The easy money policy of the Federal Reserve under Greenspan during the 1990’s helped fuel a massive bubble in the technology sector. In March of 2000, the tech-heavy NASDAQ peaked at over 5132 for a gain of nearly 500% in five years.  Soon after, the dot-com bubble burst and erased millions in paper gains.  To stave off the painful, but necessary, economic consequences of resource misallocation during the dot-com craze, the Federal Reserve dropped the Federal Funds Rate from over 6% in 2000 to under 2% by 2002. The rate dropped again to near 1% where it remained until the middle of 2004.  During this period, real estate prices soared and a new asset bubble formed.  The Federal Reserve began steadily raising interest rates from 2004 to 2007, but the damage had already been done. We now know the collapse of the artificially inflated real estate bubble was the proximate cause of the 2007/2008 financial crisis.

Since the onset of the current economic crisis, the Federal Reserve has held interest rates near 0% and has recently pledged to keep rates at this artificially low level until at least 2016. Under Fed Chairman Ben Bernanke, they have engaged in several rounds of Quantitative Easing (QE), which is a fancy way of saying money printing or debt monetization. All the while, the economy as stagnated and continues to be mired in the worst economic downturn since the Great Depression.  

The constant economic disruptions and prolonged recessions has led many previously disinterested citizens to ask the question: What causes these cyclical economic booms and busts, and is the cycle avoidable?

Why do industrialized nations seem to experience periods of elevated prosperity followed by recession?  Is there any characteristic in the market process itself that makes periodic economic recessions unavoidable?  Is this a failure of the free market?

There are a number of extra-market forces that may unexpectedly plunge an economy into recession or depression.  A few examples include war, political trade sanctions, and natural disaster.  However, there is nothing in the inherent nature of a market or price system that would lead to rapid increases or decreases in aggregate prices.  Nor is there any characteristic of an unhampered market that would cause or encourage individuals to widely misallocate resources on the nation-wide scale we witnessed in the real estate market during the middle part of the last decade.  Free market factors alone cannot account for these wild booms and busts.

To explain the pattern of unnatural expansion followed by recession, economists Ludwig von Mises and F.A. Hayek developed a theory that has since been termed the Austrian Business Cycle Theory.  Both Hayek and Mises characterized the business cycle as a period of boom caused by artificial expansion of credit followed by an inevitable bust as market forces work to correct the misallocation of scarce resources.  Austrian theory demonstrates that it is precisely the introduction of artificial money and credit by the central bank, misrepresenting the availability of resources in an economy, that causes widespread malinvestment and subsequent asset bubbles to form during the boom.

Austrian Business Cycle Theory provides us with a framework for making sense of our recent financial crisis.  Here are the ABC’s of the Austrian theory.

Artificially cheap credit creates a false signal.

According to the Austrians, the business cycle is fueled by artificially cheap credit.  The engine is the central bank, and interventionist public policy is the ignition.  For various political reasons (including creating the perception that a benevolent government is giving the public something for free), the central bank intervenes in the credit market by increasing the money supply.  This artificial increase in the money supply (or expansion of credit beyond market levels) tends to lower the interest rate below the level that would occur naturally in the market.  This sets the business cycle in motion.

We live in a world where we are limited by the scarce resources of time, materials, and labor. We must choose how we want to allocate our scarce resources to best satisfy our needs. Investing in capital goods may increase future output, but in order to invest in the future we must either decrease current consumption or consume real savings during our period of investment.

The market interest rate indicates the amount of resources that may be devoted to the production of capital goods without impacting current consumption based on available savings.  Because capital investment requires us to forego current consumption, it signals to entrepreneurs the availability of real savings accumulated to undertake capital investment projects.  The interest rate is essentially a measure of the market’s preference of present goods in relation to future goods.

An artificially low interest rate distorts this vital signal to consumers, producers, and investors.  Entrepreneurs are led to believe investments in the production of capital goods can be undertaken without frustrating current consumption.  Investors commence capital projects under the misguided assumption that sufficient resources are currently available to complete the projects and that consumer demand will exist in the future to support their investment decisions.

As a result, scarce resources are diverted away from useful projects that would have otherwise satisfied consumers’ true time preference.  The housing boom from 2002-2007 is a perfect illustration.  Artificially cheap credit sent the false signal to entrepreneurs that the market had sufficient savings necessary to undertake substantial real estate investments.  This misinformation created by the Federal Reserve has left the economy fraught with foreclosures, short-sales, and half-built homes all over the country.

Boom time is a period of pervasive economic damage.

The boom is a time of growth and prosperity, right?  Not exactly.  Sure, prices are rising.  People think that real wealth is being created at an accelerated rate.  Society is living a lifestyle fueled by artificially generated ‘economic progress.’  It is true that as a result of increased capital investment, the prices of capital goods are bid up by investors competing for the use of these scare resources and many people are making money.

However, this only fuels the malinvestment as entrepreneurs perceive the continued investment of capital will pay off.  Scarce resources are taken from productive uses and employed in projects that the market is not ready to undertake.  It is actually during the period of boom (a period that lends the perception of wealth creation) that the real damage to wealth occurs.

The faulty assumption that capital can be created by artificially increasing the supply of paper money only gives the illusion that the savings available for investment are real.  Of course, real savings must exist before capital projects can be completed, and the notion that capital can be created by a printing press is false—no matter how many times Paul Krugman tries to tell you otherwise.

Increasing the money supply may temporarily increase consumption, fueling the good times during the boom, but only at the expense of consumed capital.  As scarce resources are devoted to new investment projects, valuable capital is consumed in order to meet the current consumption demand levels.

To fully appreciate the extent of the damage caused during the boom period, it must be understood that all capital goods are not identical in nature.  Although mainstream economists like to treat all capital investment as homogeneous items to be input into complex economic models, capital goods exist as individual pieces of an intricate system of individual plans.  The structure of production is such that capital production can only exist to the extent by which the factors of production are available for use.  Not only is there massive overinvestment during the boom period, but also there is entrepreneurial investment in the wrong areas. It’s like trying to put together a puzzle with the wrong pieces.

Valuable capital is diverted to unsustainable projects during the boom in pervasive malinvestments in what economists refer to as a “cluster of errors.”  Valuable capital is consumed to sustain desired consumption levels.  It is during the boom time that real wealth is destroyed. Again, all of the resource, labor, and investment that went to real estate during the housing boom were not available for other projects, such as expanding manufacturing in more sustainable areas.

The existence of real savings and investment in capital is the reason that America became an economic powerhouse.  Over the last half a century, we have actually been consuming our savings and saved capital at an alarming rate to sustain our desired levels of consumption.  We are no longer a production economy.  We are a consumption economy.  This is not sustainable. Our standard of living seems to be high, but our destruction of capital and savings is actually making Americans relatively poorer each year.

Correction is the painful, but necessary, healing process.

The illusion that real savings exists can only go on for a finite period of time.  Once it is determined that production expansion cannot be completed with the available resources, a correction must occur.  The severity of the correction required to liquidate malinvestments and appropriately reallocate resources is determined by the duration and intensity of the central bank’s interference in the market.

The solution is not as simple as switching from the malinvestment back to previous levels of capital production.  Production requires capital.  The boom period damaged our capital structure. High unemployment is a painful consequence to the structural damage caused by the artificial expansion of the money supply by the central bank. The real estate market is not coming back to levels enjoyed during the boom anytime soon. Those jobs are gone. 

Consumption must be deferred and real savings established before there can be investment in new production. This means living modestly today; perhaps at levels that are lower than we enjoyed a decade ago. The medicine is painful, but the recessionary period is the economy’s way of healing itself from the harm caused by the government and the central bank.

If the mistakes caused by central bank interference in the market can be identified early on and stopped, the damage caused during the boom period can be fixed by the market relatively quickly during a brief period of recession.

Unfortunately, the Federal Reserve is showing no signs of stopping.  It continues to pursue the same monetary policies that caused the problem in the first place.  By propping up a false economy, the Federal Reserve is prolonging any chance of real economic recovery while inducing further damage to the production structure of our economy.

If the central bank continues to fuel the market with cheap credit, as it does today, the consequences may be dire.  Consider the following warning in Thomas Taylor’s An Introduction to Austrian Economics:  “To continue easy-money policy in order to avoid the otherwise inevitable depression must bring about an even harsher fate: the collapse of the monetary system and the market economy.” With the recent announcement of QE-Infinity, it seems like Ben Bernanke and the Federal Reserve are opting for the latter. This spells trouble for the US economy.

Like most perceived ‘market shortcomings,’ the business cycle is not a failure of the market.  The cycle of boom and bust is yet another example of the consequences of misguided attempts to centrally plan an economy.

In Liberty,

Jason Riddle  

I don't know about you, but I am pretty tired of hearing about the "1%" and the "47%" and "top 10%" and the "bottom 10%". Instead of bucketing people into relatively meaningless percentages, let's take a moment to reflect on the fact that behind each of these numbers are real human lives. We are talking about your friends, family, and neighbors. We are talking about you and me. We are the 100%.  

And something that should be of significant interest to all of us "in the 100%" is the idea of individual liberty.  Liberty is a concept that pertains to 100% of the persons in this country and around the world. Liberty is an integral part of the human experience, but it is often pushed to the background of political policy discussions.  Let's take a few quick minutes today to think about what liberty is and what it entails.

Liberty is the ability of an individual to have control over and be responsible for his or her own actions. Only the individual can have the ability to make choices and act according to his or her own reasons. Only the individual can be coerced by external forces. Only individuals are free or not free. The individual is the basic unit of social analysis. Liberty is a concept that applies to the individual and not to the group or the collective.

Liberty applies to all of us, but it is a mistake to categorize freedom as pertaining to races, religions, ethnic groups, social classes, nations, or any other collective entity such as "the 1%". There are certainly plenty of examples where individuals have used coercion to limit the freedom of other individuals on the basis of race, religion, and ethnicity, but to think of liberty (or lack there of) as belonging to the group is very dangerous. Many unspeakable travesties in human history have resulted from this tribal “us versus them” mentality; the same tribal "us versus them" analysis used by politicians and pundits to divide people in order to generate class warfare when it need not exist.

The idea that it is moral to subjugate an individual person for the betterment of the collective has been used to justify everything from the gross expropriation of property, to mass murder, to the system of government we have in the US today. Anytime the government grants special political privilege for things like corporate subsidies, bailouts, and welfare entitlement, the liberty of individual people is being sacrificed. Whenever members of our government act in any manner whatsoever, they limit the liberty of individual people. There may be justified cases where individual liberty should be limited. However, limits on liberty must always be scrutinized to the highest of standards. You should never ask your government to do on your behalf what you would not yourself be willing to force your friends, families, and neighbors to do for you.  So much of the confusion surrounding politics could be ended if we simply analyze policy using the yardstick of its impact on individual liberty.

“Libertarian thought emphasizes the dignity of each individual, which entails both rights and responsibility.” – David Boaz

In Liberty,

Jason Riddle

To better understand and situate the current state of the American politics, we must first appreciate the origins and evolution of the liberal and conservative ideologies.

In the 1965 essay titled "Left and Right: The Prospects for Liberty," Murray Rothbard explains that the origins of these two dominant political ideologies had their beginnings in Western Europe nearly 200 years ago. Liberalism (remember we are talking 19th century definition of the term) was the party “of hope, of radicalism, of liberty, of the Industrial Revolution, of progress, of humanity.”

The opposition to 18th and 19th century liberalism was embodied by the Tories; the party of “...hierarchy, statism, theocracy, serfdom, and class exploitation of the Old Order.”  The Tories were conservatives in the original sense of the word. They were the party of reaction whose goal was to preserve the traditional order of society. Roderick Long summarizes that the Tories “…had traditionally been the advocates of hierarchy and compulsion, while the Liberals had traditionally championed voluntary association and free exchange.”

Liberals on the “left” originally advocated for free markets, voluntary exchange, freedom of association, and tolerance. Roderick Long points out that these free-market radicals embraced and promoted “many of the causes we now think of as paradigmatically left-wing - feminism, antiracism, antimilitarism, the defense of laborers and consumers against big business” while the Tories, or traditional conservatives, on the “right” advocated the hierarchy and compulsion of the Old Order.

During the end of the 18th and well into the 19th century, these two ideologies started to shift and change. We saw rapid economic and social progress due to increasing adoption of the radically liberal idea of individual human rights. The American colonies asserted their independence from the established order claiming the right to life, liberty, and property. It can be argued that America was the first nation in the history of the world founded on genuine liberal principles and within a few short decades, the world witnessed the end of chattel slavery, increased rights for women, and an economic revolution.

Unfortunately, the idea of liberalism began to transform in the later part of the 19th century. During this time we saw a rise of nationalism in Prussia – the model for the central, powerful modern nation-state. Both the Left and the Right were tempted to use the apparatus of government to achieve their ends. Roderick Long, drawing from a 1884 essay by Herbert Spencer titled The New Toryism, explains that, “…liberals came to conceptualize liberalism in terms of its easily identifiable effects (benefits for the masses) rather than in terms of its essential nature (laissez-faire), and so began to think that any measure aimed at the end of benefits for the masses must count as liberal, whether pursued by the traditional liberal means of laissez-faire or by its opposite, the traditional Tory means of governmental compulsion.”

Furthermore, on the heels of great scientific advancement, intellectuals came to believe they could order and plan society to reach the liberal goals of human flourishing faster than the incremental gains achieved through the voluntary market process. Instead of continuing to be the radical champions of freedom, which had led to steady improvements, the liberals presumed they could eliminate all the ills of society and create utopia if only they could use the existing power of the State to engineer and force their design for the benefit of humanity. In short, the liberals thought they could use the Tory means to achieve their liberal ends.  Remember, the Tories on the Right traditionally instituted big-government solutions to address what they considered to be the problems in society.

Instead of focusing on the freedom of the individual to pursue happiness, the liberals believed they could arrange society in such a way that man could be free from want – that government could engineer happiness and prosperity. Because the liberals thought their end goal to be a noble one, they had great intellectual backing and what we identify as today’s version of liberalism grew rapidly. We saw the rise of socialism and Marxism across much of the globe and by 1884, Spencer observed that "[m]ost of those who now pass as Liberals, are Tories of a new type."

Remember that at the time of Spencer’s writing in 1884, the concentration of political and economic power was considered a cornerstone of the Tory ideology. In fact, historically speaking, most people in most times have considered a concentration of power as being a right-wing ideology.  Spencer went on to issue a warning that turned out to be all too true. In 1884 he said, “So that if the present drift of things continues, it may by and by really happen that the Tories will be defenders of liberties which the Liberals, in pursuit of what they think popular welfare, trample under foot.”

Murray Rothbard offers further detail about this impact on the ideological transformation of the Left and the Right. The Liberals on the Left  “with an orientation toward activism were led to abandon the old libertarian form of liberalism for the more energetic and proactive state-socialist version, while those liberals who resisted the slide toward state-socialism found themselves drifting toward the pessimistic and reactionary outlook of traditionalist conservatism.”

As a response to these new radical developments, the reactionary wing of the Left (weary of growing collectivism) and the traditional Tories on the Right (concerned with preserving the Old Order) evolved into what we would today recognize as the conservative movement. Their mission became to slow the rapid growth of the new socialist and progressive governments. However, the focus of these conservatives, still deeply rooted in maintaining the old traditional order and traditional values, was not principally concerned with the defense of individual rights and laissez-faire, as that was the original position of the radical liberals!

So what does this mean for us today?

Now, with an understanding of the history of the American liberal and conservative ideologies, it should not be difficult to identify and explain the origins of their present internal contradictions.

The folks that would today be considered libertarians and the present-day liberals had common origins, but they went their separate ways in the 19th century. While the libertarians are characterized as fighting oppression in all forms, the modern-day liberals rail against non-governmental forms of tyranny (like the big bad corporations) while simultaneously championing institutionalized oppression in the form of government. Liberals today seem especially concerned about the concentration of power by the wealthy businessmen but ignore the concentration of power by the political elite.  They pay lip service to civil liberties while systematically destroying economic liberties. They have long since forgotten the lessons of their laissez-faire roots and now believe the economy can be ordered by wise central planners. They look at government as the great equalizer instead of recognizing the fact that government is quite instrumental in ensuring in the oppressive Old Order of the Tories.

As for the conservatives, their policies become intelligible if we remember that the conservative movement has its roots in the Tory ideology of maintaining traditional order by force. Ironically, after the perversion of classical liberalism into socialism, conservatism evolved as a reaction to the progressive, socialist agenda. The original advocate of centralized power is now our only safeguard against ever expanding government? At times, conservatives have successfully retarded the agenda of the modern-day liberal, but haven’t been able to offer any real alternative. Conservatives today accept the idea of progressive government solutions and only offer us with the alternative of implementing them more efficiently or at less cost than the liberal. The conservative message of liberty is impotent. Conservatism has never stood for laissez-faire or the principled respect for individual human rights. Furthermore, arguments for economic freedom from the conservatives carry little weight when they advocate using the blunt force of big government to secure their vision of traditional social values. The conservative pays lip service to economic liberty while destroying our personal liberty.

We have good reason to be frustrated with both of the major political parties. In American politics today, liberalism and conservatism are not fundamentally different. They merely fight over the application of government power. Both have origins rooted in authoritarian power structures designed to centrally order society according to their respective visions.

If you stand for liberty, human rights, and freed markets….you are not a conservative or a liberal in today’s terms. You are a libertarian. If you still consider yourself a conservative or a liberal after having full disclosure of what these terms mean, then you are a bully.

In Liberty,

Jason Riddle

Opponents of Obamacare rightfully argue that this egregious piece of legislation does not address the root cause of the healthcare problem and will likely only make our nation's precarious economic situation all the more dismal. That being said, the Republican Party has neither addressed the healthcare issues at the root nor provided any real alternative either. In principle, the Republican alternative is a merely a water-downed version of the bad medicine prescribed by the Democrats. Throughout the last half century the Republicans have served as no more than a speed bump slowing the progress of socialized medicine.

Instead of the offering a principled alternative, the focus of the GOP has been merely to fight against the Democrats' baleful plan while accepting their premise.

In 1994, Republicans successfully fended off Clinton's healthcare proposal. After taking back control of Congress, for a decade and a half Republicans did nothing to fix the tangled regulatory mess caused by government bedevilment in healthcare. Instead of unwinding the crippling interventionist programs and regulations, Republicans complacently let the costly errors of an inherently flawed government-orchestrated system compound. Republicans had their chance and stood idle.

In the game of politics it might make sense for the minority party to steer clear from rallying around an alternative that has no chance of passing, but it is not enough for the Republicans to simply oppose bad policy when they've had years to address the root of the problem.

For the last three years we've witnessed a furious debate around healthcare reform in America. In typical fashion, the media and politicians (both Republicans and Democrats) directed our attention to arguing over detached, surface-level issues instead of the real problems. The bottom line is that the Republicans and Democrats have both shown they support socialized, government solutions to healthcare – only varying by degree. Democrats are just a more consistent and explicit in their message, but there is really not a material difference when it comes to basic principles.

Advocates for liberty should argue that Obamacare, and for that matter any government intervention in the market of providing health care, is a blatant violation of human rights. We, as human beings, may have certain responsibilities to help men and women in need, but using the force of government to coerce people into providing a service is not benevolence. It is immoral laziness.

I understand that access to medical care is, in many cases, a matter of life and death. The debate around this subject carries correspondingly weighty emotional arguments. The public is bombarded with anecdotal talking points from the popular media that confound a myriad of surface-level, consequential concretes without any reference to a consistent system of ideas. Typically, the arguments around health care are framed in a manner which presupposes that it is a human right to secure some entitlement to special privilege: "Everyone has a right to affordable care. We are a rich country. We should provide health care to people who need health care."

The astute reader may ask the question: “Who is the ‘we’ that must provide that care?” Perhaps the question one should consider is: “Can an entitlement to a good or service produced by another really be considered a human right. Can something be a right if it necessarily implies the obligation on the part of another?”

To assert that medical care must be provided as a human right is a contradiction. This necessarily implies that one person has a positive obligation to provide a product or service to another. The forced surrender of labor and property (whether it is forced medical care or mandatory insurance) for the benefit of another is a stark violation of human rights. Even with best intentions, central planners cannot magically create human rights by abrogating the human rights of another.

Moreover, it is misleading to think of healthcare as a “system” that can be controlled and distributed to the needy by a central authority. ‘Healthcare’ is a generalized term for a very specific combination of goods and service of a scarce quantity offered by and consumed by individual humans. Health care does not just appear automatically in nature. It must be produced by someone through intense physical and mental effort.

The claim that it is the role of government to ensure everyone is provided with health care or health insurance is analogous to claiming that it is the government’s role to ensure everyone has access to a car, cell phone, and color tv.  Should everyone enjoy the right to these goods as well? Unfortunately, self-described Progressives today answer “yes”.

Many people have come to view modern conveniences as necessities without considering what has made the increased standard of living possible.  Human advancement for centuries was gradual or flat.  It was a social system built on the principles of freedom and individual rights that catapulted mankind into realizing achievements past generations could not even conceptualize.

Advocates of using the centralized, monopolistic instrument of government coercion to force a group to work for the special privilege of another attempt to constrict the very engine that makes this debate even possible – a political/economic system that respects individual human rights.

Perhaps our vision of history and human rights has been skewed by our crystal-clear 21st century LASIK eyesight….

In Liberty,

Jason Riddle