Whose Premises Should One Check?

There is a new site up on the web, called Checking Premises. Its stated purpose is:

This site is being created by serious students and proponents of Objectivism in response to the danger that some, who may seem in agreement with the philosophy, are in fact subverting it.

So who is subverting Objectivism? Judging by the content so far, the main culprit is Diana Hsieh of Noodle Food fame; but since the site is new, there may be other culprits in the future; I might even have the honor of being picked out myself.

Now, I myself have at least one serious disagreement with Diana Hsieh, and, since she is criticized for criticizing Leonard Peikoff, I should say I have a far more serious disagreement with Leonard Peikoff. But I will leave those brawls aside and simply ask the question whose premises one should check, one’s own or everybody else’s?

The origin of the phrase “check your premises”, as I am sure you already know, is this exchange in Atlas Shrugged between Hugh Akston and Dagny Taggart:

There is only one helpful suggestion that I can give you: By the essence and nature of existence, contradictions cannot exist. If you find it inconceivable that an invention of genius should be abandoned among ruins, and that a philosopher should wish to work as a cook in a diner – check your premises. You will find that one of them is wrong.

“Check your premises” is what Dr. Akston says – not “check any premise that someone may hold”.

Am I nit-picking and marking words here? I think not. Premise checking can only be performed in the privacy of one’s own mind. (Neither, by the way, should one spend every waking hour checking one’s premises; one should do it when discovering or sensing some contradiction in one’s own thinking.)

As a rule, other people’s premises are not available to you. The exception is if the other person clearly states some premise of his. So if someone tells you that “it is impossible to have knowledge about true reality” (I’m sure you know which philosopher I’m paraphrasing), then you know his premise. But is it even necessary to check it? Not unless you yourself hold this premise. (If you even read this, I assume you don’t.)

If the other person’s premises are not explicitly stated but merely implicit, one may of course wonder what his hidden premises are. But this is “philosophical detection” rather than “premise checking”. You are not checking the person’s premises, you are merely trying to figure out what they are.

Here is one small exercise in philosophical detection: I once received a letter from a prominent Objectivist containing the following line:

…you might want to check your premises and ask yourself why three different ARI Boards of Directors took retaliatory action against [two persons] and why virtually every other prominent Objectivist ceased dealing with [them] over the years …

Can you find the hidden premise here?

George Reisman 75 years

My favorite economist (and one of my favorite human beings), George Reisman turned 75 on the 13th of January. As a token of appreciation, I will quote my review of his magnum opus, Capitalism: A Treatise on Economics:

George Reisman’s Capitalism: A Treatise on Economics is perhaps the greatest treatise on economics of all time; it certainly ranks with such works as Adam Smith’s The Wealth of Nations or Ludwig von Mises’ Human Action; and in one respect I think it surpasses them: even the great pro-capitalist economists in the past have had contradictions and/or inconsistencies in their reasoning that undercut their message and make it weaker than it could and should be. If there are contradictions or inconsistencies in Reisman’s treatise, I have yet to find them.

An achievement of this kind is always an integrated whole. But if I were to single out one insight as the greatest one, it would be the “primacy of profits” principle, the insight that wages are a deduction from profits, not vice versa. This lays the ground for the most thorough and fundamental refutation of the Marxian exploitation theory that is possible; it also lays the ground for what actually constitutes economy-wide profit (the “net consumption” theory of profits) and the actual relationships between profits, wages and investment, and for many other things as well. To make a comparison, I think this discovery ranks with Adam Smith’s original discovery of the principle of division of labor, or the early Austrians’ discovery of marginal utility. I sincerely hope that this principle gets thoroughly understood by economists in the future.

Some other highlights I could mention merely because I have not seen them mentioned by other reviewers:

The demonstration that the rise in the average standard of living rests entirely on lower prices for goods and services. This fact is obscured by the presence of inflation, and other economists (notably the Keynesians) have managed to create a lot of fog around this issue. Reisman’s analysis completely dissolves the fog. And this point also has a positive corollary. The only thing that actually does raise the average standard of living is a rise in the productivity of labor; behind such a rise stand saving, technological progress and capital accumulation; and behind these stands man’s reasoning mind.

Understanding the extent of the gulf between a pre-capitalist, non-division of labor society and a modern division of labor society. (E.g.: understanding why a rise in population would be a threat in the former kind of society, but a source of great benefit in the latter kind.)

The demonstration that one of the things capitalism is regularly denounced for – the concentration of great fortunes in relatively few hands – is actually to the benefit of everybody, not merely the owners of those fortunes.

The demonstration of what is wrong with modern “national income accounting”. To make a long story short, the “modern” accounting method makes it look like almost all expenditure in the economy is consumption expenditure, while the truth is that most expenditure in a modern advanced economy is expenditure for the sake of further production.

And those are just a few of the highlights.

Capitalism is not always easy reading, and a beginner would be well advised to start with The Government Against the Economy (the whole of this book, however, is incorporated into Capitalism as chapters 6–8), or with some of Reisman’s shorter pamphlets (or with one of Reisman’s own favorites, Henry Hazlitt’s Economics in One Lesson). Some previous knowledge of Classical and Austrian economics is a great help. But, particularly in the first chapters, dealing with the role of material wealth in man’s life, there are passages that made me cheer aloud when I first read them, and possibly others will cheer aloud, too. (One such observation is that we value automobiles and other means of transportation for basically the same reason that we value having legs over not having legs.)

As is probably known, George Reisman was not only a student of Ludwig von Mises but also a student of Ayn Rand, and her influence permeates his book in more ways than I have space to tell. You may recall that one of the strikers in Atlas Shrugged was “a professor of economics who couldn’t get a job outside, because he taught that you can’t consume more than you have produced”. Well, this is what George Reisman teaches, for a thousand double-column pages and better than anyone has done before him.

(An earlier version of this review was published on Amazon in 1999. It was originally published under my own name, but for some reason my name has since disappeared.)

75 is a respectable age, but let us still hope that he has many productive years before him.

Rand and Mises on the Importance of Philosophy

It is common knowledge that Ayn Rand and Ludwig von Mises held the same, or at least very similar, ideas on such issues as the superiority of laissez-faire capitalism and limited government. It is also common knowledge that their philosophical frameworks were rather different. (For example, there is a strong Kantian influence in Mises’ philosophy, and that is anathema to Ayn Rand and her followers.) Ayn Rand even went so far as to say that Mises had no philosophy. I quote from Ayn Rand Answers:

Q: What do you think of the Austrian School of Economics?

A: I think they are a school that has a great deal of truth and proper arguments to offer about capitalism – especially von Mises – but I certainly don’t agree with them in every detail, and particularly not in their alleged philosophical premises. They don’t have any, actually. They attempt – von Mises particularly – to substitute economics for philosophy. That cannot be done. (P. 43; from the Q&A session after a Ford Hall Forum lecture in 1977.)

This does not say that Mises had the wrong philosophy; it says he had no philosophy at all. But this is, to put it diplomatically, a gross exaggeration. Even the scantest perusal of his books would tell one that he does have a philosophy. Whether this philosophy is true or false, or to what extent it clashes with Objectivism, is a different matter. (I have discussed those differences elsewhere.[i])

Ayn Rand also stressed that philosophy is inescapable and that every human being does have a philosophy, even though it most often is held implicitly and subconsciously:

As a human being, you have no choice about the fact that you need a philosophy. Your only choice is whether you define your philosophy by a conscious, rational, disciplined process of thought and scrupulously logical deliberation – or let your subconscious accumulate a junk heap of unwarranted conclusions, false generalizations, undefined contradictions, undigested slogans, unidentified wishes, doubts and fears, thrown together by chance, but integrated by your subconscious into a kind of mongrel philosophy and fused into a single, solid weight: self-doubt, like a ball and chain in the place where your mind’s wings should have grown. (Philosophy: Who Needs It, p. 6.)

But this flatly contradicts her answer in the Q&A session above. If Mises (or any Austrian economist) is a human being, he cannot avoid having some philosophy. Or are we to assume that has only a subconscious philosophy that is a “junk heap of unwarranted conclusions [etc.] “? But then, where is the “solid weight of self-doubt” in Mises? I have read most of Mises major writings, and some writings of other “Austrians” as well; and whatever is screaming from those pages, it is not self-doubt.

But I am actually poking fun here; because one obviously cannot expect total intellectual precision in a short, improvised answer in a Q&A session.

But what about the allegation that Mises down-played the importance of philosophy and, in effect, tried to substitute economics for philosophy? Well, there is at least one objection to this: Mises regarded economics as one branch of a more general theory of human action (what he called “praxeology”), and that theory is obviously philosophical in nature; it deals with such things as the relation of means to ends, which is clearly a philosophical issue. And whatever the differences are between Rand and Mises, Ayn Rand’s own ethics deals with the same subject.

What made me think about this is that I recently bought two posthumous books by Mises. (They are transcriptions of lectures he delivered.) One of them is called Marxism Unmasked: From Delusion to Destruction and is a transcription of a lecture series he delivered in New York in 1952. In the very first paragraph one can read the following:

Philosophy is important because every man, whether or not he knows it, has a definite philosophy, and his philosophical ideas guide his actions.

Although it is shorter than the Rand quote above, it is basically the same thought!

And Rand and Mises must have arrived at this idea independently of one another. I am fairly certain Ayn Rand did not listen to those lectures in 1952 (she was busy writing Atlas at that time), and Mises cannot be influenced by Rand, since the Rand quote is many years later.

But there is one allegation against Mises that can now be laid to rest: the idea that he down-played the role and importance of philosophy.

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1) See for example:

Objectivism versus “Austrian” Economics on Value

Objectivism and “Austrian” Economics – compatible or not?

Induction in Economics

Is Action an A Priori Category?

Scandinavian speaking readers may also read:

Till frågan om den ”österrikiska” skolans subjektivism

”Österrikarnas” subjektivism än en gång

Creative Destruction?

A while ago I wrote a piece called Stray Observations of Joseph A. Schumpeter. Now I want to make another stray observation.

I am currently reading Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism [or the first of their return]. Hülsmann devotes a section in the beginning of the book to presenting Schumpeter’s views. (It follows after presentations of Menger, Böhm-Bawerk and Wieser, and the point is to show where Mises stands in relation to his predecessors and contemporaries.) I quote:

First, Schumpeter argued that economic development was exclusively the result of pioneering “entrepreneurs” – a special breed as different from the rest of mankind as greyhounds are from poodles. Innovative entrepreneurs are the true driving force of social evolution. They impose unheard-of products and methods of production on a reluctant society of mere adjusters. (P. 172.)

So far, so good. One cannot contest that great innovators drive society forward. Think Edison. Think Steve Jobs. Or, for that matter, think Hank Rearden. Or go pre-historical and think Prometheus. Those innovators are the Atlases that carry the world on their shoulders. Objectivists have to agree with Schumpeter here. (I find it slightly exaggerated to call them the exclusive driving forces, but this is a nit-picking criticism.) Hülsmann continues:

It was this thesis in particular that roused the admiration of Schumpeter’s friends and colleagues. Twenty years later, Mises listed the book [Theory of Economic Development] as one of the top four German-language contributions to economics. It has continued to fascinate some of the best Austrian economists to the present day. (Ibid.)

But there is a second thesis, so I continue the quote:

Second, Schumpeter portrayed entrepreneurs as essentially resourceless market participants. They needed new fiduciary bank credit (“credit out of thin air”) to finance their projects because all other investment capital was already tied up in other projects. For Schumpeter, capital was essentially “purchasing power” rather than a quantity of real goods that could sustain workers in the production process. Bankers could therefore create “capital” out of nothing by simply printing additional banknotes. (P. 173; italics mine.)

What this means, to put it bluntly (and how else should I put it?), is that those innovative entrepreneurs, those Atlases that carry the world on their shoulders, are dependent on counterfeit money! Or, to put it in other words, they are dependent on inflation. If it weren’t for the creation of credit out of thin air and its inevitable consequences – higher prices, not to speak about business cycles – we would not be able to enjoy such things as the electric light, automobiles, radio and TV, computers, mobile phones, etc., etc. Those inventions would have stayed in the heads of the innovators, and they would never have materialized because of lack of funds. Sounds weird, doesn’t it?

Now I ask myself – a wee bit sarcastically – if this is the basis of Schumpeter’s famous phrase “creative destruction”. Is inflation and business cycles the price we have to pay for progress? Is monetary destruction the price we have to pay for enjoying the innovations of the creative geniuses?

Well, I guess your guess is as good as mine.

What If the One Percent Shrugs?

(Inspired by George Reisman.)

You have certainly heard the claim from the Occupy Wall Street movement that 1% of the population owns or controls most of the wealth in the economy, and that this wealth should be taken from this 1% and re-distributed to the remaining 99%.

Those protesters need a lesson in economics.

What they fail to realize is that the wealth of the one percent provides the standard of living of the ninety-nine percent. (Read the essay I link to, and read it carefully.)

The protesters live in a highly industrialized society, but their thinking is that of the Stone Age, or at best, the age before the Industrial Revolution. They do not realize that wealth in a modern capitalistic economy plays an entirely different role than it did in the pre-capitalist world. George Reisman explains:

In such a [pre-capitalist] world, if one sees a farmer’s field, or his barn, or plow, or draft animals, and asks who do these means of production serve, the answer is the farmer and his family, and no one else. In such a world, apart from the receipt of occasional charity from the owners, those who are not owners of means of production cannot benefit from means of production unless and until they themselves somehow become owners of means of production. They cannot benefit from other people’s means of production except by inheriting them or by seizing them.

Ludwig von Mises makes a similar point:

Destitution is in a feudal society the corollary of income inequality, but not in a capitalist society. The fact that there is “big business” does not impair, but improve[s] the conditions of the rest of the people. [Quoted in a blog post by Ari Armstrong at The Objective Standard’s blog.]

In the feudal society, and back through history to the Stone Age and the Neanderthals, some men’s wealth was at the expense of other men’s destitution; and if you did not inherit wealth, there was no other solution than to forcibly seize it and redistribute it. But this is precisely what has been radically changed by capitalism and the Industrial Revolution.

In today’s world, virtually everyone benefits from the wealth of the “one percent”, even if you yourself own none of that wealth. Some examples (taken from Reisman’s essay): When you drive a car, you benefit from the wealth of the automobile industry and the oil industry; when you use a computer or a cell phone, you benefit from the wealth of Microsoft and/or Apple; and so on. Radio and television sets, refrigerators and washing machines are other examples; and you can multiply the examples on your own.

Those things – cars, computers, etc. – did not even exist in pre-capitalist days. Today, they not only exist; they get both better and cheaper over time. This is the result of the fierce completion between members of the “one percent” club. One example given by Reisman is that when Henry Ford introduced the T-Ford, the price of cars went from about $10 000 at the beginning of the 20th Century to $300 in the mid 1920s. And nobody can have failed to notice that computers and cell phones have improved vastly over the decades and have also become cheaper.

One example from my own experience: Some twenty years ago, I bought a second-hand computer for about 10 000 SEK or about $1500. This computer used Windows 3.11 as its operative system, had 4 kilobytes RAM, and the size of its hard drive – well, I don’t remember exactly, but it was measured in kilobytes or perhaps a couple of megabytes. The computer I work on now I bought last year for about the same price. It has Windows 7, the hard drive is 465 gigabytes (of which 433 are still unused), and what the RAM is, I don’t know, but is certainly more than 4 kilobytes.

And this is not all. I bought my first computer second-hand. The price the former owner had originally paid for is was 40 000 SEK or $6000!

This is the result of Bill Gates, Steve Jobs and other computer entrepreneurs vying with one another to produce both better and cheaper computers.

In the pre-capitalist age, there were no feudal lords vying with one another to produce better ploughs for the farmers. They were vying with one another to produce better weapons, better war-fare techniques, and better ways of making the farmers’ lives miserable. There was no struggle to produce more wealth; there was only struggle to seize as much as possible of the little wealth that existed.

In George Reisman’s words, the OSW protesters “see the world through an intellectual lens that is inappropriate to life under capitalism and its market economy”. They have to believe that the fortunes earned by Henry Ford, or by Bill Gates and Steve Jobs, or by any great entrepreneur, is actually stolen from them, or from the rest of us. However perverse this view is, it has to be their implicit basic premise.

What would happen if those protestors actually got their way and all the wealth of the 1% were seized and redistributed to the 99%? The question is what would vanish first: the cell phones they use to communicate; the web sites, blogs and Facebook pages they use to spread their message; or the cars or even bikes they use to travel to the places where they hold their demonstrations; or the washing machines and other household appliances that give them the free time in which to protest.

That may be as it may: the end result will be starvation. Civilization would simply end, and we would be back to pre-industrial days. That would serve them right; but they probably only comprise 1% of the population; so what about the remaining 99% who do not deserve such a fate?

And what if the “one percent” were to shrug and leave the rest of us alone? Well, I do not have to tell you, because there is a novel that shows what will happen. So I will end with quoting from it:

When you live in a rational society, where men are free to trade, you receive an incalculable bonus: the material value of your work is determined not only by your effort, but by the effort of the best productive minds who exist in the world around you.

When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making, for the work of the scientist who discovered the laws that went into the making of that product, for the work of the philosopher who taught men how to think and whom you spend your time denouncing.

The machine, the frozen form of living intelligence, is the power that expands the potential of your life by raising the productivity of your time. If you worked as a blacksmith in the mystics’ Middle Ages, the whole of your earning capacity would consist of an iron bar produced by your hands in days and days of effort. How many tons of rail do you produce per day if you work for Hank Rearden? Would you dare to claim that the size of your pay check was created solely by your physical labor and that those rails were the product of your muscles? The standard of living of that blacksmith is all that your muscles are worth; the rest is a gift from Hank Rearden.

This is the speech the OSW protestors should listen to. But then: When will they ever learn?

Paul Krugman’s Dishonesty

One should not expect honesty from Paul Krugman, but this blog post takes the price.

Krugman starts out by trying to be funny:

One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.

And then goes on:

First of all, bank regulation is important even in the absence of bailouts. Don’t trust me, trust Adam Smith. Scotland invented modern banking; it also invented modern banking crises; and Smith, having witnessed such a crisis, favored bank regulations.

And then quotes Smith as follows:

Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

Krugman doesn’t supply a page reference for this quote, and with good reason. If people read this quote in its context, they would quickly see through Krugman. (If anyone wants to look it up, it is on p. 308 of the Cannan edition of Wealth of Nations.)

If one bothers to read the whole chapter, or at least the surrounding paragraphs, one would know what kind of restrictions Smith has in mind: they are all about restraining the issue of paper money! What view of paper money could be farther away from Krugman’s views on this subject?

So what does Smith say? This is the very next paragraph in Wealth of Nations:

A paper money consisting in bank notes, issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money; since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper, must necessarily be bought as cheap as it could have been for gold and silver.

In simpler words: Bank notes with 100% gold or silver backing are as good as gold or silver. What about notes with less than 100% backing? One paragraph later:

It would be otherwise, indeed, with a paper money consisting in promissory notes, of which the immediate payment depended, in any respect, either upon the good will of those who issued them; or upon a condition which the holder of the notes might not always have it in his power to fulfil; or of which the payment was not exigible till after a certain number of years, and which in the mean time bore no interest. Such a paper money would, no doubt, fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less; or according to the greater or less distance of time at which payment was exigible. [“Exigible” is an old word which, according to my dictionary, means “able to be exacted; demandable; requirable”.]

Again in simpler words: Bank notes with less than 100% backing (or where the gold/silver backing for some reason is uncertain) are not as good as gold or silver.

So how can modern Keynesians – who dismiss gold as a “barbarous relic” – invoke Adam Smith and pretend he was on their side? Krugman is simply counting on his readers’ ignorance.

$ $ $

It is a fashionable game among “social liberals” to quote Adam Smith out of context in order to insinuate that he was in favor of interventionist measures. Here is another example, which I routinely encounter in Sweden. They take the following quote (from p. 128 in the Cannan edition):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

This sentence is taken to mean that Adam Smith was well aware of “market failures” and would approve of such interventions as price controls and anti-trust laws. But in this case, they do not even bother to ignore some earlier or later paragraphs in Smith’s text; they ignore the very next sentences in the same paragraph:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though they cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. [Emphasis added.]

Smith then goes on to describe in some details how such assemblies are rendered necessary. But the main point here is that Smith advocates less government intervention, not more.

(Scandinavian readers may read this essay of mine on this subject from 1982.)

Happy Birthday, Ludwig von Mises!

Today, it is exactly 130 years since the greatest economist of the 20th century (and perhaps of all time) Ludwig von Mises was born. Let’s hope that in the heaven of economists where he has gone, the free and unhampered market economy is not just an imaginary construction, but reality.

If you haven’t already read it, take a look at George Reisman’s homage to Mises, Ludwig von Mises: Defender of Capitalism.

There is also a long essay by Murray Rothbard on Mises’ life and achievements on the Mises Institutes’s web site: Ludwig von Mises: Scholar, Creator, Hero.

George Reisman on inflation

I found the following succinct summary of the evil of inflation in George Reisman’s essay “Production versus Consumption”:

… for everyone who spends newly created money and thereby obtains goods and services, there must be others who suffer a corresponding loss. Their loss [...] takes the form either of a depletion of their capital, a diminution of their consumption, or a lack of reward for the added labor they perform – a loss precisely corresponding to the goods and services obtained by the buyers who do not produce.

I hope I do not have to repeat how this applies to “fractional reserve banking”.

Another gem from the same essay:

Where nothing in reality will serve, the consumptionist [Keynesian] is highly adept at bringing forth totally imaginary causes of economic catastrophe.

Such as the economic catastrophe Paul Krugman claims will take place, if we don’t go to war with aliens.

A Belated Open Letter to Ayn Rand on Fractional Reserve Banking

Dear Miss Rand,

I know you have been dead for many years and cannot read and answer this; but I simply do not know whom else I should address.

You were always a staunch advocate of the gold standard – and I have always assumed you meant a pure, 100% gold standard, not some diluted version. For example, in Galt’s Gulch only gold and silver were used as media of exchange, not the worthless paper money that circulated in the outside world. And Francisco, in his money speech, said: “Those pieces of paper, which should have been gold…”, not: “Those pieces of paper, which should have been partially backed by gold…”

So – although you never explicitly addressed this issue in your writings – I have assumed that you were opposed to the practice of issuing bank notes, or other media of exchange, that are not fully covered by gold and/or silver, and that you would regard this practice as a form of counterfeiting. I have assumed this on the basis of my own understanding of both economics and Objectivism. I have assumed that if one holds honesty as a virtue, one would not endorse such a dishonest practice. I have assumed that if one does not want to seek the unearned, one would not want to cheat others out of their money in this way.

For this reason, I was severely disappointed to read the following in an interview with one of your students and followers, Dr. John Ridpath:

I vividly remember another example of her ability to go to fundamentals to clear up a debate. After a Ford Hall appearance, back at her hotel suite, one of us asked her if she could help with a debate many of us were involved in. The issue was: is fractional-reserve banking, because of its creation of expanded credit on a given base, implicit theft or legitimate banking practice. We – several of us doctoral students, if not already PhDs in economics – were split on this issue. With characteristic focus, she asked several questions, revealing a surprising understanding, and then – bingo – the answer was evident to her. It is appropriate – it is a matter of informed, calculated risk and, in essence, not theft at all. (100 Voices: An Oral history of Ayn Rand, p. 353f.)

Bingo? – I don’t know what arguments were forwarded in this discussion, but it is obvious that you were led up a garden path. So let me explain, in some detail, why fractional reserve banking is indeed counterfeiting and in what way it steals money from honest, hard-working citizens.

Inflating the money supply leads inevitably to rising prices – this much is uncontroversial (even mainstream economists have some inkling of this fact). But the prices don’t rise uniformly. New money always enters the economic blood stream at some specific point. Some people get the newly created money first. Prices have not yet risen. They are in a position to buy at the old prices. As the new money ripples through the economy, prices rise. Then the people who are last in line to receive the new money (or even do not receive it at all) will have to bear the brunt of paying the higher prices.

Is this fair? Is this just?

In today’s world, where the generation of new money is in the hands of the governments and their central banks, the newly created money comes into the hands of the friends of the government: it may go to some branch of industry that the government, for some reason, wishes to subsidize. (In periods of war, it typically goes to the weapons and munitions industries; in periods of peace, it might go to road-building or whatever the government sees fit to subsidize.)

Objectivists do understand that inflation is a bad thing; and they do understand that the government is the culprit and that the government should not meddle and intervene in the economy; that it should adopt a policy of “hands off” or “laissez-faire”. But most of them (with some notable exceptions, one of them being your own student, George Reisman) believe that the same policy is acceptable, when performed by private banks. They envisage an economy on an gold standard with no central bank and no government interference, where private banks are competing in making loans. Under such a system, they claim, it is perfectly proper for the banks to make bank notes and lend out money that is not fully backed by gold (and/or silver). Why? Because the money is then not forced on you by the government; it is a voluntary transaction; it is a normal market phenomenon; it is, with your own words, “a matter of informed, calculated risk and, in essence, not theft at all”.

But the truth is that those fractional loans are also inflationary. The scale is smaller, but this is a difference in degree, not in kind. Just as with ordinary inflation, prices will rise, but they will not rise uniformly. Those who receive the fractional loans can spend the money before prices have risen; and those who don’t get such loans will have to bear the brunt of the rising prices. The case against fractional reserve banking is exactly the same as the case against government induced inflation.

And where is the “informed, calculated risk”? This phrase could be used of any counterfeiter. If I print some notes and then go out to buy something, I take a calculated risk: my notes might be accepted, or they might not, depending on my counterfeiting skills. (Of course, I also take the calculated risk of having to go to jail.) This does not change, if there are people who accept my notes, well knowing they are counterfeit but expecting them to be so well counterfeited that they will be accepted.

I have to stress this point, since the defenders of fractional reserve banking make a point that the borrowers of fractional loans know very well that they are fractional, so they are not cheated; they are informed and take a calculated risk. But the non-borrowers – those who will end up paying the higher prices – are not informed at all!

If everyone were informed, this newly created money out of thin air would simply not be accepted. Secrecy on the part of the bank and its borrowers and ignorance on the part of the general public are a sine qua non when it comes to fractional banking.

Against every form of inflation, whether done by government-controlled central banks or private banks, there is an economic and a moral case. The economic case is that it leads to higher prices and causes misallocations. It leads to a “boom-bust” cycle, as Mises and other members of the “Austrian” school have explained so well. The moral case is that it cheats some people out of their hard-earned money; it is, indeed, a form of theft. And there is no dichotomy between the moral and the practical: the moral is the practical (as you yourself has explained so well).

George Reisman has said it best:

What underlies the practical advantages of the 100-percent-reserve gold standard over any form of fractional-reserve system is its moral superiority. It operates consistently with the law of excluded middle and does not attempt to cheat reality by getting away with a contradiction. It recognizes that lending money precludes retaining that money in one’s possession, and that retaining money in one’s possession precludes lending it. […]

Shysterism in any form is always slippery. Thus if it occurs to anyone to argue that the banks’ customers are not victims of fraud because they clearly know and understand that their funds are being lent out, then the answer is that in that case they would be parties to fraud. Their fraud would be the attempt to make payment to others not with money or reliable warehouse receipts for money, but with claims to debt. They would be engaged in the willful contradiction and deception of claiming to pay someone when in fact imposing on him the position of being a grantor of credit. (Capitalism: A Treatise on Economics, p.957f.)

Of course I understand that you are not in a position to answer me, and that it is unfair to write open letters to dead people. But John Ridpath and at least some of the other doctoral students and PhDs who took part in this discussion are still alive and could tell what was actually said in it. As I said, I cannot know what arguments were offered; I only know the conclusion, and I disagree emphatically with it.

Finally, I do hope this was an innocent error of knowledge on your part. I cannot support a philosophy that preaches virtues like honesty and justice and then endorses counterfeiting. The only “virtue” involved here is hypocrisy.

(Also published as a Facebook note.)

Earlier on this subject:
Is “fractional reserve banking” compatible with Objectivism?
And, in Swedish:
Varför “fractional reserve banking” bör förbjudas
“Fraktionella reserver” än en gång

PS. In all fairness I must add that Ayn Rand otherwise had a very good understanding of money, of the nature of credit, and of the evil of inflation. Apart from Francisco’s money speech in Atlas Shrugged, I also recommend her essay “Egalitarianism and Inflation” in Philosophy: Who Needs It. That she did not apply these insights to the subject of fractional reserve banking in a free economy is something of a riddle.

Brian Simpson teaches Reisman and Rand

Brian Simpson (the author of Markets Don’t Fail) has asked me to forward the following announcement:

National University of La Jolla, CA has a limited number of scholarships available for three online courses that focus on free-market economics and the philosophical foundations of capitalism. These scholarships are being funded by a grant from the Charles G. Koch Charitable Foundation. The scholarships cover the full tuition for the courses plus the application fee to NU. Two courses (ECO 401 and 402, Market Process Economics I and II, respectively) use Capitalism: A Treatise on Economics by George Reisman as the required textbook. One course (ECO 430 – Economics and Philosophy) uses Ayn Rand’s The Virtue of Selfishness and Capitalism: The Unknown Ideal as the required textbooks. These courses can be taken from anywhere in the world, as long as one has access to the internet. The courses incorporate live chat sessions in which the professor and students interact in a virtual classroom, much as they would in a traditional classroom. The courses run for the next time in the summer and fall of 2012. More information about the courses on the web can be found here:

ECO 401 – Market Process Economics I
http://www.nu.edu/OurPrograms/SchoolOfBusinessAndManagement/AccountingAndFinance/Courses/ECO401Syllabus.html

ECO 402 – Market Process Economics II
http://www.nu.edu/OurPrograms/SchoolOfBusinessAndManagement/AccountingAndFinance/Courses/ECO402Syllabus.html

ECO 430 – Economics and Philosophy
http://www.nu.edu/OurPrograms/SchoolOfBusinessAndManagement/AccountingAndFinance/Courses/ECO430Syllabus.html

To apply for one or more of these scholarships, send your name, transcript from your high school or university, and an essay of no more than 750 words discussing why you believe you deserve a scholarship and your future education and career plans to Dr. Brian P. Simpson. Send them to bsimpson@nu.edu<mailto:bsimpson@nu.edu> or 11255 North Torrey Pines Rd.; La Jolla, CA 92037. Please indicate which course or courses for which you are applying for a scholarship. You can apply for one to three scholarships, depending on how many courses you are interested in taking. Note that to receive a scholarship you will have to apply to National University and enroll in the course(s). If you have questions, please contact Dr. Simpson at the email address above or 858-642-8431.