Flight from Reality
By L. Carlos Lara
We are in a serious financial crisis. And, it is not only Americans who have been holding their breath throughout this ordeal. Many other countries of the world also fear total collapse because our economic affairs are so intertwined. As we watch the stock markets rollercoaster downward, we wonder if anything can possibly work at this point.
With regards to this, I can sincerely say that for the first time in my life I have had that rare opportunity to actually know of something ahead of its time. I knew this not because I am clairvoyant, nor because I am special or brilliant. And certainly, none of the insights originated from me, but the truth is that I have actually known about the coming of this catastrophic event for quite some time. I have been watching it build for years. I even have the courage to say with complete confidence that I know what our government should have done and why; and because it did not do it, I have a pretty good idea where all this heading. The reason I know this is because I have been reading and studying classical economics daily for many years. If you read what I have read for as long as I have, you would see how “I got this way” and you would be the same way too.
I can assure you of one thing, that even though this panic is referred to as the most unprecedented crisis ever in history, what we are witnessing, including the extraordinary intervention by government and central banking, is nothing new in the world. David Ricardo (1772-1823), one of the most influential of the classical economist, long ago was looking into what appeared to be mysterious failings of the free market economy and discovered that it was systematic intervention by government in the market process which created depressions.
Later, Austrian economist Ludwig von Mises (1881-1973) building on the Ricardian Theory discovered the correct and fully developed theory of the “Business Cycle” and published his findings in Theory of Money and Credit in 1912. With it he was able to predict the Great Depression of 1929. Today, nearly 100 years later, it is still the best book ever written on the theory of money and banking. Nobel Prize winning Austrian economist, Friedrich Hayek (1899-1992), an understudy of Mises, brought the theory to the English-speaking world and it is today known as the “Austrian” theory of the business cycle.
In writing about economic depressions, their causes and their cures, Austrian economist Murray N. Rothbard said this of the Misesian business cycle theory in 1969:
“Thus, the Misesian theory of the business cycle accounts for all the puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust.” Mises then pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank.”
What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating (increasing the money supply) as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the sooner the depression-readjustment is gotten over with, the better. This means, also, that government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.
The government must never try to prop up wage rates or prices of producers’ goods; doing so will prolong and delay indefinitely the completion of the depression adjustment process; it will cause indefinite and prolonged depression and unemployment in the vital capital goods industries. The government must not try to inflate again in order to get out of the depression. Even if this re-inflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving in order to validate some of the excessive investments of the boom.
Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain strict hands off, “laissez-faire” policy. Anything it does will delay and obstruct the adjustment process of the market, the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue. The government must keep absolute hands off the economy and confine itself to stopping its own inflation and to cutting its own budget.” 1
Now here are the important questions we should be asking ourselves. Do we hear either of the presidential candidates saying anything remotely close to this? Is anyone in Washington, senate or house, saying anything like this? In fact, isn’t it true that what we do see is that they are doing exactly the opposite. Invariably they are making the situation worse.
How in the world did we get this way? Obviously, all problems of this magnitude do not arise overnight and it is naïve for us to believe that they have occurred in just recent administrations. This is the type of crisis that has been building for decades. In order to get at the proper solution, we must be able to see the problem clearly and to do that we must first establish that economics is not politics. One is a science concerned with the immutable and constant laws of nature that determine the production and distribution of goods; the other is the art of ruling. At the very heart of this economic problem is the abandonment of natural laws and principles. The answer is not in throwing huge amounts of money at the problem, or in running here and there trying to figure out where to put our money before it evaporates, but mostly in returning to basic fundamental principles of economics. Knowing these fundamental principles will tells us exactly what we must do. Hopefully the following few points may shed some light on all of this, give you a perspective, and be helpful.
Point # 1: The rejection of reason (the metaphysical realm of reality) has led to increased economic ignorance.
Over the past one hundred years the emphasis in the intellectual realm of the general populace has been upon “change” and “the changing of things” rather than upon the fixed regularities of the universe. The tendency of this focus of change has the effect of undercutting the basis for any fixed natural laws or principles. In other words, the rejection of the metaphysical is a world view in which there is no order except what man temporarily decides to impose on things.
Much of this way of thinking was generated by the Romanticism Movement which gained strength during the Industrial Revolution and which stressed harnessing the power of imagination to escape the scientific rationalization of nature. Also, the writings of Charles Darwin, which stressed that everything was undergoing change, were tremendously influential. This trend and way of thinking was an unfortunate reversal of the truth because humans are and always have been wholly dependent on there being a natural order to the universe. We cannot act on any given day without these fixed regularities.
There are three levels of reality, the physical, the metaphysical and the spiritual. We come to knowledge of these three levels in three different ways: the senses, reason and by revelation and faith. In terms of duration, in ascending order, the physical does belong to the realm of change, the metaphysical, however, belongs to the realm of the enduring and the spiritual to the realm of the eternal. Clarence B. Carson, on the metaphysical says this:
“It refers to a level of reality between the spiritual and the physical, that is at least an enduring realm, that can be reached only by reason, not by the senses, for it cannot be seen, felt, tasted, smelled, nor heard. It is the level of underlying natural law, of that which gives form and order to actual classes of physical beings, the structural part of reality.” 2
Reason, that special faculty for dealing with the metaphysical, is how we are able to understand self-evident truths. Self-evident truths are those truths which are their own evidence. They are not learned by reference to some other truth. This is what Thomas Jefferson meant when he said that “it is self-evident that all men are created equal”. The American founding fathers were cognizant of this reality. However, once this way of reasoning is abandoned or forgotten, we are left with no natural laws or principles and, therefore, no economic science from which we can discover the operations of cause and effect in economies. This is not to imply that economics does not involve change, but that these changes occur within the framework of fixities.
Dr. Paul Cleveland, writing for the Journal of Private Enterprise in 1997, says:
“Much of the failure of the United States can be traced back to faulty expectations. That is, people have expected far more from government than can ever reasonably be expected. These expectations spread with the propagation of romanticism in the nineteenth century. Utopian writers became quite popular and influential. As a result, the idea that a utopian society could be achieved became widely held. Clarence Carson regards people prone to this vanity as those on a ‘flight from reality.’ Nevertheless, having been captured by the notion that this is possible, many people are still trying to legislate the way to paradise.” 3
Point # 2: There is a natural order in Economics.
Men throughout history have looked upon the heavens with awe and wonder. They have viewed the heavens and the earth as the handiwork of God and have over time gained much instruction from them. Men such as Galileo and Isaac Newton, who gave mathematical expression to the motions of the heavenly bodies, spurred men with new zeal to seek out the natural laws in other areas, including the social and the physical. In the late 17th and 18th centuries various thinkers began to discover a natural order in economics. Since there have always been governments, certain thinkers began to declare that there was economic order that would be more socially harmonious if government would stop attempting to direct the economy. Certain French thinkers referred to this remedy as “laisse faire”: that government should stay out of managing the economy and let the natural order emerge. Carson writes that it was Adam Smith who gave the fullest expression of this concept in 1776 in which Smith explained that “there is a natural harmony between the self-interest of man seeking his own gain in the production and sale of goods and the general well-being of nations and societies.” In essence, “by pursuing his own advantage in his production, he produces the most of what he can that is most wanted, and in so doing he increases not only his own supply but that available to others.”
Smith goes on to further explain it this way:
“But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of the industry, or rather is precisely the same thing with the exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.” 4
Point # 3: All economies work through “human action.”
The natural order for an economy does not lend itself to precise mathematical formulations and any attempts to do so will fail. This is because, unlike the heavenly bodies, economies work through human action which involves countless of decisions and choices of individuals. The same thing can be said of other areas of social activity such as ethics. For this reason, economics’ natural laws are generally stated as “principles” even though the metaphysical nature of what they are referring to is never ignored.
It can also be said that economics differs from the other physical sciences, such as chemistry or physics, in that economics contains within it the element of man’s “selfish interest.” This important difference necessarily takes in the study of man’s human nature, the environment in which humans act, and the relationship between the two. Therefore, economics cannot be solely understood within the framework of mathematical formulas, equations or statistics. Instead, by using “deductive” reasoning, the economist moves from an already established position to one which follows logically from it, but is not otherwise known. He uses “inductive” reasoning when something is discovered or proved by numerous instances.
Carson on this says:
“His work proceeds upon the premise that things, including man, do indeed have a nature, that there is a natural order in the universe, that all creation is informed by and to the necessary extent can be in tune with that order.”
Of supreme importance is the idea of individual freedom in economic activities. The concept of a natural order in economics reinforces this idea. For example, if the pursuit of self-interest economically results in the general well-being of the individual and society at large, then it stands to reason that the individual ought to be free to pursue just that. And again, if there is a natural order to the economy, then it also stands to reason that it is not advantageous for government to continually intervene in the economy.
Message of Hope
So here now are three points to consider against the canopy of the economic environment in which we find ourselves in today. Clearly with what we see occurring today, the concept of natural and enduring order, as well as individual liberty, has been considerably undermined. The fact is that most all of us were born into the existing political and economic system of today and are just now becoming aware of how far we have strayed from the framework created by our founding fathers. The crisis, which is so unnerving, is forcing us to realize how we are grossly uninformed. This is precisely why we must become informed and teach this to our children. So long as we cultivate the seeds of freedom within ourselves, our families and inspire others to do the same; no government will be able to take liberty away from us. Eventually, the government will have to yield to what we want.
Henry Hazlitt (1894-1993) believed that the principles of economics, in that great tradition of limited government and free men, had to be taught to each succeeding generation lest we forget the foundations for the United States Constitution. Over time he has become one of my most admired authors and defenders of freedom. His national best seller and classic book “Economics in One Lesson” is a brilliant masterpiece considering his lack of credentials or advanced formal education. I would not be completely sincere if I did not admit that he inspires me to follow in his footsteps, for he did everything he could to spread the message that most needed to be heard.
“When I look back on my own career,” he told an audience in 1964, “I can find plenty of reasons for discouragement, personal discouragement. I have not lacked for industry. I have written a dozen books. For most of 50 years, from age 20, I have been writing practically every weekday: news items, editorials, columns, articles; some 10,000 words! And in print! The verbal equivalent of about 150 average length books!
And yet, what have I accomplished? The world is enormously more socialized than when I began…yet in spite of this I am hopeful. After all, I’m still in good health, I’m still free to write, I’m still free to write unpopular opinions, and I’m keeping at it. And so are many of you. So, I bring you this message: be of good cheer; be of good spirit. If the battle is not yet won, it is not yet lost either. Even those of us who have reached and passed our seventieth birthdays cannot afford to rest on our laurel’s and spend the rest of our lives dozing in the Florida sun. The times call for courage. The times call for hard work. But if the demands are high, it is because the stakes are even higher. They are nothing less than the future of human liberty, which means the future of civilization.” 5
Notes
(1.) Murray N. Rothbard, Essay published as a mini-book by the Constitutional Alliance of Lansing, Michigan, 1969
(1.) Ludwig von Mises, The Theory of Money and Credit, translated from German by H.E. Batson, Published 1912, Liberty Fund, Indianapolis
(2.) Clarence Carson, Basic Economics, Study Guide by Paul Cleveland, Ph.D., American text Book Committee
(3.) Paul Cleveland, Ph.D., Article, Government: The Good, the Bad and the Ugly, The Journal of Private Enterprise Fall 1997
(4.) Adam Smith, The Wealth of Nations, Published 1776
(5.) Henry Hazlitt, 15 Great Austrian Economist, Ludwig von Mises Institute, Auburn, Alabama, page 178,179