A Tax-Loving ‘Austrian Economist’?

Tea Party Economist

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Recently, one of my site’s subscribers posted a link to an article written by someone who thinks he has refuted me on the question of tariffs. The man believes that sales taxes on imported goods are a way to increase national wealth. But he is special. He is not a tax-loving conservative. He is a tax-loving Austrian school economist. Anyway, he says he is an Austrian school economist. The subscriber wanted me to respond. I try to pay attention to questions from my subscribers, since my website is called Specific Answers. They pay for answers, and I feel obligated to provide them.

So, I posted a forum question in response to the site member. I asked him which arguments in the article he regarded as substantial. I also asked him not to look back at the article to review which arguments seemed substantial.

Here is my advice. If you cannot remember an argument five minutes after you have read it, then the argument is not crucial for you. Don’t worry about it.

If you believe deeply in something, and you read an article against what you believe, a good test of whether or not you need to locate a response from somebody you trust in order to refute this new argument, is to be sure you understand it. This means that you understand it well enough to summarize it, including its relevance, to somebody with no background in the field. If you cannot remember the details of the argument, or if you cannot summarize it, you would be wise not to worry about it. Just ignore it.

Here is the inescapable reality: if you do not understand the argument, you probably will not understand the refutation. You will not really know if the refutation effectively refutes the original argument. You are not really concerned about the logic of the argument. You are concerned about the fact that somebody you have never heard of thinks you are wrong, but you do not know why you are wrong. So, you want to find somebody you trust who will prove to you, merely by saying “this argument is wrong,” that this argument is wrong. This is a lose-lose position. You lose because you do not understand the original argument, and you lose because you do not understand the refutation either. It is best to ignore the argument. Anyway, it certainly is cheaper.

My subscriber had come across a website. The site is a blog. I had never heard of the individual who runs it. I looked him up. He has written a book on the coming depression. He has written another book on an unrelated topic. He has not written anything in book form on economic theory. He does not have an academic position anywhere. His academic background is limited to a bachelor’s degree in economics. College courses in economics are Keynesian. A person needs follow-up work in economics to equip himself in the field.

There is an old rule: “You cannot change just one thing.” There is a rule of economics: “If you claim to make a breakthrough in a narrow area of economics, this is going to force you to re-think almost everything else in economics.” It is not good enough to tell everybody that you have refuted the fundamental doctrine of modern free-market economics: the doctrine of free trade. You also must show that you have restructured all of economic theory in terms of your revolutionary breakthrough: discovering why sales taxes on imported goods make society richer. The site’s editor has not done this. I will go further than this: he has his work cut out for him.

In his Wiki biography, we learn that he writes science fiction novels and designs video games. I would have hoped that he had expressed greater interest in Austrian economic theory than in science fiction and video games.

It is not easy to locate his name. He uses a pseudonym. The name he has chosen for himself is mnemonically the same as the word for God. I choose not to mention it. I do not take him seriously, as you will see. He has chosen to remain anonymous, and I have decided to assist him in this worthy task.

He claims to be an Austrian school economist. He also is in favor of tariffs. He actually admits that by promoting tariffs (sales taxes on imported goods) in the name of Austrian economic theory, his position is “apparently oxymoronic.” I recommend that he drop the adjective “apparently.”“SALES TAXES MAKE US RICHER!”

He began his refutation of my defense of free trade by saying that I had invoked the names of Adam Smith and David Hume. He then went on to say that he has refuted both of them – he, plus a another guy, a man who says that Ron Paul is disingenuous on free trade, a man who is on the payroll of a industry trade association that promotes protective tariffs.

Sadly, I missed these refutations. If true, a lot of fat volumes on the history of economic thought will have to be revised. Poor old Hume. Poor old Smith. Refuted at last!

Needless to say, I remain skeptical.

He then went on to say that free traders do not pay any attention to economic history. We do not understand how economic theory applies to the real world.

Here is a man who claims to be an Austrian school economist. Yet he begins by saying that economic theory does not stand alone; economic history refutes it. He is clearly arguing that economic theory is refuted, not by better economic theory, but by economic history. This is a rejection of the first hundred pages of Ludwig von Mises’ magnum opus, Human Action.

I think it is generally a good idea that when you announce your position as an Austrian school economist, you do not abandon the epistemology of Ludwig von Mises without at least explaining on what basis you have abandoned it.

The point that Mises made was simple enough: without economic theory to guide you in your selection of facts, and also in your explanation of the relevance of these facts, you cannot say anything relevant about economic history. You will be using some unstated economic theory to select and interpret the facts, except that you will be doing this either unconsciously or surreptitiously. There is no such thing as uninterpreted facts of economic history, according to Mises, and therefore the relevance of economic history must be assessed in terms of the accuracy of the theory. This is why Mises was a deductive theorist. He made this the foundational principle of his economic system.

My critic then said that free traders adopt arguments that are 200 years old. He is correct.

One of the important aspects of truth is this: it survives for over 200 years. Amazing as it sounds, it survives for over 2000 years. One of the characteristics of truth is that it survives through time.

Then he went into a diatribe against the European Union as fascist, something that I certainly would not argue against. The fact that the European Union is fascistic has nothing to do with the truth or falsity of the logic of voluntary exchange.

We must also consider the effects of a government agent with a gun and a badge who threatens someone who wants to work out an exchange with somebody else. The logic of badges and guns extends even earlier than Adam Smith and David Hume, and it will extend a good deal longer than my life expectancy.

He never did reply to my presentation of badges and guns. There is a reason for this. He can’t – not and still maintain the illusion that he is an Austrian school economist. There is nothing remotely Austrian about his analysis.

Then he offered a paragraph on trade with South Korea. It turns out that, because of a new trade agreement that lowers tariffs from South Korea, Americans bought more goods from South Korea. Let’s see if I understand this. When you lower the price of goods, more of them are sold. Yes, yes, I think this is correct. Americans bought more goods from South Korea than we sold to them. So – I think this is right – they lent dollars to America. Does this mean “you don’t get something for nothing”? I suppose it does.

He expects hos readers to conclude:. “We must have more badges and guns and sales taxes! Nothing else will save us from poverty! Free trade, meaning free markets, meaning individual liberty of choice will destroy America otherwise! Tax us! Please tax us! We just can’t stop ourselves!”

My conceptual problem here is in understanding how a man with a badge and a gun and a sales tax would have made Americans better off. Or South Koreans.

Then he said that NAFTA is bad. Since I have never written anything in favor of NAFTA, I certainly do not want to refute him on this point. My argument related to people making an exchange, and also to a third person with a badge and a gun who sticks the gun in the belly of one of the people who wants to make an exchange, and demands payment of a sales tax. As far as I can see, this has nothing to do with NAFTA, which is a bureaucratic system for enforcing managed trade.

Then he invoked Pat Buchanan. He said that Pat had – how can I put this euphemistically? – booted my donkey. Brutally.

On a website which claims to be Austrian in perspective, invoking Pat Buchanan’s authority on this issue seems to be an inappropriate source of refutation. I do not recall that Mr. Buchanan has ever identified himself as an Austrian school economist.

He also referred to the fact that I had cited Henry Hazlitt. He went on to say that Henry Hazlitt offered a remarkably incompetent argument for free trade. He insisted that he personally discovered 13 specific errors in Hazlitt’s chapter on free trade.

Let me say at this point that I find all this delightfully amusing. Anybody who says in public that he has refuted any of Henry Hazlitt’s positions with 13 different arguments is not someone I would regard as an unimpeachable source on his own powers of reasoning. Call me narrow-minded. Call me prejudiced. But that is the way I assess it.

If you read the sections which he cited from Economics in One Lesson, you may sense that you have encountered this line of reasoning before. If you have read Mises’ Human Action, Chaptrer XXIX, Section 3, then you have indeed encountered this line of reasoning before. Hazlitt merely extended Mises’ arguments, although he wrote his book several years before Human Action was published. It would be legitimate to argue that Mises extended Hazlitt’s arguments. Of course, they were both extending arguments advanced by Hume and Smith, as well as subsequent free traders. So, what our would-be Austrian economist had argued is this: to be a well-informed Austrian economist on the issue of tariffs, you should begin with a rejection of Human Action.

He then went on to say that the classical economic defense of free trade, the conventional defense of free trade, and the neo-Keynesian case for government intervention all have failed to take debt into account.

Then he presented statistics regarding America’s debts to foreigners. It seems that owing fiat money issued by the Federal Reserve System at 0.09% per annum (T-bills) is a disaster for Americans, and getting the use of goods produced abroad is an even bigger disaster. “Heads, they win; tails, we lose.” It’s a lose-lose transaction. Sadly, Americans do not understand this. For those of us who think the U.S. government will default on this debt, we look at a Hyundai and think, “This is a good deal. They get T-bills. I get the car.”

Here is reality, according to economics. Every exchange that is not completed involves debt. That is to say, it involves the use of credit. It involves the exchange of a promise to supply future goods in exchange for present goods.

Let’s consider a common transaction. I buy a house. I borrow the money to buy the house. I am now in debt inside my house. This does not mean that I am less wealthy. In fact, from my point of view, I am more wealthy. That is why I bought the house. I regard the house as more valuable to me than the present value (discounted by the mortgage rate) of the future stream of income that I will use to pay off the house.

He said that prosperity which is generated by free trade is a mirage. He did not bother to prove this. It really does need proof. Why is the subjective value that someone gets from owning something a mirage? Why are the benefits of trade with someone across the street or across town a mirage? How about across state lines? What’s that? It’s not a mirage? But it is when I buy something across a national line, unless I get to pay a sales tax.

The logic of his position is not intuitive. It needs an explanation. But my critic did not provide one.

I buy things online. I do not pay a local sales tax. Is this increase of my subjective wealth a mirage? Would I be better off economically if I had bought it locally and paid a state and county sales tax? Are all of us who buy online victims of a mirage? This is the logic of his position. But his argument is not supported by logic. It is supported by lots of numbers issued by government statistical agencies. The numbers show that we online shoppers are suffering from the mirage of wealth. He understands this. I do not. Do you?

To overcome this mirage, we need tariffs, he implied. In other words, when two people get together to make an exchange, and somebody with a badge and a gun does not stick his gun into the belly of one of the individuals to demand payment of the sales tax, this absence of guns and badges and the threat of violence decreases their prosperity. So, there is nothing like a badge and a gun in your belly, coupled with the demand that you pay a sales tax, to make you richer.

Think of the possibilities here. If there were another guy with a badge who sticks a gun in your back, and he demands that you pay an additional sales tax, you could get rich really fast.

This is the logic of every defense of tariffs that is not made exclusively in terms of financing the government. Any argument for tariffs that says that there is a benefit to society in general from sending out people with badges and guns to collect sales taxes, is a defense of badges and guns and sales taxes as crucial tools of production.

Historically and theoretically, Austrian school economists have not been prominent in promoting the idea that badges, guns, and higher sales taxes promote greater social welfare.

He said that the logic of free trade was always erroneous, because any consideration of debt which is put into the equation – he never did provide an equation – reveals from historical statistics the intrinsic falsity of the free-trade argument.

He specifically said that buying giant houses with no money down did not make people richer. Well, how about buying smaller houses with no money down? Did that make people poorer? A lot of people over the last 75 years have bought homes for 20% down, which certainly involved debt. Did that make them less rich? Did that impoverish them?

I realize that people can make bad decisions. That possibility is basic to all economic thought, but especially Austrian economic thought. People make bad decisions based on faulty information. Fractional reserve banking and central banking are sources of widespread false information. This perspective is basic to Austrian school economics. But the fact that people were misled by fractional reserve banking and central banking does not prove that they would have been better off if somebody with a badge and a gun had charged them an extra 5% or 10% sales tax.

This supposed Austrian school economist, who has never written anything on Austrian economic international trade theory in book form, and who claims that he has refuted 13 of Henry Hazlitt’s arguments, and who has refuted David Hume and Adam Smith, is persuaded that people who pursue their individual self-interest according to the best information they have are really fools. They do not have good information. But he thinks he does. And so, this Austrian school economist wants the federal government to send out people with badges and guns to demand sales taxes from buyers, so that Americans who want to make exchanges will be less likely to do so. This will reduce their victimization by the mirage of wealth.

Taxation produces liberty. Taxation produces wealth. Taxation reduces mirages. Taxation clears the mind.

Ingsoc was right, it seems.

Let me push this logic. If all this is true of trade between people across the invisible borders separating nations, then it must be logically true regarding the invisible borders separating states inside the United States. It must also be true with respect to invisible borders separating counties.

Therefore, in order to make everybody richer, each of these government jurisdictions should send out men with badges and guns to interdict the shipment of goods across those invisible lines. They must all impose sales taxes. Why? Because, if this is not done, society will become poorer. It will succumb to the mirage of wealth.CONCLUSION

All this comes from a guy who says he is a member of Mensa, an organization of geniuses. This reminds me, once again, that if a buzz saw is set at the wrong angle, you can sharpen it for hours, but it will not cut straight.

June 21, 2012

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2012 Gary North