Like many, I have learned much from LRC and the Mises Institute over the past decade or so. As I am sure is true for many loyal fans and contributors, the process of home schooling oneself in Austrian economics and libertarian philosophy has been both cathartic and sobering. If someone told me ten years ago that today I would believe that two little-known Jewish academics — Ludwig von Mises and Murray Rothbard — were perhaps the two greatest minds of the 20th century, I would have told them they were nuts. It has all been very strange and wonderful.
Among the many interesting things I have learned came from a 2005 blog entry by Stephan Kinsella, a fellow attorney I have never met and know very little about. In his entry, Mr. Kinsella cited a passage from Alan Watson’s Roman Law and Comparative Law, and noted that Roman slaves had some, albeit very circumscribed, financial rights:
A slave could own no property, but from early times it was customary to give the slave a peculium, a fund that he could administer as if it belonged to him. Technically, this sum belonged to the master, but to some extent it was treated as a separate estate with which the master did not interfere except for good reason.
As I read this I recalled my response when my employer in the early 1990’s offered a new "401(k)" plan that allowed me invest "pretax" dollars in the market. Although untrained in Austrian economics, I instinctively recognized this as a method of coercively supplying money to the capital markets. While many around me saw the account as a government-sanctioned employment benefit, I saw it as a government threat. That is, the government was telling us that if we did not cooperate and give Wall Street its tithe, the government would take (via the ordinary income tax) thirty percent of what we did not give to Wall Street. Further proof of the coercive nature of the transaction was the government’s added ten percent penalty for those who had the temerity to withdraw what was supposedly their own capital prior to the government-authorized age.
Instinctively understanding that nature abhors a vacuum and knowing that 401(k) and IRA dollars sent to Wall Street were not subject to the government’s thirty percent charge, I anticipated that these newly-popular accounts would likely result in a significant flow of cash into the stock market. I was so convinced that this coercion would cause a market bubble that I began trying to parlay my new law degree and finance undergrad into an opportunity in the finance industry. I toddled around from investment firm to investment firm peddling my theory that the coercive transfers evidenced by 401(k)’s and IRA’s would necessarily inflate the market. Even before the repeal of Glass-Steagall, managing funds and selling 401(k) plans would be like shooting fish in barrel as long as the pipeline of pre-tax dollars continued. As long as the music continued to play — baby boomers remained employed, did not retire and did not withdraw their funds — the inflation would continue. The losers would be the ones who did not see this as a cause of the inflation and so would not be able to anticipate at least a timeframe of when the music might stop. The Ivy Leaguers with whom I shared this theory were uninterested in my simplistic analysis. From them and from financial pundits I heard instead that this was a "new era" in which P/E ratios and Capital Asset Pricing Models (CAPM) were no longer relevant. Oh well.
After spending the last decade studying Austrian economics and learning the Austrian theory of the business cycle, reading a lot of Gary North and developing some of my own thoughts on how to measure the real value of the Dow, I now realize there is more to the market bubble story, but not much. Although the Fed’s decade of artificially low interest rates and federal deficit spending have certainly contributed the bubble, the fact remains that the price of the market has been driven up by a powerful pipeline of coerced capital that is now drying up. It is no different than if one person, A, holds a gun to B’s head and tells B to pay C or A will take one-third of B’s property. B is now recognizing the scam and is refusing to play along. Much of this capital remains in the market unwillingly, it is held hostage by the coercive power of the government to tax it. It is, in short, not much different that the Roman slave’s peculium.