Nelson Nash extracted the following from an interview published in the Austrian Economics Newsletter Volume 17, Number 2 (Summer 1997)
Jesús Huerta de Soto, professor of economics at the Complutense University of Madrid, is Spain’s leading Austrian economist. As an author, translator, publisher, and teacher, he also ranks among the world’s most active ambassadors for classical liberalism. He is the author of a Spanish work on economic calculation and the Austrian method, a treatise on money and banking, the introduction to the new Spanish edition of Human Action, and articles in monetary and history of thought journals in four languages, including The Review of Austrian Economics. He was interviewed following his keynote address at the 1997 Austrian Scholars Conference at Auburn University.
de SOTO: My family business is life insurance, which is the only trait I have in common with John Maynard Keynes who in the 1930s chaired the National Mutual Life Assurance Society of London. This is a very traditional business, having evolved for 200 years without any state intervention.
Comment by RNN — Practically no one knows this fact.
[Austrian Economics Newsletter] AEN: Keynes apparently did not draw the same lessons about human action from working in the insurance business.
de SOTO: It turns out that Keynes not only corrupted economics. He also corrupted the practices of life insurance. He broke with the traditional policies of his company by valuing assets at market value instead of historical value. In the short term, it gave him an enormous competitive advantage. Keynes was able to distribute dividends to his clients against unrealized capital gains.
When the stock market was going up, it was wonderful. But when the Great Depression arrived, his company nearly went bankrupt. Both the British and the American insurance industries are suffering from his disastrous departure from tradition. On the continent it is still the practice to value assets at historical cost and only pay dividends against realized capital gains.
Comment by RNN — This appears to me to be the forerunner of the idea of Variable Life. It didn’t work then, and it won’t work today.
de SOTO: This problem of guaranteed old-age pensions is significant in all western countries. In every case, the liabilities are enormous, but demographics have made them essentially unpayable except through intolerably high taxes. Before we can know what to do about these systems, we have to understand their inherent contradictions.
First, these systems purport to be about saving money, but in fact they discourage savings. The taxes they require take the place of what would otherwise be private savings. And they encourage people to believe they will be taken care of in the future and therefore they don’t need to save. Empirically, then, the rise of social security has paradoxically coincided with huge declines in savings. This fall in savings then drives up interest rates and reduces overall investment in ways we cannot account for.
Second, no matter what the law says about how employees and employers share the burden of contributing to the system, from an economic point of view, the worker pays the whole tax. Mises first developed this insight in Socialism, where he said social insurance contributions always come at the expense of wages.
Fourth, the system cannot work as both insurance and welfare, because these are incompatible concepts. Private insurance is based on the principle that benefits are linked with contributions. Welfare is based on need. With ever-declining returns, the “insurance” element of the system is aborting the “welfare” element, and vice versa.
And why do we have these systems? Supposedly because some people would not be able to provide for themselves. But this is like saying that because a small number of people can’t get food, everyone in the whole population should be forced to eat in government canteens.
Comment by RNN — Where do these fallacious ideas come from? Socialism — Communism — Welfare state — Paternalism — name whatever ism you like and they all are nothing more than examples of “Man trying to play the role of God” as I pointed out in NELSON’S LIST OF UNDENIABLE TRUTHS.
As Paul Rosenberg describes so perfectly in FISH ARE THE LAST TO NOTICE THE WATER – this phenomenon has been the dominant problem with mankind since the beginning of time — and that it won’t work! The hubris of man is really unbelievable!
AEN: Do you think economists should take religion more seriously than they have?
de SOTO: Certainly. Religion plays an important role in the life of an economy. It transmits from generation to generation certain patterns of behavior and moral traditions that are essential for the rule of law, which makes economic exchange possible. For example, if contracts are not kept, society can fall apart. Religion, not the state, is the primary means for imparting to us a sense of our obligations to keep our promises and to respect the property of others.