, with the two last entirely dependent on the first.

Thus, it is not surprising, for example, that the United States enjoys the world’s highest standard of living. This is a direct result of the fact that the United States has the world’s highest energy consumption per capita. The United States, more than any other country, is the country where intelligent human beings have arranged for motor-driven machinery to accomplish results for them. All further substantial increases in the productivity of labor and standard of living, both here in the United States and across the world, will be equally dependent on man-made power and the growing use of energy it makes possible. Our ability to accomplish more and more with the same limited muscular powers of our limbs will depend entirely on our ability to augment them further and further with the aid of still more such energy.*

A Free-Market Response to Global Warming

Even if global warming is a fact, the free citizens of an industrial civilization will have no great difficulty in coping with it — that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the perspective of government central planners.

It would be too great a problem for government bureaucrats to handle (as is the production even of an adequate supply of wheat or nails, as the experience of the whole socialist world has so eloquently shown). But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Individuals would decide, on the basis of profit-and loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. Factories, stores, and houses all need replacement sooner or later. In the face of a change in the relative desirability of different locations, the pattern of replacement would be different. Perhaps some replacements would have to be made sooner than otherwise. To be sure, some land values would fall and others would rise. Whatever happened individuals would respond in a way that minimized their losses and maximized their possible gains. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system (as many former central planners of Eastern Europe and the former Soviet Union have come to learn). As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved greater problems than global warming, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry.**

Emissions Caps Mean Impoverishment

The environmental movement does not value industrial civilization. It fears and hates it. It does not value human life, which it regards merely as one of earth’s "biota," of no greater value than any other life form, such as spotted owls or snail darters. To it, the loss of industrial civilization is of no great consequence. It is a boon.

But to everyone else, it would be an immeasurable catastrophe: the end of further economic progress and the onset of economic retrogression, with no necessary stopping point. Today’s already widespread economic stagnation is the faintest harbinger of the conditions that would follow.

A regime of emissions caps means that all technological advances requiring an increase in the total consumption of man-made power would be impossible to implement. At the same time, any increase in population would mean a reduction in the amount of man-made power available per capita. (Greater production of atomic power, which produces no emissions of any kind, would be an exception. But it is opposed by the environmentalists even more fiercely than is additional power derived from fossil fuels.)

To gauge the consequences, simply imagine such caps having been imposed a generation or two ago. If that had happened, where would the power have come from to produce and operate all of the new and additional products we take for granted that have appeared over these years? Products such as color television sets and commercial jets, computers and cell phones, CDs and DVDs, lasers and MRIs, satellites and space ships? Indeed, the increase in population that has taken place over this period would have sharply reduced the standard of living, because the latter would have been forced to rest on the foundation of the much lower per capita man-made power of an earlier generation.

Now add to this the effects of successive reductions in the production of man-made power compelled by the imposition of progressively lower ceilings on greenhouse-gas emissions, ceilings as low as 75 or even 40 percent of today’s levels. (These ceilings have been advocated by Britain’s Stern Report and by the United Nations Intergovernmental Panel, respectively.) Inasmuch as these ceilings would be global ceilings, any increase in greenhouse-gas emissions taking place in countries such as China and India would be possible only at the expense of even further reductions in the United States, whose energy consumption is the envy of the world.

All of the rising clamor for energy caps is an invitation to the American people to put themselves in chains. It is an attempt to lure them along a path thousands of times more deadly than any military misadventure, and one from which escape might be impossible.

Already, led by French President Jacques Chirac, forces are gathering to make non-compliance with emissions caps an international crime. According to an Associated Press report of February 5, 2007, "Forty-Five nations joined France in calling for a new environmental body to slow global warming and protect the planet, a body that potentially could have policing powers to punish violators."

Given such developments, it is absolutely vital that the United States never enter into any international treaty in which it agrees to caps on greenhouse-gas emissions.

An Answer to the Hellfire-and-Brimstone Version of Global Warming

In previous centuries it was common for Religion to threaten those whose way of life was not to its satisfaction, with the prospect of hellfire and brimstone in the afterlife. Substitute for the afterlife, life on earth in centuries to come, and it is possible to see that environmentalism and the rest of the left are now doing essentially the same thing. They hate the American way of life because of its comfort and luxury. And to frighten people into abandoning it, they are threatening them with a global-warming version of hellfire and brimstone.

This is not yet so open and explicit as to be obvious to everyone. Nevertheless, it is clearly present. It is hinted at in allusions to the possibility of temperature increases beyond the UN report’s projected range of 3.5 to 8 degrees Fahrenheit. For example, according to The New York Times, "the report says there is a more than a 1-in-10 chance of much greater warming, a risk that many experts say is far too high to ignore."

Environmentalist threats of hellfire and brimstone can be expected to become more blatant and shrill if the movement’s present efforts to frighten the people of the United States into supporting its program appear to be insufficient. Hellfire and brimstone is the environmentalists’ ultimate threat.

Thus, let us assume that it were true that global warming might proceed to such an extent as to cause temperature and/or sea-level increases so great as to be simply intolerable or, indeed, literally to roast and boil the earth. Even so, it would still not follow that industrial civilization should be abandoned or in any way compromised. In that case, all that would be necessary is to seek out a different means of deliberately cooling the earth.

It should be realized that the environmentalists’ policy of reducing greenhouse-gas emissions is itself a policy of cooling the earth. But it is surely among the most stupid and self-destructive such policies as it is possible to imagine. What it claims is that if we destroy the energy base needed to produce and operate the construction equipment required to build strong, well-made, comfortable houses for hundreds of millions of people, we shall be safer from hurricanes and floods than if we retain and enlarge that energy base. It claims that if we destroy our capacity to produce and operate refrigerators and air conditioners, we shall be better protected from hot weather than if we retain and enlarge that capacity. It claims that if we destroy our capacity to produce and operate tractors and harvesters, to can and freeze food, to build and operate hospitals and produce medicines, we shall secure our food supply and our health better than if we retain and enlarge that capacity. This is the meaning of the claim that retaining this capacity will bring highly destructive global warming, while destroying it will avoid such global warming.***

There are rational ways of cooling the earth if that is what should actually be necessary, ways that would take advantage of the vast energy base of the modern world and of the still greater energy base that can be present in the future if it is not aborted by the kind of policies urged by the environmentalists….

Once people begin to put their minds to the problem, it is possible that a variety of effective and relatively low-cost solutions for global warming will be found. The two essential parameters of such a solution would be the recognition of the existence of possibly excessive global warming, on the one side, and unswerving loyalty to the value of the American standard of living and the American way of life, on the other. That is, more fundamentally, unswerving loyalty to the values of individual freedom, continuing economic progress, and the maintenance and further development of industrial civilization and its foundation of man-made power.

Global warming is not a threat. But environmentalism’s response to it is.

It claims to want to act in the name of avoiding the risk of alleged dreadful dangers lying decades and centuries in the future. But its means of avoiding those alleged dangers is to rush ahead today to cripple industrial civilization by means of crippling its essential foundation of man-made power. In so doing, it gives no consideration whatever to the risks of this. Nor does it give any consideration to any possible alternatives to this policy. It contents itself with offering to the public what is virtually merely the hope and prayer of the timely discovery of radically new alternative technologies to replace the ones it seeks to destroy. Such pie in the sky is a nothing but a lie, intended to prevent people from recognizing the plunge in their standard of living that will result if the environmentalists’ program is enacted.

If the economic progress of the last two hundred years or more is to continue, if its existing benefits are to be maintained, the people of the United States, and hopefully of the rest of the world as well, must turn their backs on environmentalism. They must recognize it for the profoundly destructive, misanthropic philosophy that it is.

They must solve any possible problem of global warming on the foundation of industrial civilization, not on a foundation of its ruins.

Notes

*The last five paragraphs, with slight adaptation, are an excerpt from pp. 77 and 78 of my book Capitalism: A Treatise on Economics.

**The last four paragraphs, with slight adaptation, are an excerpt from pp. 88 and 89 of Capitalism.

*** The examples in this paragraph are adapted from p. 88 of Capitalism.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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I

Environmentalism is the product of the collapse of socialism in a world that is ignorant of the contributions of von Mises — a world that does not know what he has said that would logically explain the collapse of socialism and, even more importantly, the success of capitalism.

Because of ignorance of the contributions of von Mises, the great majority of the intellectuals, and of the general public too, which has been subjected to the educational system fashioned and run by them, continues to believe such things as that the profit motive is the cause of starvation wages, exhausting hours, sweatshops, and child labor; and of monopolies, inflation, depressions, wars, imperialism, and racism. At the same time, they believe that saving is hoarding and a cause of unemployment and depressions, as is, allegedly, economic progress in the form of improvements in efficiency. And by the same logic, they regard war and destruction as necessary to prevent unemployment under capitalism. In addition, they believe that money is the root of all evil and that competition is "the law of the jungle" and "the survival of the fittest." Economic inequality, they believe, proves that successful businessmen and capitalists play the same social role in capitalism as did slave owners and feudal aristocrats in earlier times and is thus the logical and just basis for "class warfare."

Real, positive knowledge of the profit motive and the price system, of saving and capital accumulation, of money, economic competition, and economic inequality, and of the harmony of interests among men that results from the joint operation of these leading features of capitalism — all of this knowledge is almost entirely lacking on the part of the great majority of today’s intellectuals.

In the absence of such knowledge, such theoretical knowledge, of which von Mises is far and away the most important source, concrete, historical facts are generally insufficient to change the intellectuals’ ideas or attitudes. Merely to show them such facts as the economic superiority of West Germany over East Germany, of South Korea over North Korea, of Taiwan over mainland China, and, of course, and above all, of the United States over the Soviet Union, makes virtually no impression.

It does not because the intellectuals operate on the basis of a theory. Theory, even when it is actually wrong, is held as an understanding of reality in terms of a system of principles, that is, in terms of logical connections between propositions which are regarded either as self-evidently true or as logically derived from such propositions. Finding a fact at variance with what is considered to be such knowledge, usually only serves to call into question the fact, not the theory. The situation is comparable to someone who knows the laws of arithmetic being confronted with a situation in which the facts of the case appear to contradict those laws, e.g., a case in which two plus two appears to add up to five. In such a case, the truth of two plus two equals four will not be questioned. What will be questioned is the report of their adding up to five and every aspect of the process of reaching such a mistaken conclusion.

In the minds of the intellectuals, the evil of virtually every aspect of capitalism appears as absolutely certain. In their view, it simply cannot be that such an evil system could possibly produce good results. At the same time, the goodness of socialism appears as equally certain to them.

Of course, the economic theory of the intellectuals is riddled with false propositions, logical errors, and gross ignorance. But not having read von Mises, the intellectuals do not know this. And thus they hold their theory as being more certain than almost any historical fact.

And I must add that refuting the intellectuals’ socialist ideas also cannot be done merely by confronting them with a different fundamental philosophy, notably Ayn Rand’s philosophy of Objectivism. This is because just as the historical facts are too narrow to do the job of changing the intellectuals’ minds about capitalism, so too, a philosophical system by itself is too abstract and broad to do the job. Only von Mises is squarely on target in providing a comprehensive and compelling theoretical case for capitalism and against socialism. He is absolutely essential. Without him, the result of Objectivism alone easily turns out to be someone like Hillary Clinton, who had "an Ayn Rand period" and nevertheless ended up as a thorough-going statist.

Ignorance of the ideas of von Mises — the willful evasion of his ideas — has enabled the last three generations of intellectuals to go on with the delusion that capitalism is an "anarchy of production," a system of rampant evil, utter madness, and continuous strife and conflict, while socialism is a system of rational planning and order, of morality and justice, and the ultimate universal harmony of all mankind. For perhaps a century and a half, the intellectuals have seen socialism as the system of reason and science and as the ultimate goal of all social progress. On the basis of all that they believe, and think that they know, the great majority of intellectuals even now cannot help but believe that socialism should succeed and capitalism fail.

Ignorant of the contributions of von Mises, the intellectuals were totally unprepared for the world-wide collapse of socialism that became increasingly evident in the last decades of the twentieth century and that culminated in the overthrow of the communist regimes in Eastern Europe and the former Soviet Union. Carrying their ignorance to the depths of depravity, they have apparently chosen to interpret the undeniable failure of socialism not as evidence of their own ignorance but as the failure of reason and science. Socialism, they believe, is the system of social organization implied by reason and science. Its failure, they conclude, can only be the failure of reason and science. Such is the state of ignorance that results from ignorance of the contributions of von Mises.

This much at least must be said here about the actual relationship between socialism and reason. Reason is an attribute of the individual, not the collective. As von Mises repeatedly said, "Only the individual thinks. Only the individual acts." So far from being any kind of system demanded or even remotely supported by reason, socialism constitutes the forcible suppression of the reason of everyone except that of the Supreme Dictator. He alone is to think and plan, while all others are merely to obey and carry out his orders. A system in which one man, or a few men, presume to establish a monopoly on the use of reason must, of course, fail. Its failure can certainly not be called a failure of reason. It can no more be called a failure of reason than it could be called a failure of human legs if one man or a handful of men were somehow to deprive the rest of the human race of the power to use its legs and then, of course, found its own legs inadequate to support the weight of the human race. So far is the failure of socialism from being a failure of reason that it would be much more appropriate to describe it as a failure of lunacy: the lunacy of believing that the thinking and planning of one man or a handful of men could be substituted for the thinking and planning of tens and hundreds of millions of men cooperating under capitalism and its division of labor and price system. (Of course, because they never bothered to read von Mises, the intellectuals do not even know that ordinary people do in fact engage in economic planning, planning that is integrated and harmonized by the price system. From the abysmally ignorant perspective of the intellectuals, ordinary people are chickens without heads. Thinking and planning are allegedly actions that only government officials can perform.)

Because of ignorance of the contributions of von Mises, one cannot expect very many people to know that Nazism was actually a major form of socialism and thus that the fifteen million or more murders for which it was responsible should be laid at the door of socialism. Nazism and all of its murders aside, Marxian "scientific" socialism was responsible for more than eighty million murders in the twentieth century: thirty million in the former Soviet Union, fifty million in Communist China, and untold millions more in the satellite countries.

The great majority of the intellectual establishment never took these latter mass murders very seriously and certainly did not regard them as being caused by the nature of socialism. (They did take seriously the murders committed by the Nazis, which, in their ignorance, they blamed on capitalism.) Even when, late in the twentieth century, well after the great majority of the murders had been committed and were known to the world, President Reagan characterized the Soviet Union as "the evil empire," the intellectual establishment was capable of no other response than to criticize him for being impolite, undiplomatic, and boorish.

Now the reality is that the great majority of intellectuals of the last several generations have blood on their hands. Morally speaking at least, in urging the establishment of socialism and/or in denying or ignoring its resulting bloody consequences, they have been accessories to mass murder, either before the fact or after the fact.

And, indeed, the intellectuals have some form of awareness of their guilt. For not only do they blame reason and science for the failure of socialism but they now also regard reason and science, and its offshoot technology, as profoundly dangerous phenomena, as though they, and not socialism, had been responsible for the mass murders. Indeed, the same intellectual quarter that a generation or more ago urged "social engineering" has taken the failure of social engineering so far as to now oppose engineering of virtually any kind. The same intellectual quarter that a generation or more ago urged the totalitarian control of all aspects of human life for the purpose of bringing order to what would otherwise allegedly be chaos, now urges a policy of laissez-faire — out of respect for natural harmonies. Of course, it is not a policy of laissez-faire toward human beings, who are to be as tightly controlled as ever. Nor, of course, is it a policy that recognizes any form of economic harmonies among human beings. No, it is a policy of laissez-faire toward nature in the raw; the alleged harmonies that are to be respected are those of so-called eco-systems.

But while the intellectuals have turned against reason, science, and technology, they continue to support socialism and, of course, to oppose capitalism. They now do so in the form of environmentalism. It should be realized that environmentalism’s goal of global limits on carbon dioxide and other chemical emissions, as called for in the Kyoto treaty, easily lends itself to the establishment of world-wide central planning with respect to a wide variety of essential means of production. Indeed, an explicit bridge between socialism and environmentalism is supplied by one of the most prominent theorists of the environmental movement, Barry Commoner, who was also the Green Party’s first candidate for President of the United States.

The bridge is in the form of an attempted ecological validation of one of the very first notions of Karl Marx to be discredited — namely, Marx’s prediction of the progressive impoverishment of the wage earners under capitalism. Commoner attempts to salvage this notion by arguing that what has prevented Marx’s prediction from coming true, until now, is only that capitalism has temporarily been able to exploit the environment. But this process must now come to an end, and, as a result, the allegedly inherent conflict between the capitalists and the workers will emerge in full force. (For anyone interested, I quote Commoner at length in Capitalism.)

Concerning the essential similarity between environmentalism and socialism, I wrote:

The only difference I can see between the green movement of the environmentalists and the old red movement of the Communists and socialists is the superficial one of the specific reasons for which they want to violate individual liberty and the pursuit of happiness. The Reds claimed that the individual could not be left free because the result would be such things as "exploitation," "monopoly," and depressions. The Greens claim that the individual cannot be left free because the result will be such things as destruction of the ozone layer, acid rain, and global warming. Both claim that centralized government control over economic activity is essential. The Reds wanted it for the alleged sake of achieving human prosperity. The Greens want it for the alleged sake of avoiding environmental damage . . . [And in the end,] [b]oth the Reds and the Greens want someone to suffer and die; the one, the capitalists and the rich, for the alleged sake of the wage earners and the poor; the other, a major portion of all mankind, for the alleged sake of the lower animals and inanimate nature (Ibid., p. 102).

If the world’s intellectuals had been open to the possibility that they had been wrong about the nature of capitalism and socialism — profoundly, devastatingly wrong — and taken the trouble to read and understand the works of von Mises in order to learn how and why they had been wrong, socialism would have died once and for all with the Soviet Union, and the whole world would now be moving toward laissez-faire capitalism and unprecedented economic progress and prosperity. Instead, the intellectuals have chosen to foist the doctrine of environmentalism on the world, as a last-ditch effort to destroy capitalism and save socialism.

II

All that I have said up to now should be understood as in the nature of an introduction. I consider the substance of my talk to be the refutation of the two essential claims of the environmentalists and then a critique of their essential policy prescription. The two essential claims of the environmentalists, which I take for granted are already well known to everyone, are (1) that continued economic progress is impossible, because of the impending exhaustion of natural resources (it is from this notion that the slogan "reduce, reuse, recycle" comes), and (2) that continued economic progress, indeed, much of the economic progress that we have had up to now, is destructive of the environment and is therefore dangerous. The essential policy prescription of the environmentalists is the prohibition of self-interested individual action insofar as the byproduct of such action when performed on a mass basis is alleged damage to the environment. The leading concrete example of this policy prescription is the attempt now underway to force individuals to give up such things as their automobiles and air conditioners on the grounds that the byproduct of hundreds of millions or billions of people operating such devices is to cause global warming. And this same example, of course, is presently the leading example of the alleged dangers of economic progress.

The basis of my critique of the essential claims of the environmentalists is Carl Menger’s theory of goods. The basis of my critique of their essential policy prescription is the spirit of individualism that runs throughout the writings of Ludwig von Mises.

In his Principles of Economics, Menger develops two aspects of his theory of goods that are highly relevant to the critique of the environmentalists’ two essential claims. The first aspect is his recognition that what makes what would otherwise be mere things into goods is not the intrinsic properties of the things but a man-made relationship between the physical properties of the things and the satisfaction of human needs or wants. Menger describes four prerequisites, all of which must be simultaneously present, in order for a thing to become a good, or, as he often puts it, have "goods-character."

He writes:

If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:

1. A human need.
2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.
3. Human knowledge of this causal connection.
4. Command of the thing sufficient to direct it to the satisfaction of the need (p. 52).

The last two of these prerequisites, it must be stressed, are man-made. Human knowledge of the causal connection between external material things and the satisfaction of human needs must be discovered by man. And command over external material things sufficient to direct them to the satisfaction of human needs must be established by man. For the most part, it is established by means of a process of capital accumulation and a rising productivity of labor.

All this has immediate bearing on the subject of natural resources. It implies that the resources provided by nature, such as iron, aluminum, coal, petroleum and so on, are by no means automatically goods. Their goods-character must be created by man, by discovering knowledge of their respective properties that enable them to satisfy human needs and then by establishing command over them sufficient to direct them to the satisfaction of human needs.

For example, iron, which has been present in the earth since the formation of the planet and throughout the entire presence of man on earth, did not become a good until well after the Stone Age had ended. Petroleum, which has been present in the ground for millions of years, did not become a good until the middle of the nineteenth century, when uses for it were discovered. Aluminum, radium, and uranium also became goods only within the last century or century and a half.

An example concerning goods-character being created only after the establishment of command sufficient to direct the resource provided by nature to the satisfaction of a human need would be the case of petroleum deposits lying deeper than existing drilling equipment could go. As drilling equipment improved, command was established over deposits lying at greater and greater depths. Those deposits, to the extent that they were known, then became goods, which they had not been before. Similarly, for some years after the creation of the goods-character of petroleum, those petroleum deposits containing a significant sulfur content were unusable for the production of petroleum products and were therefore not goods. Their goods-character was created only when Rockefeller and Standard Oil developed the process of cracking petroleum molecules, which then made sulfurous deposits useable.

The second aspect of Menger’s theory of goods that is highly relevant to the critique of the environmentalists’ essential claims is his principle that the starting point both of goods-character and of the value of goods is within us — within human beings — and radiates outward from us to external things, establishing the goods-character and value first of things that directly satisfy our needs, such as food and clothing, which category of goods Menger describes as "goods of the first order," and, second, the means of producing goods of the first order, such as the flour to bake bread and the cloth to make clothing, which category of goods Menger describes as "goods of the second order." Goods-character and the value of goods then proceed from goods of the second order to goods of the third order, such as wheat, which is used to make the flour, and cotton yarn, which is used to make the cloth to make the clothing. From there they proceed to goods of the fourth order, such as the equipment and land used to produce the wheat, and the raw cotton from which the cotton yarn is made. Thus, goods-character and the value of goods, in Menger’s view, radiate outward from human beings and their needs to external things more and more remote from the direct satisfaction of human needs.

In Menger’s own words: "The goods-character of goods of higher order is derived from that of the corresponding goods of lower order." (p.63) And: ". . . the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve." (p. 150) And as to the value of goods of the first order: "The value an economizing individual attributes to a good is equal to the importance of the particular satisfaction that depends on his command of the good." (p. 146) "The determining factor . . . is . . . the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good." (p. 147)

In Menger’s view, it is clear that the process of production represents a progression from goods of higher order to goods of lower order, that is, from goods more remote from the satisfaction of human needs and the source of the value of all goods, to goods less remote from the satisfaction of human needs and the source of the value of all goods. The process of production unmistakably appears as one of continuous enhancement of utility, as it moves closer and closer to its ultimate end and purpose: the satisfaction of human needs.

To apply Menger’s views to the critique of the essential claims of environmentalism, it is first necessary to stress the fact that in his account of things, nature’s contribution to natural resources is implicitly much less than is generally supposed. According to the prevailing view, what nature has provided is the natural resources that man exploits, that is, for example, all of the iron mines and coal mines, all of the oil fields and natural-gas wells, and so on. At the same time, according to the prevailing view, man’s only connection to these allegedly all-nature-given natural resources is merely that he uses them up, with no means of replacing them. It is generally thought, for example, that while man produces such things as automobiles and refrigerators, his sole connection to the natural resources used in their production, such as iron ore, is merely to use them up, with no possibility of replacing them.

As I say, in Menger’s view, nature’s contribution to natural resources is much less than what is usually assumed. What nature has provided, according to Menger, is the material stuff and the physical properties of the deposits in these mines and wells, but it has not provided the goods-character of any of them. Indeed, there was a time when none of them were goods.

The goods-character of natural resources, according to Menger, is created by man, when he discovers the properties they possess that render them capable of satisfying human needs and when he gains command over them sufficient to direct them to the satisfaction of human needs.

All that needs to be added to Menger’s view of the man-made creation of the goods-character of natural resources is a precise, explicit recognition of the extent of the things Menger refers to that nature has provided and which are not yet goods, but which, under the appropriate circumstances, might become goods, or, at least, from the domain of which things might be drawn to a greater extent to receive goods-character by virtue of man’s contribution to the process. In other words, what precisely has nature provided with respect to which man might discover causal connections to the satisfaction of his needs and over greater portions of which he might gain command sufficient to direct such things to the satisfaction of his needs?

My answer to this question is that what nature has provided is matter and energy — matter in the form of all the chemical elements both known and as yet unknown, and energy, in all of its various forms. I call this contribution of nature "the natural resources provided by nature." Natural resources in the much narrower sense of "goods," as Menger uses the term, are drawn from this virtually infinite domain provided by nature. Natural resources that are goods in Menger’s sense are natural resources provided by nature that man has made useable and accessible by virtue of discovering properties they possess that enable them to satisfy human needs and by virtue of gaining command over them sufficient to direct them to the satisfaction of human needs.

What is essential here is to grasp the distinction between the two senses of the expression "natural resources." First, there are natural resources as provided by nature. Such natural resources, as I say, are matter, in all of its elemental forms, and energy, in all of its forms. And then, second, drawn from this domain, are natural resources to which man has given goods-character.

We are already familiar with the fact that an outstanding characteristic of natural resources in the first sense, that is, of natural resources as provided by nature, is that none of them are intrinsically goods — that their achievement of goods-character awaits action by man. A further, equally important characteristic of natural resources as provided by nature, and which now needs to be stressed as strongly as possible, is the enormity of their quantity. Indeed, for all practical purposes, they are infinite. Strictly speaking, they are one and the same with all the matter and energy in the universe. That is the full extent of the natural resources supplied by nature.

Thus, in one sense, the sense of useable, accessible natural resources — that is, of goods as Menger defines the term — the contribution of nature is zero. Practically nothing comes to us from nature that is ready-made as a useable, accessible natural resource — as a good in Menger’s sense. In another sense, however, the natural resources that come from nature — the matter, in the form of all the chemical elements, known and as yet unknown, and energy in all of its forms — are virtually infinite in their extent. In this sense, nature’s contribution is boundless.

Even if we limit our horizon exclusively to the planet earth, which certainly need not be our ultimate limit, the magnitude of natural resources supplied by nature is mind-bogglingly huge. It is nothing less than the entire mass of the earth and all of the energy that goes with it, from thunder storms in the atmosphere, a single one of which discharges more energy than all of mankind produces in an entire year, to the tremendous heat found at the earth’s core in millions of cubic miles of molten iron and nickel. Yes, the natural resources provided by nature in the earth alone extend from the upper limits of the earth’s atmosphere, four-thousand miles straight down, to its center. This enormity consists of solidly packed chemical elements. There is not one cubic centimeter of the earth, either on its surface or anywhere below its surface, that is not some chemical element or other, or some combination of chemical elements. This is nature’s contribution to the natural resources contained in this planet. It indicates the incredibly enormous extent of what is out there awaiting transformation by man into natural resources possessing goods-character.

And this brings me to what I consider to be the revolutionary view of natural resources that is implied in Menger’s theory of goods. Namely, not only does man create the goods-character of natural resources — by obtaining knowledge of their useful properties and then creating their useability and accessibility by virtue of establishing the necessary command over them — but he also has the ability to go on indefinitely increasing the supply of natural resources possessing goods-character. He enlarges the supply of useable, accessible natural resources — that is, natural resources possessing goods-character — as he expands his knowledge of and physical power over nature.

The prevailing view, that dominates the thinking of the environmentalists and the conservationists, that there is a scarce, precious stock of natural resources that man’s productive activity serves merely to deplete is wrong. Seen in its full context, man’s productive activity serves to enlarge the supply of useable, accessible natural resources by converting a larger, though still tiny, fraction of nature into natural resources possessing goods-character. The essential question concerning natural resources is what fraction of the virtual infinity that is nature does man possess sufficient knowledge concerning and sufficient physical command over to be able to direct it to the satisfaction of his needs. This fraction will always be very small indeed and will always be capable of vastly greater further enlargement.

As I stated a moment ago, the supply of useable, accessible natural resources expands as man expands his knowledge of and physical power over the world and universe. Up to now, although considerably expanded in comparison with what it was in previous centuries, man’s physical power over the world has been essentially confined to the roughly thirty percent of the earth’s surface that is not covered by sea water, and there it has been further confined to depths that are still measured in feet, not miles. Man is literally still just scratching the surface of the earth, and the far lesser part of its surface at that. And nowhere is he dealing with nature nearly as effectively or efficiently as he someday might.

In addition to the examples previously given with respect to iron, petroleum, aluminum, radium, and uranium, consider the implications for the supply of useable, accessible natural resources of man becoming able to mine at greater depths with less effort, to move greater masses of earth with less effort, to break down compounds previously beyond his power, or to do so with less effort, to gain access to regions of the earth previously inaccessible or to improve his access to regions already accessible. All of these increase the supply of useable, accessible natural resources. They do so, of course, by virtue of creating what Menger describes as command over things sufficient to direct them to the satisfaction of human needs. All of them bestow the character of goods on what had before been mere things.

As I wrote in Capitalism:

Today, as the result of such advances, the supply of economically useable natural resources is enormously greater than it was at the beginning of the Industrial Revolution, or even just one or two generations ago. Today, man can more easily mine at a depth of a thousand feet than he could in the past at a depth of ten feet, thanks to such advances as mechanical-powered drilling equipment, high explosives, steel structural supports for mine shafts, and modern pumps and engines. Today, a single worker operating a bulldozer or steam shovel can move far more earth than hundreds of workers in the past using hand shovels. Advances in reduction methods have made it possible to obtain pure ores from compounds previously either altogether impossible to work with or at least too costly to work with. Improvements in shipping, railroad building, and highway construction have made possible low-cost access to high-grade mineral deposits in regions previously inaccessible or too costly to exploit.

And, I added:

There is no limit to the further advances that are possible. Reductions in the cost of extracting petroleum from shale and tar sands have the potential for expanding the supply of economically useable petroleum by a vast multiple of what it is today. Hydrogen, the most abundant element in the universe, may turn out to be an economical source of fuel in the future. Atomic and hydrogen explosives, lasers, satellite detection systems, and, indeed, even space travel itself, open up limitless new possibilities for increasing the supply of economically useable mineral supplies. Advances in mining technology that would make it possible to mine economically at a depth of, say, ten thousand feet, instead of the present much more limited depths, or to mine beneath the oceans, would so increase the portion of the earth’s mass accessible to man that all previous supplies of accessible minerals would appear insignificant in comparison (p. 64).

The key point here is that, following Menger’s insights into the nature of goods, the supply of economically useable, accessible natural resources is expandable. It is enlarged as part of the same process by which man increases the production and supply of all other goods, namely, scientific and technological progress and saving and capital accumulation.

The fundamental situation is this. Nature presents the earth as an immense solidly packed ball of chemical elements. It has also provided comparably incredible amounts of energy in connection with this mass of chemical elements. If, over and against this massive contribution from nature stands motivated human intelligence — the kind of motivated human intelligence that a free, capitalist society so greatly encourages, with its prospect of earning a substantial personal fortune as the result of almost every significant advance, there can be little doubt as to the outcome: Man will succeed in progressively enlarging the fraction of nature’s contribution that constitutes goods; that is, he will succeed in progressively enlarging the supply of useable, accessible natural resources.

The likelihood of his success is greatly reinforced by two closely related facts: the progressive nature of human knowledge and the progressive nature of capital accumulation in a capitalist society, which, of course, is also a rational as well as a free society. In such a society, the stock of scientific and technological knowledge grows from generation to generation, as each new generation begins with all of the accumulated knowledge acquired by previous generations and then makes its own, fresh contribution to knowledge. This fresh contribution enlarges the stock of knowledge transmitted to the next generation, which in turn then makes its own fresh contribution to knowledge, and so on, with no fixed limit to the accumulation of knowledge short of the attainment of omniscience.

Similarly, in such a society the stock of capital goods grows from generation to generation. The larger stock of capital goods accumulated in any generation on the foundation of a sufficiently low degree of time preference and thus correspondingly high degree of saving and provision for the future, together with a continuing high productivity of capital goods based on the foundation of advancing scientific and technological knowledge, serves to produce not only a larger and better supply of consumers’ goods but also a comparably enlarged and better supply of capital goods. That larger and better supply of capital goods, continuing on the same foundation of low time preference and advancing scientific and technological knowledge, then serves to further enlarge and improve the supply not only of consumers’ goods but also of capital goods. The result is continuing capital accumulation, on the basis of which, from generation to generation, man is able to confront nature in possession of growing powers of physical command over it.

On the basis of both of progressively growing knowledge of nature and progressively growing physical power over nature, man progressively enlarges the fraction of nature that constitutes goods, i.e., the supply of useable, accessible natural resources.

III

I turn now to the second aspect of Menger’s theory of goods that relates to the critique of the essential tenets of environmentalism, namely, his view of the process of production as one of continuous enhancement of utility as it moves from goods of higher order to goods of lower order.

All that it is necessary to add to Menger’s view is recognition once again of the fact that the earth is an immense ball of solidly packed chemical elements. Now these chemical elements constitute man’s external material surroundings, i.e., his environment. They are the external material conditions of human life.

When these facts are kept in mind, it becomes clear that the process of production, and the whole of economic activity, so far from constituting a danger to man’s environment, as the environmentalists claim, have the inherent tendency to improve his environment, indeed, that that is their essential purpose.

This becomes obvious as soon as one realizes that not only does the entire world physically consist of nothing but chemical elements, but also that these elements are never destroyed. They simply reappear in different combinations, in different proportions, in different places. As I wrote in Capitalism:

Apart from what has been lost in a few rockets, the quantity of every chemical element in the world today is the same as it was before the Industrial Revolution. The only difference is that, because of the Industrial Revolution, instead of lying dormant, out of man’s control, the chemical elements have been moved about, as never before, in such a way as to improve human life and well-being. For instance, some part of the world’s iron and copper has been moved from the interior of the earth, where it was useless, to now constitute buildings, bridges, automobiles, and a million and one other things of benefit to human life. Some part of the world’s carbon, oxygen, and hydrogen has been separated from certain compounds and recombined in others, in the process releasing energy to heat and light homes, power industrial machinery, automobiles, airplanes, ships, and railroad trains, and in countless other ways serve human life. It follows that insofar as man’s environment consists of the chemical elements iron, copper, carbon, oxygen, and hydrogen, and his productive activity makes them useful to himself in these ways, his environment is correspondingly improved.

Consider further examples. To live, man needs to be able to move his person and his goods from place to place. If an untamed forest stands in his way, such movement is difficult or impossible. It represents an improvement in his environment, therefore, when man moves the chemical elements that constitute some of the trees of the forest somewhere else and lays down the chemical elements brought from somewhere else to constitute a road. It is an improvement in his environment when man builds bridges, digs canals, opens mines, clears land, constructs factories and houses, or does anything else that represents an improvement in the external, material conditions of his life. All of these things represent an improvement in man’s material surroundings — his environment. All of them represent the rearrangement of nature’s elements in a way that makes them stand in a more useful relationship to human life and well-being.

Thus, all of economic activity has as its sole purpose the improvement of the environment — it aims exclusively at the improvement of the external, material conditions of human life. Production and economic activity are precisely the means by which man adapts his environment to himself and thereby improves it (p. 90).

If anyone should ask how the environmentalists could miss the fact that precisely production and economic activity constitute the means whereby man improves his environment, the answer is that the environmentalists do not share Menger’s (or Western Civilization’s) starting point of value, namely, the value of human life and well-being. In their view, the starting point of value is the alleged "intrinsic value" of nature — that is, the alleged value of nature in and of itself, totally apart from any connection to human life and well-being. Such alleged intrinsic value is destroyed every time man changes anything whatever in the preexisting state of nature.

When the environmentalists speak of "harm to the environment" in connection with such things as clearing jungles, blasting rock formations, or the loss of this or that plant or animal species of no known or foreseeable value to man, what they actually mean in the last analysis is the loss of the alleged intrinsic values constituted by such things, and not any actual loss whatever to man. On the contrary, they are eager to sacrifice human life and well-being for the preservation of such alleged intrinsic values. To them, the "environment" is not the surroundings of man, deriving its value from its relationship to man, but nature in and of itself, deriving its value from itself — i.e., allegedly possessing "intrinsic" value.

Of course, the environmentalists also frequently pose as supporters of human life and well-being, and at such times they direct their fire at various comparatively minor negative byproducts of production and economic activity, such as local degradation of the quality of air or water, while totally neglecting the enormous positives, which, of course, are of overwhelmingly greater significance.

What guarantees that the positive benefits of production and economic activity incalculably outweigh any negatives associated with their byproducts is the principle of respect for individual rights. Although by no means always observed, this principle requires that one’s production and economic activity not only benefit oneself but also that insofar as any other people are involved in the process, the use of their labor and property must be obtained only by their voluntary consent. And, of course, to secure their voluntary consent, their cooperation must be made worth their while.

Thus, for example, if I wish to construct a building, not only will I benefit from it, but also all those who work for me in its construction and all those who supply me with materials and equipment for constructing it. So too will the building’s purchaser or tenants — if I construct it for the purpose of sale or rent. In addition, no third party’s property or person may be harmed by my action. For example, I risk serious legal penalty if I construct my building in a way that undermines a neighboring building’s foundation or which makes my building unsafe for passersby.

The major complaints the environmentalists currently make concern the fact that I heat and air-condition my building — to be sure, not I as one isolated individual, but as one of many tens or hundreds of millions of individuals using fossil fuels or CFCs. In so doing, mankind is allegedly guilty of the crime of increasing the level of carbon dioxide and other greenhouse gases, thereby causing "global warming," or increasing the level of ozone-destroying molecules in the upper atmosphere, thereby causing higher rates of skin cancer. And because mankind is allegedly guilty in these ways, the environmentalists assume that I as one individual man must be restricted, if not prohibited altogether, in my use of fossil fuels and CFCs, even though I, as one individual, am utterly incapable of causing any of the effects alleged; and the same, of course, is true, mutatis mutandis, for each and every other individual.

IV

Here I want to turn to the enormous spirit of individualism that is found in von Mises. Only individuals think and only individuals act, says von Mises. It follows, of course, that it is only for his own actions that an individual should be held responsible. The son should not be punished for the sins of the father; one member of a race or nation or economic class should not be held responsible for the deeds of any other members of that race, nation, or economic class.

And so too should it be in the case of any alleged environmental damage. If an individual, or an individual business enterprise, is incapable by himself of causing global warming or ozone depletion, or whatever, on a scale sufficient to cause harm to any other specific individual or individuals, then there is absolutely no proper basis on the individualistic philosophy of von Mises for prohibiting his action. As I say in Capitalism, "To prohibit the action of an individual in such a case is to hold him responsible for something for which he is simply not in fact responsible. It is exactly the same in principle as punishing him for something he did not do (p. 91)."

The individual should not be punished for consequences that can occur only as the result of the actions of the broader category or group of which he is a member, but do not occur as the result of his own actions. Thus, even if it is true that the combined effect of the actions of several billion people really is to cause global warming or ozone depletion (neither of these claims has actually been proven — the claims of global warming have all the certainty of a weather forecast, extended out to the next 100 years!), but even if, as I say, the claims were true, it still would not follow that any proper basis existed for prohibiting any specific individual or individuals from acting in ways that only when aggregated across billions of individuals resulted in global warming or ozone depletion or whatever.

If global warming or ozone depletion or whatever, really are consequences of the actions of the human race considered collectively, but not of the actions of any given individual, including any given individual private business firm, then the proper way to regard them is as the equivalent of acts of nature. Not being caused by the actions of individual human beings, they are equivalent to actions not morally caused by human beings at all, that is to say, to acts of nature.

Once we see matters in this light, it becomes clear what the appropriate response is to such environmental change, whether global warming and ozone depletion, or global cooling and ozone enrichment, or anything else nature may bring. It is the same as the appropriate response of man to nature in general. Namely, individual human beings must be free to deal with nature to their own maximum individual advantage, subject only to the limitation of not initiating the use of physical force against the person or property of other individual human beings. By following this principle, man will deal with the any negative forces of nature resulting as byproducts of his own activity taken in the aggregate in precisely the same successful way that he regularly deals with the primary forces of nature.

Allow me to elaborate on this. Here we are. We enjoy an incredibly marvelous industrial civilization, whose nature is indicated by the fact that because of it vast numbers of human beings can travel at breathtaking speeds for hundreds of miles at a stretch in their own personal automobiles, listening to symphony orchestras as they go — indeed, can fly over whole continents in a matter of hours in jet planes, while watching movies and drinking martinis; can walk into darkened rooms and flood them with light by the flick of a switch; can open a refrigerator door and enjoy delicious, healthful food brought from all over the world; can do all this and so much more. This is what we have. This, and much, much more, is what people everywhere could have if they were intelligent enough to establish economic freedom and capitalism.

But all this counts for virtually nothing as far as the environmentalists are concerned. They are ready to throw it all away because, they allege, it causes global warming and ozone depletion, i.e., bad weather. And the best way, they say, for us to avoid such bad weather, and thus to control nature more to our advantage, is to abandon modern, industrial civilization and capitalism.

The appropriate answer to the environmentalists is that we will not sacrifice a hair of industrial civilization, and that if global warming and ozone depletion really are among its consequences, we will accept them and deal with them — by such reasonable means as employing more and better air conditioners and sun block, not by giving up our air conditioners, refrigerators, and automobiles.

More fundamentally, the answer to the environmentalists is that the appropriate response to environmental change, whether global warming or a new ice age, is the economic freedom of a capitalist society. Sooner or later, such environmental change will occur — if not in this new century or even in this new millennium — then certainly at some time in the more remote future. At that time, it will require vast changes in human economic activity. Some areas presently used for certain purposes will become unusable for those purposes. Conceivably, they might even become uninhabitable. Other areas presently uninhabitable or barely habitable, will become much more desirable. Major changes in the comparative advantages of vast areas will take place, to which people must be free to respond.

For example, if and when global warming ever actually comes, vast areas in Canada, Greenland, and Russia would become far more hospitable to human beings than they now are. An article in The New York Times of Nov. 12, 2000, describes how the area around Hudson Bay, presently, in the article’s words, a "sub-Arctic region of treeless tundra," could "shift to New England-style temperate leafy forest . . . ." The enormous positive significance of such a development is entirely lost in the article’s concentration on the plight of the local polar bears. They, the article complains, "are 10 percent thinner and have 10 percent fewer cubs than they did 20 years ago. The culprit [the emotive word used by the alleged reporter], scientists and residents here said, is climate change."

As I wrote in Capitalism,

Even if global warming turned out to be a fact, the free citizens of an industrial civilization would have no great difficulty in coping with it — that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the perspective of government central planners.

It would be too great a problem for government bureaucrats to handle . . . . But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Individuals would decide, on the basis of profit-and-loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. Factories, stores, and houses all need replacement sooner or later. In the face of a change in the relative desirability of different locations, the pattern of replacement would be different. Perhaps some replacements would have to be made sooner than otherwise. To be sure, some land values would fall and others would rise. Whatever happened individuals would respond in a way that minimized their losses and maximized their possible gains. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system (as many former central planners of Eastern Europe and the former Soviet Union have come to learn). As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved much greater problems, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry (pp. 88—89).

A rational response to the possibility of large-scale environmental change is to establish the economic freedom of individuals to deal with it, if and when it comes. Capitalism and the free market are the essential means of doing this, not paralyzing government controls and "environmentalism." And both in the establishment of economic freedom and in every other major aspect of the response to environmentalism, the philosophy of Ludwig von Mises and Carl Menger must lead the way.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Recently a popular imported mineral water was removed from the market because tests showed that samples of it contained thirty-five parts per billion of benzene. Although this was an amount so small that only fifteen years ago it would have been impossible even to detect, it was assumed that considerations of public health required withdrawal of the product.

Such a case, of course, is not unusual nowadays. The presence of parts per billion of a toxic substance is routinely extrapolated into being regarded as a cause of human deaths. And whenever the number of projected deaths exceeds one in a million (or less), environmentalists demand that the government remove the offending pesticide, preservative, or other alleged bearer of toxic pollution from the market. They do so, even though a level of risk of one in a million is one-third as great as that of an airplane falling from the sky on one’s home.

While it is not necessary to question the good intentions and sincerity of the overwhelming majority of the members of the environmental or ecology movement, it is vital that the public realize that in this seemingly lofty and noble movement itself can be found more than a little evidence of the most profound toxicity. Consider, for example, the following quotation from David M. Graber, a research biologist with the National Park Service, in his prominently featured Los Angeles Times book review of Bill McKibben’s The End of Nature:

“This [man's "remaking the earth by degrees"] makes what is happening no less tragic for those of us who value wildness for its own sake, not for what value it confers upon mankind. I, for one, cannot wish upon either my children or the rest of Earth’s biota a tame planet, be it monstrous or — however unlikely — benign. McKibben is a biocentrist, and so am I. We are not interested in the utility of a particular species or free-flowing river, or ecosystem, to mankind. They have intrinsic value, more value — to me — than another human body, or a billion of them.

“Human happiness, and certainly human fecundity, are not as important as a wild and healthy planet. I know social scientists who remind me that people are part of nature, but it isn’t true. Somewhere along the line — at about a billion years ago, maybe half that — we quit the contract and became a cancer. We have become a plague upon ourselves and upon the Earth.

“It is cosmically unlikely that the developed world will choose to end its orgy of fossil-energy consumption, and the Third World its suicidal consumption of landscape. Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.”

While Mr. Graber openly wishes for the death of a billion people, Mr. McKibben, the author he reviewed, quotes with approval John Muir’s benediction to alligators, describing it as a “good epigram” for his own, “humble approach”: “`Honorable representatives of the great saurians of older creation, may you long enjoy your lilies and rushes, and be blessed now and then with a mouthful of terror-stricken man by way of a dainty!’”

Such statements represent pure, unadulterated poison. They express ideas and wishes which, if acted upon, would mean terror and death for enormous numbers of human beings.

These statements, and others like them, are made by prominent members of the environmental movement. The significance of such statements cannot be diminished by ascribing them only to a small fringe of the environmental movement. Indeed, even if such views were indicative of the thinking only of 5 or 10 percent of the members of the environmental movement — the “deep ecology,” Earth First! wing — they would represent toxicity in the environmental movement as a whole not at the level of parts per billion or even parts per million, but at the level of parts per hundred, which, of course, is an enormously higher level of toxicity than is deemed to constitute a danger to human life in virtually every other case in which deadly poison is present.

But the toxicity level of the environmental movement as a whole is substantially greater even than parts per hundred. It is certainly at least at the level of several parts per ten. This is obvious from the fact that the mainstream of the environmental movement makes no fundamental or significant criticisms of the likes of Messrs. Graber and McKibben. Indeed, John Muir, whose wish for alligators to “be blessed now and then with a mouthful of terror-stricken man by way of a dainty” McKibben approvingly quotes, was the founder of the Sierra Club, which is proud to acknowledge that fact. The Sierra Club, of course, is the leading environmental organization and is supposedly the most respectable of them.

There is something much more important than the Sierra Club’s genealogy, however — something which provides an explanation in terms of basic principle of why the mainstream of the ecology movement does not attack what might be thought to be merely its fringe. This is a fundamental philosophical premise which the mainstream of the movement shares with the alleged fringe and which logically implies hatred for man and his achievements. Namely, the premise that nature possesses intrinsic value — i.e., that nature is valuable in and of itself, apart from all contribution to human life and well-being.

The antihuman premise of nature’s intrinsic value goes back, in the Western world, as far as St. Francis of Assisi, who believed in the equality of all living creatures: man, cattle, birds, fish, and reptiles. Indeed, precisely on the basis of this philosophical affinity, and at the wish of the mainstream of the ecology movement, St. Francis of Assisi has been officially declared the patron saint of ecology by the Roman Catholic Church.

The premise of nature’s intrinsic value extends to an alleged intrinsic value of forests, rivers, canyons, and hillsides — to everything and anything that is not man. Its influence is present in the Congress of the United States, in such statements as that recently made by Representative Morris Udall of Arizona that a frozen, barren desert in Northern Alaska, where substantial oil deposits appear to exist, is “a sacred place” that should never be given over to oil rigs and pipelines. It is present in the supporting statement of a representative of the Wilderness Society that “There is a need to protect the land not just for wildlife and human recreation, but just to have it there.” It has, of course, also been present in the sacrifice of the interests of human beings for the sake of snail darters and spotted owls.

The idea of nature’s intrinsic value inexorably implies a desire to destroy man and his works because it implies a perception of man as the systematic destroyer of the good, and thus as the systematic doer of evil. Just as man perceives coyotes, wolves, and rattlesnakes as evil because they regularly destroy the cattle and sheep he values as sources of food and clothing, so on the premise of nature’s intrinsic value, the environmentalists view man as evil, because, in the pursuit of his well-being, man systematically destroys the wildlife, jungles, and rock formations that the environmentalists hold to be intrinsically valuable. Indeed, from the perspective of such alleged intrinsic values of nature, the degree of man’s alleged destructiveness and evil is directly in proportion to his loyalty to his essential nature. Man is the rational being. It is his application of his reason in the form of science, technology, and an industrial civilization that enables him to act on nature on the enormous scale on which he now does. Thus, it is his possession and use of reason — manifested in his technology and industry — for which he is hated.

The doctrine of intrinsic value is itself only a rationalization for a preexisting hatred of man. It is invoked not because one attaches any actual value to what is alleged to have intrinsic value, but simply to serve as a pretext for denying values to man. For example, caribou feed upon vegetation, wolves eat caribou, and microbes attack wolves. Each of these, the vegetation, the caribou, the wolves, and the microbes, is alleged by the environmentalists to possess intrinsic value. Yet absolutely no course of action is indicated for man. Should man act to protect the intrinsic value of the vegetation from destruction by the caribou? Should he act to protect the intrinsic value of the caribou from destruction by the wolves? Should he act to protect the intrinsic value of the wolves from destruction by the microbes? Even though each of these alleged intrinsic values is at stake, man is not called upon to do anything. When does the doctrine of intrinsic value serve as a guide to what man should do? Only when man comes to attach value to something. Then it is invoked to deny him the value he seeks. For example, the intrinsic value of the vegetation et al. is invoked as a guide to man’s action only when there is something man wants, such as oil, and then, as in the case of Northern Alaska, its invocation serves to stop him from having it. In other words, the doctrine of intrinsic value is nothing but a doctrine of the negation of human values. It is pure nihilism.

It should be realized that it is logically implicit in what has just been said that to establish a public office such as that recently proposed in California, of “environmental advocate,” would be tantamount to establishing an office of Negator of Human Valuation. The work of such an office would be to stop man from achieving his values for no other reason than that he was man and wanted to achieve them.

Of course, the environmental movement is not pure poison. Very few people would listen to it if it were. As I have said, it is poisonous only at the level of several parts per ten. Mixed in with the poison and overlaying it as a kind of sugar coating is the advocacy of many measures which have the avowed purpose of promoting human life and well-being, and among these, some that, considered in isolation, might actually achieve that purpose. The problem is that the mixture is poisonous. And thus, when one swallows environmentalism, one inescapably swallows poison.

Given the underlying nihilism of the movement, it is certainly not possible to accept at face value any of the claims it makes of seeking to improve human life and well-being, especially when following its recommendations would impose on people great deprivation or cost. Indeed, nothing could be more absurd or dangerous than to take advice on how to improve one’s life and well-being from those who wish one dead and whose satisfaction comes from human terror, which, of course, as I have shown, is precisely what is wished in the environmental movement — openly and on principle. This conclusion, it must be stressed, applies irrespective of the scientific or academic credentials of an individual. If an alleged scientific expert believes in the intrinsic value of nature, then to seek his advice is equivalent to seeking the advice of a medical doctor who was on the side of the germs rather than of the patient, if such a thing can be imagined. Obviously, Congressional committees taking testimony from alleged expert witnesses on the subject of proposed environmental legislation need to be aware of this fact and never to forget it.

Not surprisingly, in virtually every case, the claims made by the environmentalists have turned out to be false or simply absurd. Consider, for example, the recent case of Alar, a chemical spray used for many years on apples in order to preserve their color and freshness. Here, it turned out that even if the environmentalists’ claims had actually been true, and the use of Alar would result in 4.2 deaths per million over a seventy-year lifetime, all that would have been signified was that eating apples sprayed with Alar would then have been less dangerous than driving to the supermarket to buy the apples! (Consider: 4.2 deaths per million over a seventy year period means that in any one year in the United States, with its population of roughly two hundred and fifty million people, approximately fifteen deaths would be attributable to Alar! This is the result obtained by multiplying 4.2 per million times 250 million and then dividing by 70. In the same one-year period of time, approximately fifty thousand deaths occur in motor vehicle accidents in the United States, most of them within a few miles of the victims’ homes, and undoubtedly far more than fifteen of them on trips to or from supermarkets.) Nevertheless, a panic ensued, followed by a plunge in the sale of apples, the financial ruin of an untold number of apple growers, and the virtual disappearance of Alar.

Before the panic over Alar, there was the panic over asbestos. According to Forbes magazine, it turns out that in the forms in which it is normally used in the United States, asbestos is one-third as likely to be the cause of death as being struck by lightning.

Then there is the alleged damage to lakes caused by acid rain. According to Policy Review, it turns out that the acidification of the lakes has not been the result of acid rain, but of the cessation of logging operations in the affected areas and thus the absence of the alkaline run-off produced by such operations. This run-off had made naturally acidic lakes non-acidic for a few generations.

Besides these cases, there were the hysterias over dioxin in the ground at Times Beach, Missouri, TCE in the drinking water of Woburn, Massachusetts, the chemicals in Love Canal, and radiation at Three Mile Island. According to Prof. Bruce Ames, one of the world’s leading experts on cancer, it turned out that the amount of dioxin that anyone would have absorbed in Times Beach was far less than the amount required to do any harm and that, indeed, the actual harm to Times Beach residents from dioxin was less than that of drinking a glass of beer. (The Environmental Protection Agency itself subsequently reduced its estimate of the danger from dioxin by a factor of fifteen-sixteenths.) In the case of Woburn, according to Ames, it turned out the cluster of leukemia cases which occurred there was statistically random and that the drinking water there was actually above the national average in safety, and not, as had been claimed, the cause of the leukemia cases. In the case of Love Canal, Ames reports, it turned out upon investigation that the cancer rate among the former residents has been no higher than average. (It is necessary to use the phrase “former residents” because the town lost most of its population in the panic and forced evacuation caused by the environmentalists’ claims.) In the case of Three Mile Island, not a single resident has died, nor even received an additional exposure to radiation, as the result of the accident there. In addition, according to studies reported in The New York Times, the cancer rate among residents there is no higher than normal and has not risen.

Before these hysterias, there were claims alleging the death of Lake Erie and mercury poisoning in tuna fish. All along, Lake Erie has been very much alive and was even producing near record quantities of fish at the very time the claims of its death were being made. The mercury in the tuna fish was the result of the natural presence of mercury in sea water; and evidence provided by museums showed that similar levels of mercury had been present in tuna fish since prehistoric times.

And now, in yet another overthrow of the environmentalists’ claims, a noted climatologist, Prof. Robert Pease, has shown that it is impossible for chlorofluorocarbons (CFCs) to destroy large quantities of ozone in the stratosphere because relatively few of them are even capable of reaching the stratosphere in the first place. He also shows that the celebrated ozone “hole” over Antarctica every fall is a phenomenon of nature, in existence since long before CFCs were invented, and results largely from the fact that during the long Antarctic night ultraviolet sunlight is not present to create fresh ozone.

The reason that one after another of the environmentalists’ claims turn out to be proven wrong is that they are made without any regard for truth in the first place. In making their claims, the environmentalists reach for whatever is at hand that will serve to frighten people, make them lose confidence in science and technology, and, ultimately, lead them to deliver themselves up to the environmentalists’ tender mercies. The claims rest on unsupported conjectures and wild leaps of imagination from scintillas of fact to arbitrary conclusions, by means of evasion and the drawing of invalid inferences. It is out and out evasion and invalid inference to leap from findings about the effects of feeding rats or mice dosages the equivalent of a hundred or more times what any human being would ever ingest, and then draw inferences about the effects on people of consuming normal quantities. Fears of parts per billion of this or that chemical causing single-digit deaths per million do not rest on science, but on imagination. Such claims have nothing to do either with actual experimentation or with the concept of causality.

No one ever has, can, or will observe such a thing as two groups of a million people identical in all respects except that over a seventy-year period the members of one of the groups consume apples sprayed with Alar, while the members of the other group do not, and then 4.2 members of the first group die. The process by which such a conclusion is reached, and its degree of actual scientific seriousness, is essentially the same as that of a college students’ bull session, which consists of practically nothing but arbitrary assumptions, manipulations, guesses, and plain hot air. In such a session, one might start with the known consequences of a quarter-ton safe falling ten stories onto the head of an unfortunate passerby below, and from there go on to speculate about the conceivable effects in a million cases of other passersby happening to drop from their hand or mouth an M&M or a peanut on their shoe, and come to the conclusion that 4.2 of them will die.

Furthermore, as indicated, in contrast to the procedures of a bull session, reason and actual science establish causes, which, in their nature, are universal. When, for example, genuine causes of death, such as arsenic, strychnine, or bullets, attack vital organs of the human body, death is absolutely certain to result in all but a handful of cases per million. When something is in fact the cause of some effect, it is so in each and every case in which specified conditions prevail, and fails to be so only in cases in which the specified conditions are not present, such as a person’s having built up a tolerance to poison or wearing a bulletproof vest. Such claims as a thousand different things each causing cancer in a handful of cases are proof of nothing but that the actual causes are not yet known — and, beyond that, an indication of the breakdown of the epistemology of contemporary science. (This epistemological breakdown, I might add, radically accelerated starting practically on the very day in the 1960s when the government took over most of the scientific research in the United States and began the large-scale financing of statistical studies as a substitute for the discovery of causes.)

In making their claims, the environmentalists willfully ignore such facts as that carcinogens, poisons, and radiation exist in nature. Fully half of the chemicals found in nature are carcinogenic when fed to animals in massive quantities — the same proportion as applies to man-made chemicals when fed in massive quantities. (The cause of the resulting cancers, according to Prof. Ames, is actually not the chemicals, either natural or man-made, but the repeated destruction of tissue caused by the massively excessive doses in which the chemicals are fed, such as saccharin being fed to rats in a quantity comparable to humans drinking eight hundred cans of diet soda a day.) Arsenic, one of the deadliest poisons, is a naturally occurring chemical element. Oleander, one of the most beautiful plants, is also a deadly poison, as are many other plants and herbs. Radium and uranium, with all their radioactivity, are found in nature. Indeed, all of nature is radioactive to some degree. If the environmentalists did not close their eyes to what exists in nature, if they did not associate every negative exclusively with man, if they applied to nature the standards of safety they claim to be necessary in the case of man’s activities, they would have to run in terror from nature. They would have to use one-half of the world to construct protective containers or barriers against all the allegedly deadly carcinogens, toxins, and radioactive material that constitute the other half of the world.

It would be a profound mistake to dismiss the repeatedly false claims of the environmentalists merely as a case of the little boy who cried wolf. They are a case of the wolf crying again and again about alleged dangers to the little boy. The only real danger is to listen to the wolf.

Direct evidence of the wilful dishonesty of the environmental movement comes from one of its leading representatives, Stephen Schneider, who is well-known for his predictions of global catastrophe. In the October 1989 issue of Discover magazine, he is quoted (with approval) as follows:

“. . . To do this, we need to get some broad-based support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we may have. This “double ethical bind” we frequently find ourselves in cannot be solved by any formula. Each of us has to decide what the right balance is between being effective and being honest.”

Thus, in the absence of verification by sources totally independent of the environmental movement and free of its taint, all of its claims of seeking to improve human life and well-being in this or that specific way must be regarded simply as lies, having the actual purpose of inflicting needless deprivation or suffering. In the category of malicious lies fall all of the environmental movement’s claims about our having to abandon industrial civilization or any significant part of it in order to cope with the dangers of alleged global warming, ozone depletion, or exhaustion of natural resources. Indeed, all claims constituting denunciations of science, technology, or industrial civilization which are advanced in the name of service to human life and well-being are tantamount to claiming that our survival and well-being depend on our abandonment of reason. (Science, technology, and industry are leading products of reason and are inseparable from it.) All such claims should be taken as nothing but further proof of the environmental movement’s hatred of man’s nature and man’s life, certainly not of any actual danger to human life and well-being.

It is important to realize that when the environmentalists talk about destruction of the “environment” as the result of economic activity, their claims are permeated by the doctrine of intrinsic value. Thus, what they actually mean to a very great extent is merely the destruction of alleged intrinsic values in nature such as jungles, deserts, rock formations, and animal species which are either of no value to man or hostile to man. That is their concept of the “environment.” If, in contrast to the environmentalists, one means by “environment” the surroundings of man — the external material conditions of human life — then it becomes clear that all of man’s productive activities have the inherent tendency to improve his environment — indeed, that that is their essential purpose.

This becomes obvious if one realizes that the entire world physically consists of nothing but chemical elements. These elements are never destroyed. They simply reappear in different combinations, in different proportions, in different places. Apart from what has been lost in a few rockets, the quantity of every chemical element in the world today is the same as it was before the Industrial Revolution. The only difference is that, because of the Industrial Revolution, instead of lying dormant, out of man’s control, the chemical elements have been moved about, as never before, in such a way as to improve human life and well-being. For instance, some part of the world’s iron and copper has been moved from the interior of the earth, where it was useless, to now constitute buildings, bridges, automobiles, and a million and one other things of benefit to human life. Some part of the world’s carbon, oxygen, and hydrogen has been separated from certain compounds and recombined in others, in the process releasing energy to heat and light homes, power industrial machinery, automobiles, airplanes, ships, and railroad trains, and in countless other ways serve human life. It follows that insofar as man’s environment consists of the chemical elements iron, copper, carbon, oxygen, and hydrogen, and his productive activity makes them useful to himself in these ways, his environment is correspondingly improved.

All that all of man’s productive activities fundamentally consist of is the rearrangement of nature-given chemical elements for the purpose of making them stand in a more useful relationship to himself — that is, for the purpose of improving his environment.

Consider further examples. To live, man needs to be able to move his person and his goods from place to place. If an untamed forest stands in his way, such movement is difficult or impossible. It represents an improvement in his environment, therefore, when man moves the chemical elements that constitute some of the trees of the forest somewhere else and lays down the chemical elements brought from somewhere else to constitute a road. It is an improvement in his environment when man builds bridges, digs canals, opens mines, clears land, constructs factories and houses, or does anything else that represents an improvement in the external, material conditions of his life. All of these things represent an improvement in man’s material surroundings — his environment. All of them represent the rearrangement of nature’s elements in a way that makes them stand in a more useful relationship to human life and well-being.

Thus, all of economic activity has as its sole purpose the improvement of the environment — it aims exclusively at the improvement of the external, material conditions of human life. Production and economic activity are precisely the means by which man adapts his environment to himself and thereby improves it.

So much for the environmentalists’ claims about man’s destruction of the environment. Only from the perspective of the alleged intrinsic value of nature and the nonvalue of man, can man’s improvement of his environment be termed destruction of the environment.

The environmentalists’ recent claims about the impending destruction of the “planet” are entirely the result of the influence of the intrinsic value doctrine. What the environmentalists are actually afraid of is not that the planet or its ability to support human life will be destroyed, but that the increase in its ability to support human life will destroy its still extensively existing “wildness.” They cannot bear the thought of the earth’s becoming fully subject to man’s control, with its jungles and deserts replaced by farms, pastures, and forests planted by man, as man wills. They cannot bear the thought of the earth’s becoming man’s garden. In the words of McKibben, “The problem is that nature, the independent force that has surrounded us since our earliest days, cannot coexist with our numbers and our habits. We may well be able to create a world that can support our numbers and our habits, but it will be an artificial world. . . .” (Italics supplied.)

The toxic character of the environmental movement implies the observance of a vital principle in connection with any measures which the movement advocates and which might actually promote human life and well-being, such as those calling for the reduction of smog, the cleaning up of rivers, lakes, and beaches, and so forth. The principle is that even here one must not make common cause with the environmental movement in any way. One must be scrupulously careful not to advocate even anything that is genuinely good, under its auspices or banner. To do so is to promote its evil — to become contaminated with its poison and to spread its poison. In the hands of the environmentalists, concern even with such genuine problems as smog and polluted rivers serves as a weapon with which to attack industrial civilization. The environmentalists proceed as though problems of filth emanated from industrial civilization, as though filth were not the all-pervasive condition of human life in pre-industrial societies, and as though industrial civilization represented a decline from more healthful conditions of the past.

The principle of noncooperation with the environmental movement, of the most radical differentiation from it, must be followed in order to avoid the kind of disastrous consequences brought about earlier in this century by people in Russia and Germany who began as basically innocent and with good intentions. Even though the actual goals and programs of the Communists and Nazis were no secret, many people did not realize that such pronouncements and their underlying philosophy must be taken seriously. As a result, they joined with the Communists or Nazis in efforts to achieve what they believed were worthy specific goals, above all, goals falling under the head of the alleviation of poverty. But working side by side with the likes of Lenin and Stalin or Hitler and Himmler, did not achieve the kind of life these people had hoped to achieve. It did, however, serve to achieve the bloody goals of those monsters. And along the way, those who may have started out innocently enough very quickly lost their innocence and to varying degrees ended up simply as accomplices of the monsters.

Evil needs the cooperation of the good to disguise its nature and to gain numbers and influence it could never achieve on its own. Thus, the doctrine of intrinsic value needs to be mixed as much as possible with alleged concern for man’s life and well-being. In allowing themselves to participate in advancing the cause of the mixture, otherwise good people serve to promote the doctrine of intrinsic value and thus the destruction of human values.

Already large numbers of otherwise good people have been enlisted in the environmentalists’ campaign to throttle the production of energy. This is a campaign which, to the degree that it succeeds, can only cause human deprivation and the substitution of man’s limited muscle power for the power of motors and engines. It is actually a campaign which seeks nothing less than the undoing of the Industrial Revolution, and the return of the poverty, filth, and misery of earlier centuries.

The essential feature of the Industrial Revolution is the use of man-made power. To the relatively feeble muscles of draft animals and the still more feeble muscles of human beings, and to the relatively small amounts of useable power available from nature in the form of wind and falling water, the Industrial Revolution added man-made power. It did so first in the form of steam generated from the combustion of coal, and later in the form of internal combustion based on petroleum, and electric power based on the burning of any fossil fuel or on atomic energy.

This man-made power is the essential basis of all of the economic improvements achieved over the last two hundred years. Its application is what enables us human beings to accomplish with our arms and hands the amazing productive results we do accomplish. To the feeble powers of our arms and hands is added the enormously greater power released by these sources of energy. Energy use, the productivity of labor, and the standard of living are inseparably connected, with the two last entirely dependent on the first.

Thus, it is not surprising, for example, that the United States enjoys the world’s highest standard of living. This is a direct result of the fact that the United States has the world’s highest energy consumption per capita. The United States, more than any other country, is the country where intelligent human beings have arranged for motor-driven machinery to accomplish results for them. All further substantial increases in the productivity of labor and standard of living, both here in the United States and across the world, will be equally dependent on man-made power and the growing consumption of energy it makes possible. Our ability to accomplish more and more with the same limited muscular powers of our limbs will depend entirely on our ability to augment them further and further with the aid of still more such energy.

In total opposition to the Industrial Revolution and all the marvelous results it has accomplished, the essential goal of environmentalism is to block the increase in one source of man-made power after another and ultimately to roll back the production of man-made power to the point of virtual nonexistence, thereby undoing the Industrial Revolution and returning the world to the economic Dark Ages. There is to be no atomic power. According to the environmentalists, it represents the death ray. There is also to be no power based on fossil fuels. According to the environmentalists, it causes “pollution,” and now global warming, and must therefore be given up. There is not even to be significant hydro-power. According to the environmentalists, the building of the necessary dams destroys intrinsically valuable wildlife habitat.

Only three things are to be permitted as sources of energy, according to the environmentalists. Two of them, “solar power” and power from windmills, are, as far as can be seen, utterly impracticable as significant sources of energy. If somehow, they became practicable, the environmentalists would undoubtedly find grounds for attacking them. The third allowable source of energy, “conservation,” is a contradiction in terms. “Conservation” is not a source of energy. Its actual meaning is simply using less. Conservation is a source of energy for one use only at the price of deprivation of energy use somewhere else.

The environmentalists’ campaign against energy calls to mind the image of a boa constrictor entwining itself about the body of its victim and slowly squeezing the life out of him. There can be no other result for the economic system of the industrialized world but enfeeblement and ultimately death if its supplies of energy are progressively choked off.

Large numbers of people have been enlisted in the campaign against energy out of fear that the average mean temperature of the world may rise a few degrees in the next century, mainly as the result of the burning of fossil fuels. If this were really to be so, the only appropriate response would be to be sure that more and better air conditioners were available. (Similarly, if there were in fact to be some reduction in the ozone layer, the appropriate response, to avoid the additional cases of skin cancer that would allegedly occur from exposure to more intense sunlight, would be to be sure that there were more sunglasses, hats, and sun-tan lotion available.) It would not be to seek to throttle and destroy industrial civilization.

If one did not understand its underlying motivation, the environmental movement’s resort to the fear of global warming might appear astonishing in view of all the previous fears the movement has professed. These fears, in case anyone has forgotten, have concerned the alleged onset of a new ice age as the result of the same industrial development that is now supposed to result in global warming, and the alleged creation of a “nuclear winter” as the result of man’s use of atomic explosives.

The words of Paul Ehrlich and his incredible claims in connection with the “greenhouse effect” should be recalled. In the first wave of ecological hysteria, this “scientist” declared:

“At the moment we cannot predict what the overall climatic results will be of our using the atmosphere as a garbage dump. We do know that very small changes in either direction in the average temperature of the Earth could be very serious. With a few degrees of cooling, a new ice age might be upon us, with rapid and drastic effects on the agricultural productivity of the temperate regions. With a few degrees of heating, the polar ice caps would melt, perhaps raising ocean levels 250 feet. Gondola to the Empire State Building, anyone?”

The 250-foot rise in the sea level projected by Ehrlich as the result of global warming has been scaled back somewhat. According to McKibben, the “worst case scenario” is now supposed to be eleven feet, by the year 2100, with something less than seven feet considered more likely. According to a United Nations panel of alleged scientists, it is supposed to be 25.6 inches. (Even this still more limited projected rise did not stop the UN panel from calling for an immediate 60 percent reduction in carbon-dioxide emissions to try to prevent it.)

Perhaps of even greater significance is the continuous and profound distrust of science and technology that the environmental movement displays. The environmental movement maintains that science and technology cannot be relied upon to build a safe atomic power plant, to produce a pesticide that is safe, or even to bake a loaf of bread that is safe, if that loaf of bread contains chemical preservatives. When it comes to global warming, however, it turns out that there is one area in which the environmental movement displays the most breathtaking confidence in the reliability of science and technology, an area in which, until recently, no one — not even the staunchest supporters of science and technology — had ever thought to assert very much confidence at all. The one thing, the environmental movement holds, that science and technology can do so well that we are entitled to have unlimited confidence in them is forecast the weather — for the next one hundred years!

It is, after all, supposedly on the basis of a weather forecast that we are being asked to abandon the Industrial Revolution, or, as it is euphemistically put, “to radically and profoundly change the way in which we live” — to our enormous material detriment.

Very closely connected with this is something else that might appear amazing. This concerns prudence and caution. No matter what the assurances of scientists and engineers, based in every detail on the best established laws of physics — about backup systems, fail-safe systems, containment buildings as strong as U-boat pens, defenses in depth, and so on — when it comes to atomic power, the environmental movement is unwilling to gamble on the unborn children of fifty generations hence being exposed to harmful radiation. But on the strength of a weather forecast, it is willing to wreck the economic system of the modern world — to literally throw away industrial civilization. (The 60 percent reduction in carbon dioxide emissions urged by that United Nations panel would be utterly devastating in itself, totally apart from all the further such measures that would surely follow it.)

The meaning of this insanity is that industrial civilization is to be abandoned because this is what must be done to avoid bad weather. All right, very bad weather. If we destroy the energy base needed to produce and operate the construction equipment required to build strong, well-made, comfortable houses for hundreds of millions of people, we shall be safer from the wind and rain, the environmental movement alleges, than if we retain and enlarge that energy base. If we destroy our capacity to produce and operate refrigerators and air conditioners, we shall be better protected from hot weather than if we retain and enlarge that capacity, the environmental movement claims. If we destroy our capacity to produce and operate tractors and harvesters, to can and freeze food, to build and operate hospitals and produce medicines, we shall secure our food supply and our health better than if we retain and enlarge that capacity, the environmental movement asserts.

There is actually a remarkable new principle implied here, concerning how man can cope with his environment. Instead of our taking action upon nature, as we have always believed we must do, we shall henceforth control the forces of nature more to our advantage by means of our inaction. Indeed, if we do not act, no significant threatening forces of nature will arise! The threatening forces of nature are not the product of nature, but of us! Thus speaks the environmental movement.

All of the insanities of the environmental movement become intelligible when one grasps the nature of the destructive motivation behind them. They are not uttered in the interest of man’s life and well-being, but for the purpose of leading him to self-destruction.

It must be stressed that even if global warming turned out to be a fact, the free citizens of an industrial civilization would have no great difficulty in coping with it — that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the perspective of government central planners.

It would be too great a problem for government bureaucrats to handle (as is the production even of an adequate supply of wheat or nails — as the experience of the whole socialist world has so eloquently shown). But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him. Individuals would decide, on the basis of profit and loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system (as many former central planners of Eastern Europe and the Soviet Union have come to learn). As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved much greater problems, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry.

Indeed, it would probably turn out that if the necessary adjustments were allowed to be made, global warming, if it actually came, would prove highly beneficial to mankind on net balance. For example, there is evidence suggesting that it would postpone the onset of the next ice age by a thousand years or more and that the higher level of carbon dioxide in the atmosphere, which is supposed to cause the warming process, would be highly beneficial to agriculture.

Whether global warming comes or not, it is certain that nature itself will sooner or later produce major changes in the climate. To deal with those changes and virtually all other changes arising from whatever cause, man absolutely requires individual freedom, science, and technology. In a word, he requires the industrial civilization constituted by capitalism.

This brings me back to the possibly truly good objectives that have been mixed in with environmentalism, such as the desire for greater cleanliness and health. If one wants to advocate such objectives without aiding the potential mass murderers in the environmental movement in achieving their goals, one must first of all accept unreservedly the values of human reason, science, technology, and industrial civilization, and never attack those values. They are the indispensable foundation for achieving greater cleanliness and health and longer life.

In the last two centuries, loyalty to these values has enabled man in the Western world to put an end to famines and plagues, and to eliminate the once dread diseases of cholera, diphtheria, smallpox, tuberculosis, and typhoid fever, among others. Famine has been ended, because the industrial civilization so hated by the environmentalists has produced the greatest abundance and variety of food in the history of the world, and created the transportation system required to bring it to everyone. This same hated civilization has produced the iron and steel pipe, and the chemical purification and pumping systems, that enable everyone to have instant access to safe drinking water, hot or cold, every minute of the day. It has produced the sewage systems and the automobiles that have removed the filth of human and animal waste from the streets of cities and towns.

Such improvements, together with the enormous reduction in fatigue and exhaustion made possible by the use of labor-saving machinery, have resulted in a radical reduction in mortality and increase in life expectancy, from less than thirty years before the beginning of the Industrial Revolution to more than seventy-five years currently. By the same token, the average newborn American child today has a greater chance of living to age sixty-five than the average newborn child of a nonindustrial society has of living to age five.

In the earlier years of the Industrial Revolution, the process of improvement was accompanied by the presence of coal dust in towns and cities, which people willingly accepted as the by-product of not having to freeze and of being able to have all the other advantages of an industrial society. Subsequent advances, in the form of electricity and natural gas, have radically reduced this problem. Those who seek further advances along these lines, should advocate the freedom of development of atomic power, which emits no particulate matter of any kind into the atmosphere. Atomic power, however, is the form of power most hated by the environmentalists.

Also essential for further improvements in cleanliness and health, and for the long-term availability of natural resources, is the extension of private ownership of the means of production, especially of land and natural resources. The incentive of private owners is to use their property in ways that maximize its long-term value and, wherever possible, to improve their property. Consistent with this fact, one should seek ways of extending the principle of private ownership to lakes, rivers, beaches, and even to portions of the ocean. Privately owned lakes, rivers, and beaches, would almost certainly be clean lakes, rivers, and beaches. Privately owned, electronically fenced ocean ranches would guarantee abundant supplies of almost everything useful that is found in or beneath the sea. Certainly, the vast land holdings of the United States government in the western states and in Alaska should be privatized.

But what is most important in the present context, in which the environmental movement is operating almost unopposed, is that anyone who is afraid of becoming physically contaminated by exposure to one or another alleged toxic chemical should take heed that he does not place an indelible stain on his very existence through his exposure to the deadly poison of the environmental movement. This is what one is in danger of doing by ingesting the propaganda of the environmental movement and being guided by it. I do not know of anything worse that anyone can do than, having been born into the greatest material civilization in the history of the world, now take part in its destruction by cooperation with the environmental movement, and thus be a party to untold misery and death in the decades and generations to come.

By the same token, there are few things better that one can do than, having become aware of what is involved, take one’s stand with the values on which human life and well-being depend. This is something which, unfortunately, one must be prepared to do with few companions in today’s world. The great majority of those who should be fighting for human values — the professional intellectuals — either do not know enough to do so, have become afraid to do so, or, still worse, have themselves become the enemies of human values and are actively working on the side of environmentalism.

It is important to explain why there are so few intellectuals prepared to fight environmentalism and why there are so many who are on its side.

I believe that to an important extent the hatred of man and distrust of reason displayed by the environmental movement is a psychological projection of many contemporary intellectuals’ self-hatred and distrust of their own minds arising as the result of their having been responsible for the destruction wrought by socialism. As the parties responsible for socialism, they have certainly been “a plague upon the world,” and if socialism had in fact represented reason and science, as they continue to choose to believe, there would be grounds to distrust reason and science.

In my judgment, the “green” movement of the environmentalists is merely the old “red” movement of the communists and socialists shorn of its veneer of science. The only difference I see between the greens and the reds is the superficial one of the specific reasons for which they want to violate individual liberty and the pursuit of happiness. The reds claimed that the individual could not be left free because the result would be such things as “exploitation” and “monopoly.” The greens claim that the individual cannot be left free because the result will be such things as destruction of the ozone layer and global warming. Both claim that centralized government control over economic activity is essential. The reds wanted it for the alleged sake of achieving human prosperity. The greens want it for the alleged sake of avoiding environmental damage. In my view, environmentalism and ecology are nothing but the intellectual death rattle of socialism in the West, the final convulsion of a movement that only a few decades ago eagerly looked forward to the results of paralyzing the actions of individuals by means of “social engineering” and now seeks to paralyze the actions of individuals by means of prohibiting engineering of any kind. The greens, I think, may be a cut below the reds, if that is possible.

While the collapse of socialism is an important precipitating factor in the rise of environmentalism, there are other, more fundamental causes as well.

Environmentalism is the leading manifestation of the rising tide of irrationalism that is engulfing our culture. Over the last two centuries, the reliability of reason as a means of knowledge has been under a constant attack led by a series of philosophers from Immanuel Kant to Bertrand Russell. As a result, a growing loss of confidence in reason has taken place. As a further result, the philosophical status of man, as the being who is distinguished by the possession of reason, has been in decline. In the last two generations, as the effects of this process have more and more reached the general public, confidence in the reliability of reason, and the philosophical status of man, have declined so far that now virtually no basis is any longer recognized for a radical differentiation between man and animals. This is the explanation of the fact that the doctrine of St. Francis of Assisi and the environmentalists concerning the equality between man and animals is now accepted with virtually no opposition.

The readiness of people to accept the closely connected doctrine of intrinsic values is also a consequence of the growing irrationalism. An “intrinsic value” is a value that one accepts without any reason, without asking questions. It is a “value” designed for people who do what they are told and who do not think. A rational value, in contrast, is a value one accepts only on the basis of understanding how it serves the self-evidently desirable ultimate end that is constituted by one’s own life and happiness.

The cultural decline of reason has created the growing hatred and hostility on which environmentalism feeds, as well as the unreasoning fears of its leaders and followers. To the degree that people abandon reason, they must feel terror before reality, because they have no way of dealing with it other than reason. By the same token, their frustrations mount, since reason is their only means of solving problems and achieving the results they want to achieve. In addition, the abandonment of reason leads to more and more suffering as the result of others’ irrationality, including their use of physical force. Thus, in the conditions of a collapse of rationality, frustrations and feelings of hatred and hostility rapidly multiply, while cool judgment, rational standards, and civilized behavior vanish. In such a cultural environment, monstrous ideologies appear and monsters in human form emerge alongside them, ready to put them into practice. The environmental movement, of course, is just such a movement.

But if, because of these reasons, there are no longer many intellectuals ready to take up the fight for human values — in essence, for the value of the intellect, for man the rational being and for the industrial civilization he has created and requires — then all the greater is the credit for whoever is willing to stand up for these values now and, in so doing, don the mantle of intellectual.

There is certainly ample work for such “new intellectuals” to do.

At one level, the work directly concerns the issue of environmentalism.

The American people must be made aware of what environmentalism actually stands for and of what they stand to lose, and have already lost, as the result of its growing influence. They must be made aware of the environmental movement’s responsibility for the energy crisis and the accompanying high price of oil and oil products, which is the result of its systematic and highly successful campaign against additional energy supplies. They must be made aware of its consequent responsibility for the enrichment of Arab sheiks at the expense of the impoverishment of hundreds of millions of people around the world, including many millions here in the United States. They must be made aware of its responsibility for the vastly increased wealth, power, and influence of terrorist governments in the Middle East, stemming from the high price of oil it has caused, and for the resulting need to fight a war in the region.

The American people must be made aware of how the environmental movement has steadily made life more difficult for them. They must be shown how, as the result of its existence, people have been prevented from taking one necessary and relatively simple action after another, such as building power plants and roads, extending airport runways, and even establishing new garbage dumps. They must be shown how the history of the environmental movement is a history of destruction: of the atomic power industry, of the Johns Manville Company, of cranberry growers and apple growers, of sawmills and logging companies, of paper mills, of metal smelters, of coal mines, of steel mills, of tuna fishermen, of oil fields and oil refineries — to name only those which come readily to mind. They must be shown how the environmental movement has been the cause of the wanton violation of private property rights and thereby of untold thousands of acres of land not being developed for the benefit of human beings, and thus of countless homes and factories not being built. They must be shown how as the result of all the necessary actions it prohibits or makes more expensive, the environmental movement has been a major cause of the marked deterioration in the conditions in which many people now must live their lives in the United States — that it is the cause of families earning less and having to pay more, and, as a result, being deprived of the ability to own their own home or even to get by at all without having to work a good deal harder than used to be necessary.

In sum, the American people need to be shown how the actual nature of the environmental movement is that of a virulent pest, consistently coming between man and the work he must do to sustain and improve his life.

If and when such understanding develops on the part of the American people, it will be possible to accomplish the appropriate remedy. This would include the repeal of every law and regulation in any way tainted by the doctrine of intrinsic value, such as the endangered species act. It would also include repeal of all legislation requiring the banning of man-made chemicals merely because a statistical correlation with cancer in laboratory animals can be established when the chemicals are fed to the animals in massive, inherently destructive doses. The overriding purpose and nature of the remedy would be to break the constricting grip of environmentalism and make it possible for man to resume the increase in his productive powers in the United States in the remaining years of this century and in the new century ahead.

In addition to all of this vital work, there is a second and even more important level on which the new intellectuals must work. This, ironically enough, entails a form of cleaning up of the environment — the philosophical, intellectual, and cultural environment.

What the cultural acceptance of a doctrine as irrational as environmentalism makes clear is that the real problem of the industrialized world is not “environmental pollution” but philosophical corruption. The so-called intellectual mainstream of the Western world has been fouled with a whole array of intellectual toxins resulting from the undermining of reason and the status of man, and which further contribute to this deadly process. Among them, besides environmentalism, are collectivism in its various forms of Marxism, racism, nationalism, and feminism; and cultural relativism, determinism, logical positivism, existentialism, linguistic analysis, behaviorism, Freudianism, Keynesianism, and more.

These doctrines are intellectual toxins because they constitute a systematic attack on one or more major aspects of the requirements of human life and well-being. Marxism results in the kind of disastrous conditions now prevailing in Eastern Europe and the Soviet Union. All the varieties of collectivism deny the free will and rationality of the individual and attribute his ideas, character, and vital interests to his membership in a collective: namely, his membership in an economic class, racial group, nationality, or sex, as the case may be, depending on the specific variety of collectivism. Because they view ideas as determined by group membership, these doctrines deny the very possibility of knowledge. Their effect is the creation of conflict between members of different groups: for example, between businessmen and wage earners, blacks and whites, English speakers and French speakers, men and women.

Determinism, the doctrine that man’s actions are controlled by forces beyond his power of choice, and existentialism, the philosophy that man is trapped in a “human condition” of inescapable misery, lead people not to make choices they could have made and which would have improved their lives. Cultural relativism denies the objective value of modern civilization and thus undercuts both people’s valuation of modern civilization and their willingness to work hard to achieve personal values in the context of it. The doctrine blinds people to the objective value of such marvelous advances as automobiles and electric light, and thus prepares the ground for the sacrifice of modern civilization to such nebulous and, by comparison, utterly trivial values as “unpolluted air.”

Logical positivism denies the possibility of knowing anything with certainty about the real world. Linguistic analysis regards the search for truth as a trivial word game. Behaviorism denies the existence of consciousness. Freudianism regards the conscious mind (the “Ego”) as surrounded by the warring forces of the unconscious mind in the form of the “Id” and the “Superego,” and thus as being incapable of exercising substantial influence on the individual’s behavior. Keynesianism regards wars, earthquakes, and pyramid building as sources of prosperity. It looks to peacetime government budget deficits and inflation of the money supply as a good substitute for these allegedly beneficial phenomena. Its effects, as the present-day economy of the United States bears witness, are the erosion of the buying power of money, of credit, of saving and capital accumulation, and of the general standard of living.

These intellectual toxins can be seen bobbing up and down in the “intellectual mainstream,” just as raw sewage can be seen floating in a dirty river. Indeed, they fill the intellectual mainstream. Virtually, every college and university in the Western world is a philosophical cesspool of these doctrines, in which intellectually helpless students are immersed for several years and then turned loose to contaminate the rest of society. These irrationalist doctrines, and others like them, are the philosophical substance of contemporary liberal arts education.

Clearly, the most urgent task confronting the Western world, and the new intellectuals who must lead it, is a philosophical and intellectual cleanup. Without it, Western civilization simply cannot survive. It will be killed by the poison of environmentalism.

To accomplish this cleanup, only the most powerful, industrial-strength, philosophical and intellectual cleansing agents will do. These cleansing agents are, above all, the writings of Ayn Rand and Ludwig von Mises. These two towering intellects are, respectively, the leading advocates of reason and capitalism in the twentieth century. A philosophical-intellectual cleanup requires that all or most of their writings be introduced into colleges and universities as an essential part of the core curriculum, and that what is not included in the core curriculum be included in the more advanced programs. The incorporation of the writings of Ayn Rand and Ludwig von Mises into a prominent place in the educational curriculum is the central goal that everyone should work for who is concerned about his cultural environment and the impact of that environment on his life and well-being. Only after this goal is accomplished, will there be any possibility that colleges and universities will cease to be centers of civilization-destroying intellectual disease. Only after it is accomplished on a large scale, at the leading colleges and universities, can there be any possibility of the intellectual mainstream someday being clean enough for rational people to drink from its waters.

The 21st Century should be the century when man begins the colonization of the solar system, not a return to the Dark Ages. Which it will be, will depend on the extent to which new intellectuals can succeed in restoring to the cultural environment the values of reason and capitalism.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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The environmental movement has been doing its utmost to sabotage energy production since the 1960s, long before it was able to latch onto the prospect of global warming. Its opposition to atomic power has nothing to do with global warming, nor does its opposition to the construction of dams to provide hydro-electric power. Indeed, if global warming and the consumption of fossil fuels, which it alleges is the cause of global warming, were really its concern, it would be a leading advocate of atomic power and of the construction of new and additional dams to provide hydro-electric power. Instead, however, the environmental movement opposes atomic power even more adamantly than it opposes power derived from fossil fuels, and it also urges the actual tearing down of existing dams, even though they provide substantial electric power. (On this last, see, for example, the article in today’s New York Times “Climate Change Adds Twist to Debate Over Dams.”)

The only sources of power that the environmental movement is willing to allow are wind and sunlight. The first is subject to the proviso that birds are not killed by flying into the propellers of the windmills. The second makes no allowance for all of the times when sunlight is blocked, i.e., in cloudy weather and at night, when the sun has gone down.

Environmentalists like to say that there is a third alternative source of energy: conservation.

“Conservation” as a source of energy is a contradiction in terms. It is not a source of energy. Its actual meaning is simply using less energy. It is a source of energy for one use only at the price of deprivation somewhere else. Moreover, the logic of conservationism is not consistent with using energy saved in one part of the economic system to expand energy use in other parts. Those other parts are also supposed to conserve, i.e., to use less energy rather than more.

The objective of the environmental movement is and always has been simply the destruction of energy production. Its further goal is the undoing of the Industrial Revolution and the return of the modern world to the poverty and misery of the pre-Industrial era.

This goal is not hidden. It is stated openly. In the words of Maurice Strong, Founder of the UN Eco-summits and Undersecretary General of the UN: “Isn’t the only hope for the planet that the industrialized civilizations collapse? Isn’t it our responsibility to bring [that] about?” — as quoted in The Politically Incorrect Guide to Global Warming and Environmentalism (Washington, D. C.: Regnery Publishing, Inc., 2007), p. 6.

Destruction of industrial civilization, by means of destroying its foundation in man-made power. That, not the avoidance of global warming, is what environmentalism seeks.

The question is, are enough people stupid enough to let it succeed and allow themselves to be destroyed?

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Back in 1969, Henry Hazlitt’s Man Versus the Welfare State appeared. It was a valuable collection of essays, one of which was “Uruguay: Welfare State Gone Wild.”

This essay consisted largely of a series of verbal “snapshots” of Uruguay, as Hazlitt called them, in the form of quotations drawn from a variety of sources over the years 1956 to 1968. What Hazlitt described by means of the quotations was an economic system plunged into ruin by unrestrained welfare-state spending.

Having taken a tour of Montevideo, Uruguay’s capital, last month, I’d like to offer a “snapshot” as of the present year, 2007.

What I saw was a city of almost unrelieved drabness and ruin. Graffiti filled walls within a hundred yards of the seat of the country’s Congress. The city’s public parks, presented as an attraction to tourists, were overgrown with weeds; the wrought-iron fences they contained were in a state of collapse. Building after building, in neighborhood after neighborhood, was in a state disrepair. Often, only a burnt-out concrete shell was left. Hardly anything, anywhere, looked new. Much of the city was reminiscent of the South Bronx, an area devastated by more than two generations of rent controls. Only one, small area of the city, near the River Plate, appeared to be at all prosperous.

Uruguay no longer has trains. “They don’t work anymore,” our tour-guide announced. “Uruguay has been resting for the last 50 years and has made no progress in that time,” she said. The population of Montevideo and of the country as a whole are both declining. A large proportion of university graduates in particular leave, in search of better opportunities elsewhere.

From what I saw, if there are another 50 years of such “rest,” there may be nothing much left of Montevideo beyond an impoverished village.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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The UN’s Intergovernmental Panel on Climate Change recently released the summary of its latest, forthcoming report on global warming. It’s most trumpeted finding is that the existence of global warming is now u201Cunequivocal.u201D

Although such anecdotal evidence as January’s snowfall in Tucson, Arizona and freezing weather in Southern California and February’s more than 100-inch snowfall in upstate New York might suggest otherwise, global warming may indeed be a fact. It may also be a fact that it is a by-product of industrial civilization (despite, according to The New York Times of November 7, 2006, two ice ages having apparently occurred in the face of carbon levels in the atmosphere 16 times greater than that of today, millions of years before mankind’s appearance on earth).

If global warming and mankind’s responsibility for it really are facts, does anything automatically follow from them? Does it follow that there is a need to limit and/or reduce carbon emissions and the use of the fossil fuels — oil, coal, and natural gas — that gives rise to the emissions? The need for such limitation and/or rollback is the usual assumption.

Nevertheless, the truth is that nothing whatever follows from these facts. Before any implication for action can be present, additional information is required.

One essential piece of information is the comparative valuation attached to retaining industrial civilization versus avoiding global warming. If one values the benefits provided by industrial civilization above the avoidance of the losses alleged to result from global warming, it follows that nothing should be done to stop global warming that destroys or undermines industrial civilization. That is, it follows that global warming should simply be accepted as a byproduct of economic progress and that life should go on as normal in the face of it.

Modern, industrial civilization and its further development are values that we dare not sacrifice if we value our material well-being, our health, and our very lives. It is what has enabled billions more people to survive and to live longer and better. Here in the United States it has enabled the average person to live at a level far surpassing that of kings and emperors of a few generations ago.

The foundation of this civilization has been, and for the foreseeable future will continue to be, the use of fossil fuels.

Of course, there are projections of unlikely but nevertheless possible extreme global warming in the face of which conditions would be intolerable. To deal with such a possibility, it is necessary merely to find a different method of cooling the earth than that of curtailing the use of fossil fuels. Such methods are already at hand, as I will explain in an article that will appear shortly.

In fact, if it comes, global warming, in the projected likely range, will bring major benefits to much of the world. Central Canada and large portions of Siberia will become similar in climate to New England today. So too, perhaps, will portions of Greenland. The disappearance of Arctic ice in summer time, will shorten important shipping routes by thousands of miles. Growing seasons in the North Temperate Zone will be longer. Plant life in general will flourish because of the presence of more carbon dioxide in the atmosphere.

Strangely, these facts are rarely mentioned. Instead, attention is devoted almost exclusively to the negatives associated with global warming, above all to the prospect of rising sea levels, which the report projects to be between 7 and 23 inches by the year 2100, a range, incidentally, that by itself does not entail major coastal flooding. (There are, however, projections of a rise in sea levels of 20 feet or more over the course of the remainder of the present millennium.)

Yes, rising sea levels may cause some islands and coastal areas to become submerged under water and require that large numbers of people settle in other areas. Surely, however, the course of a century, let alone a millennium, should provide ample opportunity for this to occur without any necessary loss of life.

Indeed, a very useful project for the UN’s panel to undertake in preparation for its next report would be a plan by which the portion of the world not threatened with rising sea levels would accept the people who are so threatened. In other words, instead of responding to global warming with government controls, in the form of limitations on the emission of carbon dioxide and other greenhouse gases, an alternative response would be devised that would be a solution in terms of greater freedom of migration.

In addition, the process of adaptation here in the United States would be helped by making all areas determined to be likely victims of coastal flooding in the years ahead ineligible for any form of governmental aid, insurance, or disaster relief that is not already in force. Existing government guarantees should be phased out after a reasonable grace period. Such measures would spur relocation to safer areas in advance of any future flooding.

Emissions Caps Mean Impoverishment

The environmental movement does not value industrial civilization. It fears and hates it. Indeed, it does not value human life, which it regards merely as one of earth’s u201Cbiota,u201D of no greater value than any other life form, such as spotted owls or snail darters. To it, the loss of industrial civilization is of no great consequence. It is a boon.

But to everyone else, it would be an immeasurable catastrophe: the end of further economic progress and the onset of economic retrogression, with no necessary stopping point. Today’s already widespread economic stagnation is the faintest harbinger of the conditions that would follow.

A regime of limitations on the emission of greenhouse gases means that all technological advances requiring an increase in the total consumption of man-made power would be impossible to implement. At the same time, any increase in population would mean a reduction in the amount of man-made power available per capita. (Greater production of atomic power, which produces no emissions of any kind, would be an exception. But it is opposed by the environmentalists even more fiercely than is additional power derived from fossil fuels.)

To gauge the consequences, simply imagine such limits having been imposed a generation or two ago. If that had happened, where would the power have come from to produce and operate all of the new and additional products we take for granted that have appeared over these years? Products such as color television sets and commercial jets, computers and cell phones, CDs and DVDs, lasers and MRIs, satellites and space ships? Indeed, the increase in population that has taken place over this period would have sharply reduced the standard of living, because the latter would have been forced to rest on the foundation of the much lower per capita man-made power of an earlier generation.

Now add to this the effects of successive reductions in the production of man-made power compelled by the imposition of progressively lower ceilings on greenhouse-gas emissions, ceilings as low as 75 or even 40 percent of today’s levels. (These ceilings have been advocated by Britain’s Stern Report and by the United Nations Intergovernmental Panel, respectively.) Inasmuch as these ceilings would be global ceilings, any increase in greenhouse-gas emissions taking place in countries such as China and India would be possible only at the expense of even further reductions in the United States, whose energy consumption is the envy of the world.

All of the rising clamor for energy caps is an invitation to the American people to put themselves in chains. It is an attempt to lure them along a path thousands of times more deadly than any military misadventure, and one from which escape might be impossible.

Already, led by French President Jacques Chirac, forces are gathering to make non-compliance with emissions caps an international crime. Given such developments, it is absolutely vital that the United States never enter into any international treaty in which it agrees to caps on greenhouse-gas emissions.

If the economic progress of the last two hundred years or more is to continue, if its existing benefits are to be maintained and enlarged, the people of the United States, and hopefully of the rest of the world as well, must turn their backs on environmentalism. They must recognize it for the profoundly destructive, misanthropic philosophy that it is. They must solve any possible problem of global warming on the foundation of industrial civilization, not on a foundation of its ruins.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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My last post showed how The New York Times promotes the Green party line. The one before that showed how it has supported the Red party line. Like a traffic light, The New York Times alternates between Red and Green. (There is actually little fundamental difference between the two. The Reds want to abolish the individual’s pursuit of happiness on the grounds that it results in exploitation, monopolies, and depressions. The Greens want to abolish it on the grounds that it results in acid rain, destruction of the ozone layer, and global warming.)

Today we are back to Red, with two transparent attempts of The Times to promote the doctrine of class warfare.

In a January 8, 2007 article titled u201CWorking Harder for the Man,u201D Times columnist Bob Herbert writes:

[T]he top five Wall Street firms (Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley) were expected to award an estimated $36 billion to $44 billion worth of bonuses to their 173,000 employees, an average of between $208,000 and $254,000, u201Cwith the bulk of the gains accruing to the top 1,000 or so highest-paid managers.u201D … There are 93 million production and nonsupervisory workers (exclusive of farmworkers) in the U.S. Their combined real annual earnings from 2000 to 2006 rose by $15.4 billion, which is less than half of the combined bonuses awarded by the five Wall Street firms for just one year.

As if to answer the question of whether his intention is to provoke a riot or revolution inspired by the notion of class warfare, Mr. Herbert concludes his article with these words:

There’s a reason why the power elite get bent out of shape at the merest mention of a class conflict in the U.S. The fear is that the cringing majority that has taken it on the chin for so long will wise up and begin to fight back.

I provide an exhaustive
critique of Marxism and the doctrine of class warfare in my book Capitalism.
Here I will observe only that the activities of businessmen and capitalists
are the driving force of virtually all increases in real wages. It
is their savings that pay the wages of workers and buy the capital
goods with which they work and on which the wage earners’ productivity
depends. It is the innovations of the businessmen and capitalists
that underlie both continuing capital accumulation and the continuing
rise in the productivity and real wages of the workers. To the extent
that real wages fail to rise, the explanation is to be found in the
frustration of the activities of businessmen and capitalists
by misguided government policies that undermine capital accumulation
and the rise in the productivity of labor.

In this brief space, I only want to concentrate on challenging Mr. Herbert’s assertions alleging a gross disparity between the earnings of a comparative handful of Wall Streeters and the great mass of wage earners.

As soon as I saw that Mr. Herbert was comparing the alleged meager growth in real earnings of wage earners with the alleged very substantial current monetary earnings of the Wall Streeters, a warning flag went up in my mind, simply because such a thing is not a legitimate comparison. It’s comparable to comparing one entity’s net gain with another entity’s gross revenues, e.g., Toyota’s net profit with General Motors’ sales revenues.

To compare apples with apples, I was immediately curious to know what the growth in wage earners’ monetary earnings had been between 2000 and 2006. To find the answer, I turned to the Survey of Current Business, which is the leading source of statistics on national income, wages, and profits, and gross domestic product. Page D 15 of the January 2007 issue of that publication reports total annual compensation of employees as $7524.4 billion as of the 3rd quarter of 2006, which is the most recent quarter for which data have been published.

At the same time, page 197 of the August 2005 issue of the Survey of Current Business reports total compensation of employees as $5837.4 billion as of the 3rd quarter of 2000. Subtracting this number from the total compensation of employees in 2006 gives a difference of $1687.0 billion. If this, apples-to-apples number is compared with the alleged $36 billion to $44 billion of Wall Street bonuses, it is 38 to 47 times larger, not half as large.

But what about the growth in wage earners’ real earnings, their earnings adjusted for the rise in prices? Might that not turn out to be a mere $15.4 billion, as alleged by Mr. Herbert? The answer is no, far from it.

To calculate the change in real earnings, it’s necessary to allow for the rise in prices between 2000 and 2006. According to the Bureau of Labor Statistics, which is the source of the data, the Consumer Price Index for Urban Wage Earners and Clerical Workers stood at 168.9 for 2000 and at 196.8 as of November of 2006, the most recent month for which data are available. This is an increase of 17 percent. If this rise in prices is applied to the employee compensation of $5837.4 billion in 2000, that number is raised to $6801.7 billion. The difference between this inflation-adjusted figure and 2006′s total employee compensation of $7524.4 billion is $722.7 billion. This is the rise in real total employee compensation over the period. This number is more than 47 times larger than the number alleged by Mr. Herbert. It also ranges from more than 16 to more than 20 times the Wall Street bonuses alleged by Mr. Herbert.

Mr. Herbert needs to explain how he arrived at his numbers. Until he provides a reasonable explanation, I leave it to the reader to judge his honesty and to decide whether or not and to what extent the culture of The New York Times has changed since the days of Jayson Blair, The Times’ reporter who simply fabricated claims.

I turn now to The Times’ second attempt to promote the doctrine of class warfare. This occurs in an article which appeared on the same day titled u201C[Bush] Tax Cuts Offer Most for Very Rich, Study Says.u201D (u201CBushu201D is in brackets because it appeared only in the title of the print edition of the article.)

The article opens in a way that easily suggests that while tax rates at the very top are being dramatically reduced, they are actually being increased for middle-class taxpayers.

WASHINGTON, Jan. 7 —Families earning more than $1 million a year saw their federal tax rates drop more sharply than any group in the country as a result of President Bush’s tax cuts, according to a new Congressional study.

The study, by the nonpartisan Congressional Budget Office, also shows that tax rates for middle-income earners edged up in 2004, the most recent year for which data was available, while rates for people at the very top continued to decline.

If one reads the article very carefully, from beginning to end, one learns that what is actually being complained about is merely the fact that the tax rate of the top 1 percent of taxpayers was reduced by a larger number of percentage points than the tax rate of middle-income tax payers. One also learns that the rise in the tax rate on the middle class, so prominently featured by The Times, was a very minor one that took place in the course of a four-year sustained decline in tax rates on the middle class amounting to more than 40 percent. In the article’s own words:

Families in the middle fifth of annual earnings, who had average incomes of $56,200 in 2004, saw their average effective tax rate edge down to 2.9 percent in 2004 from 5 percent in 2000…. (My italics.)
It may have escaped
The Times’ reporter, and his editor, but 2.9 percent is less
than 60 percent of 5 percent, which implies a reduction in middle-class
tax rates of more than 40 percent. This is a decrease, relatively
speaking, compared to what the rate was in 2000, a huge decrease.
It is not an increase. This decrease deserves to be featured,
not presented as the very opposite of itself.

The article goes on to complain that

Households in the top 1 percent of earnings, which had an average income of $1.25 million, saw their effective individual tax rates drop to 19.6 percent in 2004 from 24.2 percent in 2000. The rate cut was twice as deep as for middle-income families….

What is allegedly
unfair here is that while the tax rate of the top 1 percent falls
by 4.6 percentage points from 24.2 percent to 19.6 percent, the tax
rate on the middle income tax payers falls only by 2.1 percentage
points from 5 percent to 2.9 percent. Not only does The Times’
reporter, and his editor, choose to ignore the very substantial, more
than 40 percent reduction in middle-class tax rates from 2000 to 2004,
but also to completely ignore the fact that relatively speaking the
reduction in rates on the top 1 percent was far less than
the reduction on the middle class. A tax rate that is still 19.6 percent
is approximately 81 percent of a tax rate of 24.2 percent. Thus, relatively
speaking, while the income tax rate on the middle class fell by more
than 40 percent, it fell by less than 20 percent on the top 1 percent
of taxpayers.

Apparently, the only thing that would satisfy The Times (and the authors of the u201Cnonpartisanu201D Congressional Budget Office study) would be if the tax rate on both groups were reduced by the same number of percentage points. In that case, the middle income tax payers would pay a tax rate of only .4 percent, while the top 1 percent paid 19.6 percent.

Such logic implies that the elimination of the income tax can simply never be fair, unless by some magical means it could be accompanied by the ex nihilo creation of a correspondingly large subsidy for everyone else. Thus if the income tax paid by the middle class were .4 percent, while the tax rate on the top 1 percent of taxpayers were 19.6 percent, fairness would allegedly require that reduction of the 19.6 percent rate to zero be accompanied by the subtraction of 19.6 percentage points from .4 percent. This, of course, would mean the creation of a negative income tax rate of 19.2 percent for the middle class. That is the logic of The New York Times.

The Times and its reporters and editors regard the doctrine of egalitarianism as an axiomatic truth and insinuate it at every turn in all aspects of the newspaper. With respect to egalitarianism and all that goes with it, there is no distinction between news column and editorial at The New York Times. Apart from such features as classified advertising, the entire paper is one huge, day-in and day-out editorial for egalitarianism, collectivism, and Marxism.

When one reads The New York Times, one should know what one is getting. It is not unvarnished news, but the news as seen through the lens of a distinct philosophical and political doctrine, a doctrine that is hostile to the freedom, prosperity, and happiness of the individual, and thus to the foundations of the United States.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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The New York Times must have a guilty conscience about the continuous distortions of the news that appear in its pages. Evidence of this guilt is provided every day in the Times’ claim that its “news and editorial departments do not coordinate coverage and maintain a strict separation in staff and management.”

That claim is necessary only because the Times has become sensitive about the matter. And with good reason. Because even though there may not be formal meetings, strategy sessions, and the like to coordinate its news reporting with its leftist editorial slant, that leftist slant nevertheless very definitely does permeate its reporting.

Perhaps it’s the result simply of the fact that the Times’ editorial writers and its reporters were all educated in the same kind of universities, all promoting the same leftist ideas in economics, politics, history, and the various branches of philosophy. Whatever the explanation, the paper’s editorial writers and reporters consistently come at things from the same perspective and, with only occasional exceptions, end up pushing the same party line.

A good example of this appears in today’s (January 6, 2007) edition. On the first page of the business section, there is an article titled “The Land of Rising Conservation.” The article is a pure puff piece for environmentalism/conservationism. Its theme is that Japan is the model country of energy conservation, pointing the way for the United States on the basis of the use of the latest technology. Indeed, the subtitle of the article, in the print edition, is “Japan Offers a Lesson in Using Technology to Lessen Energy Consumption.” A leading illustration of this technology is an alleged futuristic “home fuel cell, a machine as large and quiet as a filing cabinet that…turns hydrogen into electricity and cold water into hot — at a fraction of regular utility costs.”

The article compares Japan with the United States in terms of annual energy consumption per home and trumpets the fact that in Japan’s it is less than half of that in the United States. It also declares that while Japan’s “population and economy are each about 40 percent as large as that of the United States, yet in 2004 it consumed less than a quarter as much energy as America did, according to the International Energy Agency, which is based in Paris.”

The article credits Japan’s superiority in “energy efficiency” to the “guiding hand of government,” which has forced “households and companies to conserve by raising the cost of gasoline and electricity far above global levels. Taxes and price controls make a gallon of gasoline in Japan currently cost about $5.20, twice America’s more market-based prices.” The same relationship apparently applies to energy prices in general. An advisor to the Japanese Parliament is favorably quoted as saying, “Japan has taught itself how to survive with energy prices that are twice as high as everywhere else.” The sharply higher energy prices, the article explains, are the source of tax revenues, which “[t]he government in turn has used…to help Japan seize the lead in renewable energies like solar power, and more recently home fuel cells.”

Despite the Times’ and its reporter’s obvious enthusiasm for the Japanese government’s energy policies, a careful, critical reading of the article results in a very different kind of appraisal. (Unfortunately, such a reading is not likely to be performed by many of the Times’ readers.)

It turns out that that futuristic home fuel cell, that allegedly operates “at a fraction of regular utility costs,” requires a government “subsidy of about $51,000” per unit. This is what makes possible its purchase “for about $9,000, far below production cost.” (I hope I will be forgiven for failing to see the intelligence of a policy that makes people pay twice the price for energy in order to provide funds to make possible the production of electricity at a sharply higher cost.)

But there is more. It also turns out such technological advances are only part of the story. There is also a major “human interest”/cultural angle that contributes to Japan’s "superiority" in “energy efficiency.” This centers on a Mr. Kimura and his family. (He owns the futuristic home fuel cell that a Times’ photograph showed standing in front of his house.) Without any apparent awareness of the significance of the information being revealed and certainly without any embarrassment about it, the Times’ reporter writes this about the subject of his human interest.

Mr. Kimura says he, his wife, and two teenage children all take turns bathing in the same water, a common practice here. Afterward, the still-warm water is sucked through a rubber tube into the nearby washing machine to clean clothes. Wet laundry is hung outside to dry or under a heat lamp in the bathroom. The different approach is also apparent in the layout of Mr. Kimura’s home, which at 1,188 square feet is about the average size of a house in Japan but only about half as big as the average American one. The rooms are also small, making them easier to heat or cool. The largest is the living room, which is about the size of an American bedroom.

During winter, the entire family, including the miniature dachshund, gathers here, which is often the only room heated. Like most Japanese homes, Mr. Kimura’s does not have central heating. The hallways, stairwell and bathrooms are left cold. The three bedrooms have wall-mounted heaters, which are used only when the rooms are occupied, and switched off at night.

The living room is kept toasty by hot water running through pipes under the floor. Mr. Kimura says such ambient heat saves money. He says the energy bill for his home is about 20,000 yen ($168) a month. Central heating alone would easily double or triple his energy bill, he says.

“Central heating is just too extravagant,” says Mr. Kimura, who is solidly middle class.

The government has tried to foster a culture of conservation with regular campaigns like this winter’s Warm Biz, a call to businesspeople to don sweaters and long johns under their gray suits so that office thermostats could be set lower.

So there you have it: the Green party line presenting poverty as technologically advanced, as the wave of the future, and as morally virtuous. We can supposedly all look forward to the day when we will be as advanced as the Japanese and energy will cost us twice as much as it now does. When we too will be unable to afford central heating and will have to live in houses half their present size. When we will have to gather our entire family into the one heated room in the house. When we will have to follow one another into the same bathwater, and then use that bathwater to wash our clothes, which we will have to dry outdoors, as our great-grandparents did. When we will have to wear long underwear and sweaters to keep warm indoors. What a glorious, green future! What green slime the Times pours on the readers of its alleged news reports.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Below are the headlines of four obituaries that have run in the New York Times. The first is that of the recent obituary of the Anti-Communist Augusto Pinochet. The next three are those of the obituaries of the Communist mass murderers Mao, Stalin, and Lenin. Please be sure to note how many are described as having ruled by terror.

December 11, 2006, Augusto Pinochet, Dictator Who Ruled by Terror in Chile, Dies at 91

September 10, 1976, Friday, . . . Mao Tse-tung Dies in Peking at 82; Leader of Red China’s Revolution

March 6, 1953, Friday, Stalin Rose From Czarist Oppression to Transform Russia Into Mighty Socialist State; RUTHLESS IN MOVING TO GOALS

January 24, 1924, Thursday, ENORMOUS CROWDS VIEW LENIN’S BODY AS IT LIES IN STATE; Wait Hours in Snow and Zero Temperature Outside Moscow Nobles’ Club. COFFIN CARRIED FIVE MILES Members of Council of Commissars Stagger Under Load, Refusing Gun Caisson. LENIN CALLED A CHRISTIAN Archbishop Summons Synod to Declare Founder of Bolshevism Member of Church. ENORMOUS CROWDS VIEW LENIN’S BODY

In these headlines we find utter condemnation of a dictator who was relatively mild as dictators go, but who was Anti-Communist; his leading characteristic was allegedly rule by “Terror.”

In contrast, in the case of Communist mass murderers we find non-judgmental tolerance in the headlines, along with a studious refusal to mention the incalculably greater terrors they caused. More than that, we find positive esteem and enthusiasm in the headlines for the Communist mass murderers. Thus Mao was the “Leader of Red China’s Revolution”; Stalin allegedly transformed “Russia Into Mighty Socialist State”; and Lenin’s funeral was described as a phenomenon of near worshipful enthusiasm: “…COFFIN CARRIED FIVE MILES Members of Council of Commissars Stagger Under Load, Refusing Gun Caisson…”

It is patterns such as this that lead some people to think that the reporting of the New York Times is colored by its politics and that the color of its politics is red.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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On Sunday, December 10, General Augusto Pinochet of Chile died, at the age of 91. General Pinochet deserves to be remembered for having rescued his country from becoming the second Soviet satellite in the Western hemisphere, after Castro’s Cuba, and, like the Soviet Union, and Cuba under Castro, a totalitarian dictatorship.

The General is denounced again and again for the death or disappearance of over 3,000 Chilean citizens and the alleged torture of thousands more. It may well be that some substantial number of innocent Chilean citizens did die or disappear or otherwise suffered brutal treatment as the result of his actions. But in a struggle to avoid the establishment of a Communist dictatorship, it is undoubtedly true that many or most of those who died or suffered were preparing to inflict a far greater number of deaths and a vastly larger scale of suffering on their fellow citizens.

Their deaths and suffering should certainly not be mourned, any more than the deaths of Lenin, Stalin, and Hitler, and their helpers should be mourned. Had there been a General Pinochet in Russia in 1918 or Germany in 1933, the people of those countries and of the rest of the world would have been incomparably better off, precisely by virtue of the death, disappearance, and attendant suffering of vast numbers of Communists and Nazis. Life and liberty are positively helped by the death and disappearance of such mortal enemies. Their absence from the scene means the absence of such things as concentration camps, and is thus ardently to be desired.

As for the innocent victims in Chile, their fate should overwhelmingly be laid at the door of the Communist plotters of totalitarian dictatorship. People have an absolute right to rise up and defend their lives, liberty, and property against a Communist takeover. In the process, they cannot be expected to make the distinctions present in a judicial process. They must act quickly and decisively to remove what threatens them. That is the nature of war. The fate of innocent bystanders, largely those who cannot be readily distinguished from the enemy, is the responsibility of the Communists. Had they not attempted to impose their totalitarian dictatorship, there would not have been any need to use force and violence to prevent them, and thus the innocent would not have suffered.

Contrary to the attitude of so many of today’s intellectuals, Communists do not have a right to murder tens of millions of innocent people and then to complain when their intended victims prevent their takeover and in the process kill some of them.

General Pinochet was undoubtedly no angel. No soldier can be. But he certainly was also no devil. In fact, if any comparison applies, it may well be one drawn from antiquity, namely, that of Cincinnatus, who saved the Roman Republic by temporarily becoming its dictator. Like Cincinnatus, General Pinochet voluntarily relinquished his dictatorship. He did so after both preventing a Communist takeover and imposing major pro-free-market reforms, inspired largely by Milton Friedman (who in large part was himself inspired by Ludwig von Mises). The effect of these reforms was to make Chile’s the most prosperous and rapidly progressing economy in Latin America, Thereafter, in the words of his New York Times’ — largely hostile — obituary, he used his remaining power to “set limits, for example, on economic policy debates with frequent warnings that he would not tolerate a return to statist measures.”

General Pinochet was thus one of the most extraordinary dictators in history, a dictator who stood for major limits on the power of the state, who imposed such limits, and who sought to maintain such limits after voluntarily giving up his dictatorship.

When General Pinochet stepped down, he did so with a guarantee of immunity from prosecution for his actions while in power. However, the present and previous regime in Chile violated this agreement and sought to ensnare the General in a web of legal actions and law suits, making the last years of his life a period of turmoil. This was a clear violation of contract, comparable to the seizure of property in violation of contract. Not surprisingly the regimes in question were avowedly socialist. As a result of their breach, it is now considerably less likely that the world will soon see any other dictator voluntarily relinquish his power. The Chilean socialists will have taught him that to be secure, he must remain in power until he dies.

Dictatorship, like war, is always an evil. Like war, it can be justified only when it is necessary to prevent a far greater evil, namely, as in this case, the imposition of the far more comprehensive and severe, permanent totalitarian dictatorship of the Communists.

Despite the fact that General Pinochet was able to use his powers as dictator to enact major pro-free-market reforms, dictatorship should never be seen as justified merely as a means of instituting such reforms, however necessary and desirable they may be. Dictatorship is the most dangerous of political institutions and easily produces catastrophic results. This is because a dictator is not restrained by any need for public discussion and debate and thus can easily leap headlong into disasters that would have been avoided had there been the freedom to criticize his proposed actions and to oppose them. And even when his policies may be right, the fact that they are imposed in defiance of public opinion operates greatly to add to their unpopularity and thus to make permanent change all the more difficult.

On the basis of such considerations, when asked many years ago what he would do if he were appointed dictator, von Mises replied, “I would resign.”

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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In recent weeks, the New York City Board of Health has displayed a pattern of profound aggression against the citizens of New York City. I dealt with one major instance of this in my last article, “Pick Your Gender and We’ll Enforce Your Choice, Says New York City’s Board of Health.” There I explained how the Board’s proposed rule to allow individuals to change the sex recorded on their birth certificates, without the necessity of undergoing any actual physical change in their sex, would compel other individuals to deny the evidence of their senses in order to comply with the law.

The Board’s banning, last Tuesday [December 5, 2006], of the use of trans fats in restaurants is a second instance in which the Board shows that it has no compunctions about violating the sanctity of the human mind and its freedom to judge and to choose. The freedom of choice of the citizen apparently means nothing to the Board. Like a curt parent controlling the choices of a child and expecting that his “No” will be sufficient, the Board has taken away the power of choice from adult citizens and told them they will no longer be able to obtain food in restaurants that is prepared with trans fats.

What allegedly justifies this behavior by the Board is the mere fact that trans fats have supposedly been scientifically proven to be unhealthy. As reported by The New York Times of October 31, according to one of the speakers at the Board’s hearing on the subject the day before, “at least 6 percent of the deaths from heart attacks in the nation could be attributed to consumption of trans fats. `Everything we have learned about trans fats is damaging.’”

The meaning of this is that if something is shown to be bad, nothing else is required to put an end to its consumption: no cognition on the part of the individual consumer, no choice on his part. These count for nothing according to the New York City Board of Health and its alleged experts. They can simply be ignored and brushed aside.

Ignoring matters of knowledge and understanding, of choice and will, of voluntary consent, is certainly an appropriate way to deal with inanimate objects. However, it is not an appropriate, or practical, way to deal with the more intelligent animals, let alone children. It is absolutely not an appropriate or practical way to deal with adult human beings. It is the kind of method employed by criminals. Matters such as choice, will, and consent mean nothing to them. A rapist is perhaps the clearest example. Now, with its high-handed banning of trans fats, the New York City Board of Health has shown that it provides another example.

Such outrageous behavior on the part of government has become so common and ingrained that it well might pass as believable if someone were to claim that the following was an actual government plan being considered for enactment.

“Within ninety days, every citizen must report to a government authorized physician to be weighed, measured, and interviewed. On the basis of the data so obtained, the physician will determine the appropriate diet for the citizen in terms of calories, fats, proteins, and every other relevant category of nutrition.

“Within a further ninety days, each citizen will receive a ration book containing weekly allotments for the various nutritional categories. In buying food in supermarkets, restaurants, or anywhere else, the citizen will have to turn over whatever portion of his weekly allotments correspond to the nutritional values of the foods being purchased. All sellers of food will be required to determine the nutritional values of the foods they sell, if they have not already been determined. It shall be illegal to purchase food without surrendering the necessary allotment coupons. It shall be illegal to buy or sell such coupons.

“These measures are necessary because diets and other voluntary methods simply do not work. People are getting too fat. Diabetes is increasing. The government’s cost of providing medical care is increasing correspondingly.

“This program is what good health requires. The government already regulates alcohol and tobacco. The regulation of fats, sugars, and all other nutritional elements is no less necessary.

“Because of this program, overweight people will finally be compelled to lose weight, whether they want to or not. Diabetes and heart disease will be reduced. Health in general will improve. People will live longer.”

Such a program is implicit in the ideas people already accept. Indeed, nutritional values must already be printed on the packaging of practically all foods sold in supermarkets and grocery stores. At the same meeting at which it outlawed trans fats, the New York City Board of Health added a requirement that the calorie content of each food item be posted on the menus of hundreds of restaurants. It thus may well be only a question of time before such a program is actually proposed. If and when it is, there is presently no basis for expecting any principled opposition to it. The opponents will likely be of the kind who’ll think they’ve won a profound victory for “free markets” if they can make the ration coupons tradable.

The only basis of serious opposition is acceptance of the principle that there is something more fundamental and more important than mere physical health, that is, more important than the condition of man’s body considered as a mere hunk of mindless meat. And that is respect for the value of the human mind and of the individual’s freedom to act on the judgment of his mind. That is the principle for which libertarians must stand.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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It is very common for people to talk nowadays about environmental good and evil, but with virtually no explicit statement of the standards by which something is to be judged environmentally good or evil. People are unaware that a standard is always present and that there is more than one such standard. There are in fact two diametrically opposed and mutually exclusive standards of environmental good and evil. The following example will bring them out.

Thirty years ago, the land under the house I live in, in Southern California, was empty desert. Had I wanted to sleep in the same location that my bedroom now stands on, I would have had to bring a sleeping bag, take precautions against rattlesnakes, scorpions, and coyotes, and hope I could find a place for my sleeping bag such that I wouldn’t have rocks pressing into my body. If it rained, I would get wet. If it was cold, I would be cold. If it was hot, I would be hot. Going to the bathroom would be a chore. Washing up would be difficult or impossible.

How incomparably better is the environment provided by my house and my bedroom. I sleep on a bed with an innerspring mattress. I don’t have to worry about snakes, scorpions, or coyotes. I’m protected from the rain, the cold, and the heat, by a well-constructed house with central heating and air conditioning. I have running water, hot and cold, a flush toilet, a sink, a shower, and a bathtub, in fact more than one of each of these things, and I have electricity and most of the conveniences it makes possible, such as a refrigerator, a television set, a VCR, and CD and DVD players.

It’s obvious to me that the existence of my house constitutes an enormous improvement in my environment compared with living at the same location on the bare ground, and that the same is true of the existence of virtually all houses in relation to the environment of their occupants. It’s further obvious to me that the process of improving the environment in this way starts with developers and contractors who bring in bulldozers and other heavy construction equipment to clear the tops of hills, level and compact the land, build streets, and utility connections, and construct houses.

Yet those who are called “environmentalists” describe the exact same process of development and construction as harming the environment. Why? Because they have a profoundly different standard of environmental good and evil than the one that is present in my example. The standard that is present in my example is that of human life and well-being. What is environmentally good according to this standard is the promotion of human life and well-being, notably, housing construction and the existence of houses. What is environmentally evil is what impairs human life and well-being, such as preventing housing construction.

The environmentalists call the construction of houses evil because, as I say, their standard of value is very different. Instead of taking human life and well-being as their standard of value, they take nature in and of itself as their standard of value. Nature, they say, has intrinsic value, i.e., value in and of itself, apart from all connection with human life and well-being. Thus, in their view, hillsides and empty land, as they exist in a state of nature, together with their wildlife, have intrinsic value. And it is those alleged intrinsic values that are harmed by development and construction. In other words, the harm the environmentalists complain about in such cases is harm only from a non-human, indeed, anti-human perspective.

Here is a classic statement of the doctrine of intrinsic value by one of its leading environmentalist supporters:

This [man's “remaking the earth by degrees”] makes what is happening no less tragic for those of us who value wildness for its own sake, not for what value it confers upon mankind. I, for one, cannot wish upon either my children or the rest of Earth’s biota a tame planet, be it monstrous or — however unlikely — benign. McKibben is a biocentrist, and so am I. We are not interested in the utility of a particular species or free-flowing river, or ecosystem, to mankind. They have intrinsic value, more value — to me — than another human body, or a billion of them.

Human happiness, and certainly human fecundity, are not as important as a wild and healthy planet. I know social scientists who remind me that people are part of nature, but it isn’t true. Somewhere along the line — at about a billion years ago, maybe half that — we quit the contract and became a cancer. We have become a plague upon ourselves and upon the Earth.

It is cosmically unlikely that the developed world will choose to end its orgy of fossil-energy consumption, and the Third World its suicidal consumption of landscape. Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along. (David M. Graber, in his review of Bill McKibben’s The End of Nature, in the Los Angeles Times Book Review, Sunday, October 22, 1989, p. 9.)

The doctrine of intrinsic value is present in such statements as the North Slope of Alaska is “a sacred place” that should never be given over to oil rigs and pipelines. It is present in such statements as, “There is a need to protect the land not just for wildlife and human recreation, but just to have it there.” It is present in all instances in which forests, rivers, canyons, hillsides, or any other natural formation is presented as automatically deserving to be preserved, irrespective of its value in being put to use by human beings. And, of course, it is present in all the numerous cases in which human life or well-being have been sacrificed for the sake of the preservation of this or that species of animal or plant. Such cases range from the sacrifice of the property rights of human beings for the sake of snail darters and spotted owls, to the sacrifice of untold millions of actual human lives. This last has occurred as the result of the resurgence of malaria because the use of DDT was prohibited in order to preserve the alleged intrinsic value of some species of birds.

It is crucial that people recognize the distinction between the two standards of environmental good and evil and that the standard of the environmental movement is fundamentally that of the intrinsic value of nature, not that of human life and well-being. Given its standard of value, it is certainly not possible to accept as sincere or well-motivated any of the claims the environmental movement makes of seeking to improve human life and well-being, whether in connection with its allegations about global warming, the ozone layer, acid rain, or anything else.

Indeed, environmentalism’s acceptance of the doctrine of intrinsic value implies a profound hatred of man and a desire to destroy him. Such statements as those of Mr. Graber, that I quoted above, expressing a wish for a virus to come along and kill a billion human beings, are not at all accidental. They are logically implied by environmentalism’s standard of value.

Acceptance of the doctrine of intrinsic value, as I wrote in Capitalism, “inexorably implies a desire to destroy man and his works because it implies a perception of man as the systematic destroyer of the good, and thus as the systematic doer of evil. Just as man perceives coyotes, wolves, and rattlesnakes as evil because they regularly destroy the cattle and sheep he values as sources of food and clothing, so, on the premise of nature’s intrinsic value, the environmentalists view man as evil, because, in the pursuit of his well-being, man systematically destroys the wildlife, jungles, and rock formations that the environmentalists hold to be intrinsically valuable. Indeed, from the perspective of such alleged intrinsic values of nature, the degree of man’s alleged destructiveness and evil is directly in proportion to his loyalty to his essential nature. Man is the rational being. It is his application of his reason in the form of science, technology, and an industrial civilization that enables him to act on nature on the enormous scale on which he now does. Thus, it is his possession and use of reason — manifested in his technology and industry — for which he is hated.” (p. 82)

The primitive hunter-gatherers who were modern man’s remote ancestors left virtually no mark whatever on the rest of nature. The alleged intrinsic values destroyed in their gathering and eating nuts and berries and in their hunting, killing, and eating animals were quickly and automatically replenished by nature. The pre-industrial farmers who were modern man’s more recent ancestors left an imprint on nature that was essentially limited to plowed fields and primitive villages. And though somewhat more enduring, it was still very limited in extent. Great limitation of extent characterizes the enduring mark left by the pyramids, the ruins of towns and cities built in antiquity, and the stone castles of the Middle Ages.

In contrast, the modern man of capitalism clears entire forests and jungles; he drains swamps and irrigates deserts. He changes the balance of nature by decimating and destroying entire species of plants and animals and, though not often mentioned, radically increasing the populations of others, whose characteristics he alters to suit him. He establishes mechanized farms, large numbers of major towns and cities, indeed, giant metropolises. He builds factories, roads, bridges and tunnels, dams and canals. He digs mines, sometimes moving entire mountains in doing so, and drills for oil and gas, often reaching depths of several miles. From the perspective of environmentalism and its doctrine of intrinsic value, these activities, which leave a large and enduring mark on a vast swath of the rest of nature, constitute the destruction of intrinsic values on a massive scale and thus characterize modern man as the doer of massive evil.

Keeping all this in mind, it follows that it is absolutely perilous for human beings to allow themselves to be guided by policies recommended by the environmental movement, especially when doing so would impose great deprivation or cost, such as would be entailed in having to make radical reductions in carbon dioxide emissions to combat global warming. Nothing could be more absurd or dangerous than to take advice on how to improve one’s life and well-being from those who regard one’s wealth and happiness as a source of harm, who accord one the status of vermin, and who wish one dead as the means of preserving nature’s alleged intrinsic values. Indeed, not only Mr. Graber, but also other prominent environmentalists have expressed a wish for human deaths on a scale that far surpasses all those caused by the Nazis and Communists combined.

The danger of accepting environmentalist claims, it must be stressed, applies irrespective of the scientific or academic credentials of an individual. If an alleged scientific expert believes in the intrinsic value of nature, then to seek his advice is equivalent to seeking the advice of a medical doctor who was on the side of the germs rather than the patient, if such a thing can be imagined. It is the equivalent of a Jew asking the medical advice of a Dr. Josef Mengele.

All advice, all policy recommendations emanating from the environmentalist movement must be summarily rejected unless and until they can be validated on the basis of a pro-man, pro-wealth, pro-capitalist standard of value. Such a standard will never imply such a thing as the destruction of the energy base of industrial civilization as the means of addressing global warming.

The environmental movement is the philosophic enemy of the human race. It should be treated as such. If we value the material well-being and, indeed, the very lives of billions of our children and grandchildren, we must treat it as such. We must treat environmentalism as our mortal enemy.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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In the last 500 million years, there have been two ice ages at the same time that vastly higher carbon dioxide levels prevailed in the earth’s atmosphere — up to 16 times the present level.

This remarkable finding, along with others, was reported in yesterday’s (November 7, 2006) New York Times. For details, see the article by William Broad, “In Ancient Fossils, Seeds of a New Debate on Warming.”

The article contains references to the work of a number of important scientists who aren’t supposed even to exist, according to the environmentalist propaganda machine, which brooks no opposition. The article deserves to be required reading for everyone who is seriously interested in the subject of global warming.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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From The New York Times of October 31, 2006:

Dozens of people appeared before the city’s Board of Health yesterday, offering a largely favorable response to proposed restaurant regulations that would ban all but a minute amount of artificial trans fats in food preparation, and require some restaurants to post calorie counts on their menus and menu boards.

The board has said it planned to vote on both proposals, which are supported by Mayor Michael R. Bloomberg, in December. The hearing yesterday was part of a process of public comment that also includes written responses.

The New York City proposals, which have drawn attention across the country, would establish some of the most rigorous limits on trans fats in restaurants and set requirements for menu labeling more rigid than in any other American city.

From The New York Times of November 7, 2006:

Separating anatomy from what it means to be a man or a woman, New York City is moving forward with a plan to let people alter the sex on their birth certificate even if they have not had sex-change surgery.

Under the rule being considered by the city’s Board of Health, which is likely to be adopted soon, people born in the city would be able to change the documented sex on their birth certificates by providing affidavits from a doctor and a mental health professional laying out why their patients should be considered members of the opposite sex, and asserting that their proposed change would be permanent.

Bottom line: Starting soon, in New York City, you won’t be able to buy a donut baked with trans fat, but you will be able choose your sex, irrespective of your anatomy.

If you think this is crazy, you’d better watch out and not say so. That’s because sooner or later, if there isn’t already, there will be a further regulation that bans such dissent as “antisocial,” “insensitive,” or “offensive.”

Even so, I can’t suppress the thought that if the hosts of, say, the Boston Tea Party, were alive, they might physically relocate New York City’s Board of Health to the streets below, perhaps with its office furniture wrapped around its members’ necks. A hostile response, I know. But then I’m feeling like that rattlesnake on a flag of my country’s Revolutionary War. His message to the world was, “Don’t Tread on Me.”

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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To the accompaniment of much fanfare and hoopla, the British government has released Sir Nicholas Stern’s Stern Review on the Economics of Climate Change, a report that it commissioned but that it labels “independent.”

The report is a rehash of now standard environmentalist claims concerning alleged disasters that await the world if it continues with its wicked ways of fossil fuel consumption: the disappearance of islands beneath the sea, the flooding of coastal cities, more severe droughts and hurricanes, famines, disease, the displacement of tens of millions of people from their traditional homelands — it’s all regurgitated in the report. A couple of times, however, the report provides a hint of something even much worse:

Under a BAU [business as usual] scenario, the stock of greenhouse gases could more than treble by the end of the century, giving at least a 50% risk of exceeding 5°C global average temperature change during the following decades. This would take humans into unknown territory. An illustration of the scale of such an increase is that we are now only around 5°C warmer than in the last ice age. (p. ix of the Executive Summary.)

It remains unclear whether warming could initiate a self-perpetuating effect that would lead to a much larger temperature rise or even runaway warming . . . . (p. 10 of the full report, the Stern Review.)

The frightening allusions to “unknown territory” and “runaway warming” come very close to conjuring up old-time religious images of hellfire and brimstone as the fate of the world if it does not take Sir Nicholas’s Report to heart and repent of its ways. But Sir Nicholas never actually does make this threat. He leaves it merely to implication.

Perhaps if it were made, it would be easier for people to identify the environmentalists’ fears for the empty bugaboo that they are and dismiss them. Their response would need be only that if economic progress and the enjoyment of its fruits will consume the world in flames, and thus that living like human beings means we really will all go to hell, as the preachers have always claimed, then so be it. Better to live as human beings now, while we can, than throw it away for the sake of descendants living as pre-industrial, medieval wretches later on. (But, of course, we will never have to make such a choice, for reasons that will become clear shortly.)

Surprisingly, the actual negative consequences Sir Nicholas alleges that will occur from global warming are extremely tame, at least in comparison with hellfire. In his “Summary of Conclusions,” he writes:

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

Sir Nicholas’s use of the words “don’t act” is very misleading. What he is urging when he speaks of “action” is a mass of laws and decrees — i.e., government action. This government action will forcibly prevent hundreds of millions, indeed, billions of individual human beings from engaging in their personal and business private action — that is, from acting in ways that they judge to serve their own self-interests. Thus, what he is actually urging is not action, but government action intended to stop private action.

Furthermore, he does not explain why he believes that global warming means the end of all subsequent economic progress, though that is implied in the words “now and forever.” He compares the dangers of global warming to “those associated with the great wars and the economic depression of the first half of the 20th century (ibid.),” yet seems to forget the stupendous economic progress that followed them.

According to Sir Nicholas, what we must do to avoid the loss of up to 20% of annual GDP, is ultimately to reduce our carbon dioxide emissions “more than 80% below the absolute level of current annual emissions.” (p. xi of the Executive Summary. My italics.) Lest one think that such drastic reduction lies only in the very remote future, Sir Nicholas also declares,

By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be 3 — 4 times larger than today — so emissions per unit of GDP would need to be just one quarter of current levels by 2050. (Ibid.)

In appraising Sir Nicholas’s views, it should be kept in mind that our ability to produce, now and for many years to come, vitally depends on the use of fossil fuels. These fuels are the source of most of our electric power and thus of our ability to use machinery. They propel our trucks, trains, ships, and planes. And, of course, their use entails the emission of carbon dioxide. Thus, it would seem that Sir Nicholas’s means of preventing even a 20% loss of GDP would entail a far greater loss of GDP than 20%. It follows that if it is output that concerns us, we would be better off simply accepting global warming, if that is what is in store, than attempting to avoid it in the way Sir Nicholas prescribes. We will certainly not produce 3—4 times the output in 2050 with 25% less carbon dioxide emission. Far more likely, if such a reduction is forced upon us, we will produce substantially less output, despite the probable existence of a substantially larger population by then.

Sir Nicholas appears to be as naïve in his estimate of the cost of replacing today’s technologies of fuel and power as he is in estimating the effect of their loss. Without evidence of any kind, he claims that while the cost of “inaction” is as much as 20% of annual global GDP, “the costs of action — reducing greenhouse gas emissions to avoid the worst impacts of climate change — can be limited to around 1% of global GDP each year.”

Thus his program is designed to appear as really quite a bargain: the world’s governments will appropriate an additional mere 1% of global GDP each year in order to prevent their citizens from wantonly destroying as much as 20% of annual global GDP by foolishly pursuing their own self-interests. And it turns out that, in Sir Nicholas’s view, even this 1% is far more than is required by the governments for the actual development of new technologies. In his chapter titled “Accelerating Technological Innovation,” he writes that “Global public energy R&D funding should double, to around $20 billion, for the development of a diverse portfolio of technologies.” (p. 347 of the Stern Review.) Twenty billion dollars are a mere one-twentieth of one percent of the world’s current annual GDP of roughly $40 trillion. That’s supposed to be all that it takes to develop the technologies that will enable the world to eventually reduce carbon emissions by 80% from today’s levels.

How easy and simple it is all supposed to be, if only we will do as we are told, and get started doing so right away. All we have to do is sit back and leave the direction of our lives in the hands of the government. It will solve the problem of changing the global technology of energy production with the same success that the Soviets and the British Laborites pursued their respective varieties of socialism and with the same success that our own government has conducted its wars on poverty, drugs, and terror, and in Vietnam and Iraq. Did I say, “success”?

Sir Nicholas’s Review is characterized by an apparent belief in a kind of magical power of words to create and control reality. Thus, the actual fact, as reported in The New York Times, is that “About one large coal-burning plant is being commissioned a week, mostly in China.” In the same report, The Times points out that “A typical new coal-fired power plant, [is] one of the largest sources of emissions, [and] is expected to operate for many decades.” Totally ignoring these facts, Sir Nicholas believes he has said something meaningful and significant when he writes,

Developing countries are already taking significant action to decouple their economic growth from the growth in greenhouse gas emissions. For example, China has adopted very ambitious domestic goals to reduce energy used for each unit of GDP by 20% from 2006—2010 and to promote the use of renewable energy. India has created an Integrated Energy Policy for the same period that includes measures to expand access to cleaner energy for poor people and to increase energy efficiency.” (p. xxiv of Executive Summary.)

To say the least, this represents the use of a mere statements of intent concerning action in the future in an effort to override the diametrically opposite character of China’s and India’s actual actions in the present, and in the foreseeable future as well if these countries are to achieve further substantial economic development.

Another illustration of the attempt to employ words as though their use could control reality, occurs in Sir Nicholas’s discussion of “learning and economies of scale” in connection with low-carbon technologies. He notes that “The cost of technologies tends to fall over time, because of learning and economies of scale,” and appears to conclude from this that low-carbon technologies can therefore eventually be as efficient as the high-carbon technologies they are supposed to replace when the latter are forcibly curtailed. He writes, “There have been major advances in the efficiency of fossil-fuel use; similar progress can also be expected for low-carbon technologies as the state of knowledge progresses.” (Stern Review, p. 225.) It apparently does not occur to him that there may be some necessary order of sequence involved and that the use of high-carbon technologies is the necessary foundation for the possible later adoption of low-carbon technologies.

Presumably, he does not believe that in the period 1750—1950, industrialization could have proceeded on the foundation of low-carbon technologies. For example, before such technology as that of atomic power could be developed, generations of industrial progress had to take place on a foundation of fossil fuels. And this was equally true for the technology of wind turbines and solar power. The ability to produce the materials, components, and equipment required by these low-carbon technologies rests on the existence of previously established highly developed carbon-based technologies. Further substantial economic development on the same foundation is required for the further development of low-carbon technologies.

Wherever the use of high-carbon technology is cheaper than that of low-carbon technology, forcibly curtailing its use implies the forcible reduction of the physical volume of production in the economic system, including its ability to produce further capital goods. Thus, forcibly curtailing the use of carbon-based technology cuts the ground from beneath the development of future low-carbon technology. It aborts the development of the necessary industrial base. (For elaboration of these points, see my Capitalism, pp. 178-179, 212, 622—642.)

Sir Nicholas’s and the rest of the environmental movement’s hostility to carbon technology, is ultimately contrary to purpose not only insofar as it prevents the development of the low-carbon technologies they claim to favor, but also in that it simultaneously, and more fundamentally, operates to deprive the world of the ability to counteract destructive climate change, such as global warming.

Whether or not they are aware of it, in attempting to combat alleged global warming, Sir Nicholas, and the rest of the environmentalists, are urging a policy of deliberate counteractive global climate change by the world’s governments. They want the world’s governments to change the world’s climate from the path that they believe it is otherwise destined to take. They want the world’s governments to make the earth’s climate cooler than they believe it will otherwise be as the next two centuries or more unfold. But their policy of climate control is the most stupid one imaginable. It’s more stupid than a modern-day equivalent of a savage’s attempting to control nature by the sacrifice of his goat.

The reason it’s more stupid, much more stupid, is that the goat that they want to sacrifice is most of modern industrial civilization — the part that depends on the 80% of the carbon emissions they want to eliminate, and which will not be replaced through any magical power of words to create and control reality, however much they may believe in that power. It is precisely modern industrial civilization and its further expansion and intensification that is mankind’s means of coping with all aspects of nature, including, if it should ever actually be necessary, the ability to control the earth’s climate, whether to cool it down or to warm it up.

If mankind ever really finds it necessary to control the earth’s climate, whether to prevent global warming or, as is in fact probably more likely, a new ice age, its ability to do so will depend on the power of its economic system. An economic system with the ability to provide such things as massive lasers, fleets of rocket ships carrying cargoes of various chemicals, equipment, and materials for deployment in outer space, with the ability to create major chemical reactions here on earth too, if necessary — such an economic system will have far more ability to make possible any necessary change in the earth’s climate. That is the kind of economic system we could reasonably expect to have in coming generations, if it is not prevented from coming into existence by policies hostile to economic progress, notably those urged by Sir Nicholas and the environmental movement.

What Sir Nicholas and the rest of the environmental movement offer is merely the destruction of much of our existing means of coping with nature and the aborting of the development of new and additional means. To the extent that their program is enacted, it will serve to prevent effectively dealing with global warming if that should ever actually be necessary.

A major word of caution is necessary here. The above discussion implies that the use of modern technology to control climate is infinitely more reasonable than the virtually insane policy of attempting to control climate by means of destroying modern technology. The word of caution is that in the hands of government, a policy of climate control based on the use modern technology could be almost as dangerous as the policy of government climate control by means of the destruction of modern technology.

In fact, a possible outcome of today’s intellectual chaos on the subjects of environment and government is a combination of major destruction of our economic system resulting from policies based on hostility to carbon technology and climate damage caused by governmental efforts to control climate through the use of modern technology. It’s not impossible that what we might end up with is an economic system largely destroyed by environmentalist policies plus the start of a new ice age resulting from government efforts to counteract global warming through the use of technologically inspired counter measures.

The only safe response to global warming, if that in fact is what is unfolding, or to global freezing, when that develops, as it inevitably will, is the maximum degree of individual freedom. (For elaboration and proof of this proposition, see Capitalism, pp. 88—90.)

Any serious consideration of the proposals made in the Stern Review for radically reducing carbon technology and the accompanying calls for immediacy in enacting them makes clear in a further way how utterly impractical the environmentalist program for controlling global warming actually is. The fundamental impracticality of the program, of course, lies in its utterly destructive character. But in addition to that, the fact that people are not prepared easily or quickly to make a massive sacrifice of their self-interests dooms the enactment of the program. Even if, in utter contradiction of the truth, the program were sound, it would simply not be possible to enact it in time to satisfy the environmentalists that the level of carbon buildup they fear will not occur. In other words, the world is quickly moving past the window of opportunity for enacting the environmentalists’ program for controlling global warming. (Concerning this point, see pp. xi—xii of the Executive Summary, especially Figure 3 on p. xii.) The implication is that either they will have to find another issue or different means for addressing the issue.

The only different means, however, are technological in character. Environmentalism thus stands a very strong chance of ultimately reverting to the more traditional socialism of massive government construction and engineering projects. Its future may well lie with what is coming to be called “geo-engineering.” We shall see.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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At the most fundamental level, environmentalism and the Green movement that represents it are hostile to business. The ethics of environmentalism and the Greens is one of human deprivation and individual self-sacrifice. Business in contrast rests on a foundation of the pursuit of happiness and the profit motive. The one represents a joyless existence devoted to selfless service to the “environment,” which is allegedly valuable in and of itself, i.e., is “intrinsically” valuable. The other represents progressive improvement in human life and well-being, i.e., the achievement of ever greater comfort, ease, and enjoyment of life, based on the recognition that human life and well-being alone are the proper sources of values for human beings.

Nevertheless, in utter disregard of their opposite natures and of the blatant contradictions involved, a philosophical monstrosity has been hatched that goes by the name “Green Businesses,” i.e., businesses infused with the spirit of environmentalism.

Not surprisingly, a so-called Green Business functions very differently than does a normal business. While a normal business seeks to add amenities to its offerings, a so-called Green Business seeks to subtract them, by means of pursuing a deliberate policy of corner cutting. Thus, for example, for some time, “Green Hotels” have been busy attempting to persuade their customers to forego the customary daily provision of fresh sheets and towels in guest rooms. And more recently, they have begun to replace the provision of fresh bars of soap each day with the installation of fixed liquid-soap dispensers, similar to those in public lavatories, even in showers and bathtubs, where they can actually be dangerous.

Of course, there are times when a normal business too cuts back on the amenities it offers, as when the cost of continuing to provide them comes to exceed what its customers are willing to pay for them. A Green Business, however, cuts back in conditions in which its customers clearly are willing to pay substantially more for the amenities being eliminated than the cost of providing them. In the case of sheets and towels in a hotel room costing two-hundred or more dollars per day, it would probably take a fairly significant deduction from the daily rate to get many people to choose to forego a daily change on economic grounds. The hotel would thus lose far more in revenue than it would save in costs. Precisely this is the reason that good hotels traditionally changed sheets and towels daily.

Green Hotels avoid this loss of revenue when they get people to accept less frequent changes. They do not offer the choice of a rate deduction great enough to induce customers to accept a less frequent change on the basis of their own self-interest. No. Instead, they prey on the ignorance, guilt, and general lack of self-confidence of many of their guests.

They tell the guests that the amenities are being reduced for “the sake of the environment” and to help “save the planet.” The guests are thus urged to think of their loss of amenities as a contribution to a noble and urgent cause, a contribution which also serves to make them personally, morally better people for having made it. Very few people in such circumstances will think of asking for a lower rate. To do so would appear to them to be asking to be compensated for behaving morally, which would be an utterly contradictory and profoundly immoral request when the morality that one accepts is precisely the morality of self-sacrifice.

Thus the Green Hotels are able to practice a racket that would be the envy of many a scam artist. They preach a morality of self-sacrifice to their guests and proceed to profit from their guests’ acceptance of that morality. For them the sacrifices of their guests are a simple cost saving, which allows them equivalently to increase their profits, since the reduction in amenities provided is not accompanied by any reduction in revenue. In other words, the Green Hotels are playing their guests for suckers and getting away with it. That is the essence of their Green Business.

In the long run, of course, the extra profit of the Green Hotels will be eroded. They will probably lose guests and may end up having to trim their rates after all, in order to stem that loss. They may also incur some additional costs, for example, in the form of having to contribute to environmentalist organizations in order to keep up recognition for their activities.

Irrespective of the effect on their profits in the long run, what the Green Hotels are doing is disgusting. It is part of a cultural assault on luxury and pleasure. One that works to make every day of everyone’s life one of unrelieved drudgery and sacrifice, to the point of there being no escape. Even vacations and holidays are now to be stamped with the mark of sacrifice. Sacrifice not even for other people, but for the “planet.”

The Green Hotels are becoming increasingly brazen in their racket. Until recently, it was enough to leave a card on a pillow if one wanted the sheets changed. Now it’s becoming necessary to call the hotel’s front desk. In addition, notification that sheets and towels will not automatically be changed is becoming much less prominent. Just last week, I personally experienced these things at what I would have expected to be a really first-class hotel, namely, the Hyatt Regency in Newport, Rhode Island. (This hotel also had a liquid-soap dispenser installed at the bathroom sink, though it continued to provide fresh bar soap each day. It was at the [Dis]Comfort Inn near Boston’s Logan Airport, that bar soap was entirely replaced with liquid soap dispensers.)

Hotel guests should protest vehemently against any loss in their comforts or conveniences for the alleged sake of the “environment” or the “planet.” They should demand lower rates as compensation for any sacrifices they are asked to make and tell the hotels that they resent being abused for the sake of a dishonest profit being made at their expense. Either in making reservations or at check-in, they should ask about the hotel’s policy with respect to sacrifices for the environment and have it noted that they want no part of it.

People need to tell the hotels that they’re vacationing for enjoyment, not self-sacrifice. And business travelers too should insist on their comfort. We human beings do not exist for the sake of the “planet.” We are not “stewards” of the planet. We are the lords of the planet. We have the ability to make it exist for our benefit — for our pleasure. And that is what we can and should do.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Saving is the use of revenue or income by a business or individual for purposes other than expenditure on consumers’ goods (or consumers’ services). It is revenue or income that is not consumed.

Because what is saved is not spent by the saver for consumption, a popular fallacy has grown up that saving is synonymous with hoarding — i.e., with the retention of money in the manner of a miser. This fallacy is not so difficult to understand when committed by people with limited education, who thus know little beyond their own personal experience. Most such people are wage earners, who normally do not personally make any kind of expenditures but consumption expenditures. In the absence of wider knowledge, it is easy for such people to confuse consumption spending with all of spending and thus to conclude that what is not spent for consumption is simply not spent. But the fallacy is also prevalent in the press, which persists in equating an increase in the rate of saving with a decrease in the spending for goods. For example, whenever it is reported that some increase in the rate of saving has taken place, the press concludes that the effect must be economically dampening at the very least.

Worse still, the fallacy that saving is hoarding is prevalent among professional economists — notably the Keynesians and neo-Keynesians — who routinely describe saving as a “leakage” from the “spending stream.” (Such economists have taught the fallacy to the members of the press.)

Indeed, so complete has been the intellectual severance of saving from spending that for several decades it has been routinely taught in college and university classrooms not only that what is saved simply disappears from spending and depresses the economy, but also that what is invested virtually comes out of nowhere and financially stimulates the economy. This is a state of confusion that would be comparable to believing that the seeds a farmer scatters simply disappear, and that the crop that later comes up, comes out of nowhere. Yet such a state of confusion is the corollary of believing that saving is hoarding. If one recognized that investment comes from saving, one would have to recognize no less that saving goes into investment — that the two are merely different aspects of the same phenomenon. In that case, one would not view saving as depressing, nor investment as stimulating.

The Hoarding Doctrine as an Instance of the Fallacy of Composition

It should be realized that while any particular individual might save in the form of adding to his cash holding — that is, in the form of “hoarding” — it is not possible for the economic system as a whole to do so. Indeed, the belief that the economic system as a whole can save by means of hoarding is an instance of the fallacy of composition — the same fallacy encountered in connection with the belief that not only an individual industry or group of industries can overproduce, but that the economic system as a whole can overproduce.

The reason that an individual can save by means of hoarding cash, while the economic system as a whole cannot, is because whatever cash an individual adds to his holding, some other individual has had to subtract from his holding. If I sell my goods for $1,000, say, and decide to retain that sum in the form of cash, it is true that I increase my savings in the form of cash by $1,000. But in the very same period of time, the individuals to whom I have sold my goods have had to reduce their cash holdings, and thus their accumulated savings in the form of cash, by that very same $1,000. I have $1,000 more in savings in the form of cash, but they have $1,000 less in savings in the form of cash. Adding up the change not only in my position, but in theirs as well, it thus turns out that in the economic system as a whole there is no increase whatever in savings in the form of cash holdings. What some individuals save by means of adding to their cash holdings other individuals have had to dissave.

The situation of students in a classroom provides an excellent illustration of this proposition. At any given time, the members of the class have just so much cash in their possession. If the doors to that classroom were locked and that class became a “closed economic system” for an hour or so, with its members carrying on some form of production and buying and selling from one another, any individual student might increase his savings by adding to his cash holding over that interval of time. But then the rest of the class must decrease its savings in the form of cash holdings to exactly the same extent. There is no way that the class as a whole can increase its savings by increasing its holding of cash.

It follows that if there is to be saving in the economic system as a whole — that is, an increase in the savings of some or all members of the economic system that is not compensated for by a decrease in the savings of other members of the economic system — the only way it can take place is in the form of an increase in assets other than cash. The increase in the savings of the economic system as a whole must take the form of an increase in its capital assets, such as business plant, equipment, and inventories.

The only exception to the principle that the economic system cannot save by means of adding to its cash holdings exists insofar as there is an increase in the quantity of money. If, over a period of time, the quantity of money in the economic system increases, then, to that extent, there can be an increase in the holding of cash that does not imply an equivalent decrease in the holding of cash by others. But this is the only exception, and it obviously does not reduce spending. Moreover, it is inescapable inasmuch as the new and additional money must be added to the cash holdings of someone and in that capacity will constitute part of their savings.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.

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Illegal immigrants are overwhelming the resources of the Welfare State: government-funded hospital emergency rooms are filled with them; public schools are filled with their children. On the basis of such complaints, many people are angry and want to close the border to new illegal immigrants and deport those who are already here.

They want to keep new illegal immigrants out with fences along the border. It is not clear whether the fences would contain intermittent watchtowers with searchlights and machine guns. The illegal immigrants who are already here would be ferreted out by threatening anyone who employed them with severe penalties and making it a criminal offense not to report them.

This is a classic illustration of Mises’s principle that prior government intervention into the economic system breeds later intervention. Here the application of his principle is, start with the Welfare State, end with the Police State. A police state is what is required effectively to stop substantial illegal immigration that has become a major burden because of the Welfare State.

The philosophy of individual rights and capitalism implies that foreigners have a right to come and to live and work here, i.e., to immigrate into the United States. The land of the United States is owned by individuals and voluntary associations of individuals, such as private business firms. It is not owned by the United States government or by the American people acting as a collective; indeed many of the owners of land in the United States are not Americans, but foreign nationals, including foreign investors.

The private owners of land have the right to use or sell or rent their land for any peaceful purpose. This includes employing immigrants and selling them food and clothing and all other goods, and selling or renting housing to them. If individual private landowners are willing to accept the presence of immigrants on their property as employees, customers, or tenants, that should be all that is required for the immigrants to be present. Anyone else who attempts to determine the presence or absence of immigrants is simply an interfering busybody ready to use a gun or club to impose his will.

At the same time, however, the philosophy of individual rights and capitalism implies that the immigrants do not have a right to be supported at public expense, which is a violation of the rights of the taxpayers. Of course, it is no less a violation of the rights of the taxpayers when native-born individuals are supported at public expense. The immigrants are singled out for criticism based on the allegation that they in particular are making the burden intolerable.

The implementation of the rights both of the immigrants and of the taxpayers requires the abolition of the Welfare State. Ending the Welfare State will end any problem of immigrants being a public burden.

Of course, ending the Welfare State is much easier said than done, and it is almost certainly not going to be eliminated even in order to avoid the environment of a police state.

But the burdens of the Welfare State and the consequent resentment against immigrants could at the very least be substantially reduced by means of some relatively simple, common-sense reforms in the direction of greater economic freedom.

In a future posting, I’ll explain how not only the problem of chronically crowded hospital emergency rooms but also the whole so-called crisis of the medically uninsured, which certainly applies to all illegal immigrants, could be radically reduced, if not entirely eliminated, by introducing some simple economic freedoms into medical care.

George Reisman [send him mail] is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. Visit his website.