Ideas on Liberty: February 2010

Wednesday 17 February 2010

Monetary Stability and the Case for Gold Standard (University paper)

I. Introduction

My aim in this research paper is to investigate whether the current monetary arrangement has achieved the promised stability, and if not, what other options can we look to solve the problem from an Austrian School perspective. We can summarize the current monetary arrangement as an interdependent relationship between the central bank, fractional-reserve banks and fiat money. Even though this kind of arrangement was originally put forward by independent influential bankers, its contemporary adherents mainly come from the camps of Keynesianism and that of Chicago’s monetarists. Both schools believe the free market is incapable of properly handling the supply and demand for money, and therefore they say, the management of money should be centralized under the control of a monopoly institution with direct ties to the state.

In United States, for example, the said monetary arrangement has come into place in 1913 when the Federal Reserve system was created. Before the Fed, America had two central banks which were later abolished. What persisted, however, was a proto fractional-reserve banking system instituted in 1837 to start a period known as the “Free Banking” era which lasted until 1862. During that period, banks were free to issue notes against their specie, while the states regulated their reserve requirements as well as interest rates for loans and deposits. This changed in 1864 with the National Banking Act, one of the purposes of which was to create a uniform currency, forcing banks to accept each other’s currencies at par value, as well as finance the American Civil War that was going on. This system was characterized with expansions and contractions which led to several economic slumps. None was more serious, however, than the Panic of 1907. During this recession, the government allowed the banks to suspend their specie payments temporarily as it had done before. The crisis was a strong consolidation of previous claims from businessmen and politicians alike to create a European-style central bank to serve as “a lender of last resort” (Rothbard, 2002, p. 240). Its function would be to provide the fractional-reserve banking system with the desired liquidity in order to prevent any future crises such as that of 1907. In 1910, representatives of influential bankers, those of the J.P. Morgan and the Rockefeller families, gathered in a secret meeting in Jekyll Island, New York. They drafted an agreement, later known as the Federal Reserve Act, which was presented in Senate through their representatives and friends, culminating in the Fed that we know today. Supporters of the central bank believed that recessions came as a result of liquidity shortage needed to supply the banks who engaged in fractional-reserve banking. To them, the creation of the Fed meant that those problems were solved because whenever banks were in short of cash, Fed would be there to print it.

II. Has Monetary Stability Been Achieved?

Since the creation of the Fed in 1913, the U.S. alone has experienced 19 recessions (National Bureau of Economic Research, 2008). The most recent one which started in 2007 is being compared to the Great Depression. After many insolvencies, especially on part of the banks, the unemployment rate continues to rise despite the Fed’s endeavors to mitigate the crisis. The Fed chairman Ben Bernanke has decreased interest rates to almost 0% for the first time in the U.S. history, yet many say that the recession is far from over. Fearing that the economy has fallen in “the liquidity trap,” the U.S. government pressured Congress into accepting the $700bn stimulus plan as part of the fiscal policy to revive the economy. The stimulus along with the previous monetary policy actions haven’t showed any considerable signs of improvement, and so far lending in particular remains depressed. Now maybe it’s unfair to criticize the Fed, as one may argue that if it wasn’t for them the recession would have been even worse, and the total number of recessions after its creation would surpass 19. Some may argue that Bernanke & co. need more time to get the economy going, so people have to be patient and trust them. These arguments, however, appear dim in the light that there is already a school of economic thinking that has presented strong theories in contradiction with the aims and practices of centralizing the monetary system. Meet the Austrian School of economics.

Austrian School economists say that Fed’s attempts to restore “price stability” are in vain. According to them, attempts to achieve such a thing are based on flawed understanding of money. At the root of price stability is the idea that money is “neutral” (Shostak, 2003). By neutral, it is meant that changes in the quantity of money have no effects whatsoever in the real economy. Proponents of the idea of neutral money believe that changes in the quantity of money only affect its purchasing power, and do so proportionately. What is ignored, however, is the importance of relative prices of goods (Mises, 1938). For example, if a tomato’s exchange rate is two apples, then one apple is half of a tomato. Let’s say the price of tomato is $1, making the price of apple $0.5. Now if the quantity of money is doubled, prices will increase by 50%, making tomato cost $2 whereas the apple $1. According to this view of thinking, the increase in the money supply didn’t alter the fact that the trader can still exchange apples to tomatoes at a ratio of 2:1. However, this does not reflect the reality, for when the Fed increases or decreases the money supply, prices don’t change uniformly but rather fluctuate in different ways. It is therefore important to realize that the effects of supply and demand for goods are intertwined with the effects of supply and demand for money when it comes to prices. These effects cannot be separated, because if the price of tomatoes increases by 10% and those of apples by 2%, knowing the overall increase in the quantity of money will not help to single out these isolated effects (Shostak, 2003). This makes price stability simply futile, and any attempt to achieve it will only distort the capital production structure by misleading economic agents into misallocating resources.

Economy is in a continuous perpetual change, in which human action exposes preferences concerning money in the same way that it affects the demand and supply for other goods. The quantification of prices by adding different goods together and then dividing that number by the number of goods can only lead to arbitrary assumptions about any “level” of prices. Goods such as shirts or TV sets cannot be added together, because human judgment is subjective in evaluating goods that are even homogenous. Secondly, there is no “level” of prices which changes proportionately, because in reality, goods of prices change in different ways both absolutely and relatively. This kind of flawed thinking is in contrast with the definition of price itself; which is the units of currency paid for a particular unit of good or service at a definite point in time, at a definite place.

In this the great Austrian scholar Ludwig von Mises said, “Human action originates change. As far as there is human action there is no stability, but ceaseless alteration” (1996, p. 223). Therefore, the Fed’s goal of achieving price stability is impossible because in a changing, dynamic world, money cannot remain neutral. What made the concept of “price stability” important among economists who support this monetary arrangement are only the shortcomings of the centralized monetary system. It is the failure of managing money that historically caused massive fluctuations in prices and therefore spawned the need for “stability” (Mises, 1996, p. 219).

III. The Case for Gold Standard

If the current monetary arrangement hasn’t achieved stability, what options are there to provide it? The classical gold standard has garnered as many advocates in its favor as much as it has turned people away from it. Some see it as an imperative for the stability of the currency system; others see it as the cause of Great Depression.

Austrian School economists support the concept of sound money. First, sound money is the ethical position that people ought to be free to choose their desired medium of exchange, devoid of any coercion or regulation such as the contemporary legal tender laws. In this Mises claimed, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right” (1981, p. 454).

Second, sound money implies the recognition of the fact that when people are free, they tend to choose commodity money as a medium of exchange, such as gold or silver, just like they have done for centuries. Economists have tried to explain the reason why money has value (purchasing power) and why people use it, mainly through either the idea of government decree forcing people to use it or through “social convention” (Varian, 2004). However, in order to understand the benefits of a gold standard as Austrian economists maintain, it is important to understand the origins of money first.

The first to explain the origins of money in Austrian circles was Carl Menger, the alleged founder of the School. Other economists, particularly W. Stanley Jevons, contributed to the debate of origins too. Many questions regarding the value of money, however, were still left unanswered and what surfaced was merely circular reasoning. “Money has value because it is accepted. And why is it accepted? Because it is accepted!” (Shostak, 2004). This was the case until 1912, when Mises introduced the famous regression theorem in his book The Theory of Money and Credit. In order to understand regression theorem, it is important to make a distinction between the value of money and that of other goods. Using the subjective theory of value, Austrian economists maintain that people make different evaluations of goods based on the goods’ abilities to satisfy peoples’ unique demands. In the case of money, the only demand is its purchasing power, but since that is the issue in question, explaining the value of money through “its value” is merely circular reasoning. In turn, Mises implies, money has value today based on the purchasing power it had yesterday. And money had value yesterday, based on its value of 2 days ago. In this time dimension, one can regress the value of money until it reaches a specific point. That specific point is the moment where money was linked to a commodity, such as the dollar which was essentially only a unit of measure for gold. When we reach the point of a commodity, then its value can be explained by the simple law of supply and demand, i.e. in a barter economy (1996, p. 409). In this, Rothbard elaborates, “In contrast to directly used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold)” (1990, p. 13).

Having clarified the origins of money, we can see that there’s an established natural link between people’s desire to hold some pieces of paper and their inevitable link to some commodity at some point in time. It is in this breath that we can determine that a stable currency system can only stem from this natural link with commodities that human behavior has established throughout centuries. Any escape from this reality will only throw us into the realm of the current monetary arrangement, a sea of ceaseless fluctuations in the value of money, yielded by the lack of capacity to manage it. People have used gold for thousands of years, voluntarily, and ironically; the only reason that they use government-mandated paper-money today is because that very money once upon a time had a direct link to gold. In addition to protection from the flawed monetary policies of the central bank, the gold standard would also protect from the fractional-reserve banking system, inhibiting banks from expanding beyond their means. In middle ages, when no central bank existed and a proto free-market banking scenario was in place, banks were unable to expand their credit beyond the specie in their deposits, or else they’d go bankrupt. Establishing a 100-percent gold standard today would provide the same guarantee and secure people’s deposits as well as overwhelmingly reduce bank insolvencies. However, it is important to reflect on the properties of something by inviting others to express their criticisms, and then see whether that something can be justified.

IV. Its Critique and Austrian School Responses

In order to see whether the gold standard is useful or not, it’s important to answer to its critics in an attempt to justify it. The critics of gold standard are usually the Keynesians, who lament it for inhibiting the government from using the tools of monetary and fiscal policy to correct the “inefficiencies” of the market. On the other side, Chicago’s monetarists directly blame the gold standard for the Great Depression as well as its restrictions on what they believe should be a fixed, steady, monetary growth rate.

One critique is that if the gold standard had been useful, it would have been in place today. And because it was abolished, there’s strong evidence that in general people were against it. To answer to this critique, it’s crucial to realize when the gold standard was repealed. Countries went on and off gold standard in different periods throughout their history, but they never did it as uniformly and as massively as in World War I. It is this period that is usually marked in history as a point in which the governments abandoned their monetary ties to any commodity. But was gold’s ineffectiveness the problem? No. The problem was war. Governments’ military campaigns soon drained their funding, which could only be supplemented by further taxes or borrowing. Since wars generally bring economic turmoil, governments knew that raising taxes to shore up the budget was out of question. Borrowing was also not a viable option since many governments were involved in the war themselves, so there were only a very reluctant few willing to lend. The only option left was inflation, and in gold standard, that wasn’t possible. It was therefore the political need to maintain such a destructive war that brought about the end of the gold standard. On this, Mises recalls, “The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard” (1981, p. 461).

Another critique is that the increases in the quantity of gold will have the same effect on prices as increases in the quantity of money. Though, critics maintain, this won’t be as severe as in an unbacked-money system, it will still cause fluctuations. Mises explains that an increase in the quantity of gold doesn’t necessarily mean an increase in the riches of the owners of the mines. “For them, the annual output of the mines does not mean an increase in riches and does not impel them to offer higher prices. They will continue to live at the standard at which they used to live before” (Mises, 1996, p. 414). According to him, the incoming of gold in the market cannot start up a process of depreciation, as this new quantity is neutral with regard to prices, and if anything, prices have a general tendency to fall over time. In addition, the average increases of gold per annum range only from 1 to 2% (Blumen, 2009). Compare this to the increases in the paper money supply. Only from February 2008 up to December 2008, Fed’s yearly-rate growth of its balance sheet jumped to 153% (Shostak, 2009).

Another critique of the gold standard comes from Milton Friedman, but this time not because it overrides his “3% rule for the Fed,” but because using gold “requires the use of real resource to add to the stock of money” (1962, p. 40). He said that people have to “work hard to dig the gold out,” and that this “establishes a strong incentive for people to find ways to achieve the same result without employing these resources” (1962, p. 40). It is, therefore, Friedman’s fear of economic waste that makes the use of real resources for money inadequate. Preceding this statement, Friedman had cherished the importance of gold before, saying, “The (classical) liberal is suspicious of assigning to government any functions that can be per formed through the market, both because this substitutes coercion for voluntary cooperation in the area in question and because by giving government an increased role, it threatens freedom in other areas” (1999, p. 17). This shows considerable acknowledgement on his part for the importance of gold in the liberty of individuals. However, when you take these two claims for comparison, you realize that Friedman is implying that there is a tradeoff between liberty and efficiency. In addition, Austrian School economist Walter Block raised another counter-argument by asking “why did then people use gold as money if it was resource costly?” (Block, 1999, p. 17). The rest of Friedman’s argument is a bit confusing, however, when one considers his statement made on the same subject, “If people will accept as money pieces of paper on which is printed ‘I promise to pay - units of the commodity standard,’ these pieces of paper can perform the same function as the physical pieces of gold or silver, and they require very much less in resources to produce.” (1962, p. 40). It is unclear how that paper money will perform the same action as the commodity-backed money, unless what Friedman meant was that paper money would be used physically in transactions, whereas that couldn’t be the case with gold. The proponents of gold standard don’t advocate the use of gold physically in transactions; they simply say that all the paper money in circulation should be backed by a market-chosen commodity (it doesn’t have to be gold necessarily). Nevertheless, the usage of gold in everyday transactions is inconvenient.

There are other arguments against the gold standard, but there are other responses on its defense too. Discussing them, as well as other consequences of using or not using gold, would drive us into many different fields of economics. It is therefore impossible to cover more of them in this paper.

V. Conclusion

After conducting the research, I concluded that there is vast evidence that the current monetary arrangement has failed to achieve the stability it promised us. This may be partly because of the flawed understanding of money by the bureaucrats managing it, and partly because what can’t be known (or understood), can’t be managed. In consideration with other viable options, the gold standard remains a candidate with satisfactory results from the past as well as good economic theories in its defense.

The more that individuals leave to the government, the less they get to decide for themselves, so implicitly they centralize decisions on the hands of a few. In addition, government has a rich history of abuses by special interests at the expense of the people it was conceived to protect. Maybe the time has come for radical changes, especially in the monetary system. Congressman from Texas, Dr. Ron Paul, recently wrote a book titled End the Fed, claiming that the Fed has failed Americans and that it should be abolished if the economy wants to pursuit a path of stability. For those who agree and have been direct victims of the government’s manipulation of currency, their motto may well be “FED up!”

Reference List

Block, Walter. (1999). The Gold Standard: A critique of Friedman, Mundell, Hayek and Greenspan from the free enterprise perspective. Ludwig von Mises Institute, 17.

Blumen, Robert. (2009). Does gold mining matter? Mises Daily.

Retrieved Dec. 9, 2009, from http://mises.org/daily/3593

Friedman, Milton. (1962). Capitalism and freedom. The University of Chicago Press, 40.

Mises, Ludwig. (1938). The non-neutrality of money. Springer.

Mises, Ludwig. (1996). Human action. Fox & Wilkes, 223. 219. 409. 414.

Mises, Ludwig. (1981). Theory of money and credit. Liberty Press, 454. 461.

National Bureau of Economic Research. (2008). List of business cycles.

Retrieved Dec. 6, 2009, from http://www.nber.org/cycles/cyclesmain.html

Rothbard, Murray. (2002). A history of money and banking in United States. Ludwig von Mises Institute, 240.

Rothbard, Murray. (1990). What has the government done to our money? Ludwig von Mises Institute, 13.

Varian, Hal. (2004). Why is that dollar in your pocket worth anything? New York Times.

Retrieved Dec. 5, 2009, from http://people.ischool.berkeley.edu/~hal/people/hal/NYTimes/2004-01- 15.html

Shostak, Frank. (2004). How does money acquire its value? Mises Daily.

Retrieved Dec. 7, 2009, from http://mises.org/daily/1430

Shostak, Frank. (2003). The myth of price stability. Mises Daily.

Retrieved Dec. 4, 2009, from http://mises.org/daily/1303

Shostak, Frank. (2009). Where is the U.S. economy heading? Mises Daily.

Retrieved Dec. 5, 2009, from http://mises.org/daily/3898

Saturday 13 February 2010

Briefly on China’s Growth and Future

Some economists, usually Keynesian, have suggested that China’s recent growth has come as a result of following the so-called “exports-growth” model. The explanation behind this is that China is doing well because of exporting so much (China overtook Germany in 2009 as the largest exporter). This has been possible, Keynesian economists say, due to China’s central bank low interest rate policy, which still fights to keep the Chinese currency yuan (RMB) artificially undervalued against the dollar (the biggest buyer of Chinese products). This in turn makes Chinese products cheaper vis-à-vis the dollar and other currencies and therefore stimulates export in a large scale.

This, however, is not true. Anyone that understands the capital theory well knows that growth can only come from an increase in capital. Nothing else can make growth possible, and neither can China’s central bank nor its other socialist Gosplan ministries which strive to calculate. Capital increase, in turn, is only possible through savings and investment. Without one’s abstention from consumption, capital increases are not possible. If China has grown, it’s only because its citizens save more than they consume. The Chinese hard-working citizens have an incredible savings rate standing at 57%, in contrast to that of U.S. which is a symbolic 8%. This means that the average Chinese citizen saves more than half of what he/she earns in a year. The saved income is then either invested somewhere or loaned to banks which then fund Americans’ and Europeans’ consumption-intensive behavior. Naturally, the capital accumulation at this scale couldn’t have been possible without China’s liberalization reforms undertaken by the Deng Xiaoping regime. The massive economic liberties and privatizations that emerged allowed for the division of labor to a satisfactory extent. The slashing of government spending, regulations and interventions reduced crowding out effects and produced more positive outcomes for the Chinese people.

The role of central bank in all this is entirely negative. Instead of paving the way for people to rightfully accumulate capital per head and thus increase their standard of living, the central bank is engaging in inflationary policies that have many severe effects. First, low interest rates meant to make the yuan so massively undervalued will distort (and have already distorted) the capital structure. By messing with the market’s time preference, the sudden availability of cheap credit will induce entrepreneurs to embark on investment projects which are not profitable because they are a) unsustainable and b) the demand for them is temporary (also fueled due to easy credit). When the central bank increases the interest rates later in order to avoid high inflation, these investment projects will come under enormous pressure and will have to be liquidated. In short, the policy will create recessions. The second negative effect is the destruction that this policy will have on savings. Although this may not be as risky in China, exactly because the pool of savings is good, it nevertheless will artificially increase consumption and direct it more towards consumable goods, leaving the capital goods to deplete. Although the policy will favor companies that export, it will only do so at the expense of the Chinese citizens who are faced with rising domestic prices. If China’s central bank really wants to help its people, it should abolish and leave the monetary system in private hands.

One should also note, however, that China is not growing at the rate that it is being reported. This is because a) GDP is not an accurate measurement of one country’s growth, and b) China is still a socialist country which means it will falsify its economic indicators to promote the “socialist paradise.” GDP is based on the Keynesian framework that every spending is somebody’s income. GDP therefore measures spending in an attempt to also measure income and therefore “overall wealth.” This is done by multiplying the quantity of goods by their prices. China’s monetary pumping which has caused the prices to rise will therefore show as an increase in wealth in the GDP. In real terms, however, the Chinese are less prosperous. The same inflationary policy is also making it possible for the GDP of U.S. to rise even at a time when the effects of the crisis have yet to unfold entirely. This is without mentioning many other deficiencies of GDP, such as the failure to account for leisure. China’s socialist nature and recently growing nationalism will want to sell China as an emerging super-power and a key player in world affairs. This means that statistic falsifications are being done on daily basis. The limitations that the government places on foreign investigators and journalists alike impede them to give an unbiased account of the state of Chinese economy. It’s no secret, however, that China is growing at a fast pace.

While that is so, it doesn’t mean that China is without challenges in the future. Both domestically and internationally, there are obstacles needed to be overcome. While a free, libertarian China would have no problem in dealing with them, the current regime will sweat hard to keep their act together and survive the bumpy ride. Domestically, China should expect a lot of dysfunctions in some private sectors due severe misallocations of capital fueled by the above-mentioned central bank’s low interest rate policy. Internationally, China will have problems dealing with the dollar crisis, as they have around over $2 trillion reserves in dollars. Although the weak dollar will give China political capital to ask for important commodities such as oil to be denominated in any other currency (e.g. euros), their pile of serves will mean they are more or less depended on dollar’s value. In this sense, China will look to get rid of the dollars as quickly as possible. Whether China continues to grow or not is a matter of the regime. The more restrained that they are and the more they leave to the Chinese individuals to decide for themselves, the more prosperity will China have. On the other hand, the more they interfere in the economy through the central bank, regulation increases or subsidies, the less prosperous will China be. The goal for a better future is simple: continue economic liberalizations and let the people be.

Tuesday 9 February 2010

Cooling Down Global Warming

The anthropogenic global warming (AGW) idea is the current trend. With the Intergovernmental Panel on Climate Change (IPCC) and politicians all over the world at the forefront of the crusade, the message of saving the world from disaster is being lauded ever more. Based on “scientific evidence,” politicians are urging direct action to combat carbon dioxide emissions which they believe to be the main cause. Considerable action on the part of private non-governmental groups is also underway, with organizations such as Greenpeace going as far as to violate private property in a “peaceful” attempt to raise awareness.¹ The general public’s stance doesn’t seem to be crystal clear, but there is no doubt that the idea of AGW is now widespread and that people are very lenient toward accepting it.

On the very other side, there are the skeptics who have offered their own opposite views, sometimes even under conditions of oppression.² Skeptics’ principle of refusing to take for granted anything that is deemed to be “standard truth” or “a consensus” has generated doubts over the validity of the theory and its practical implications. As a result, skeptics have mounted a stronghold against the AGW alarmists, refuting both the basic idea as well as the measures “needed” to be taken.

Governments, however, are moving quickly to enact legislation in line with the goals of cutting back CO₂ emissions. The cap-and-trade act endorsed by President Obama in the Congress as well as the highlighted Copenhagen Climate Conference are just two examples of governmental intent on taking concrete action. We should expect significant changes in the coming years, changes that may have profound effects on our lives. In all this, there are three very important questions to be asked.

Is Global Warming Really Happening?

The case of people making competent, affirmative statements about the existence of AGW isn’t nearly as scary as people saying that there is a consensus about the acknowledgement of its existence. If there’s anything that you can establish after sniffing for information that concerns the matter, it’s the fact that there are two main polarized camps, and that there’s absolutely no consensus. Both the scientific community and non-academic individuals have differences over the theory in part or in whole. In 2008, for example, 31,478 U.S. scientists (around 10,000 of which have PhDs) signed a petition rejecting the theory altogether.³

But what is global warming in the first place? It’s the idea that natural greenhouse gases (such as water vapor, carbon dioxide, nitrous oxide, etc.) accumulate in the atmosphere, thereby trapping the heat from leaving earth. So according to environmentalists, humans are intensifying the release of carbon dioxide in the atmosphere and therefore disrupting the natural carbon cycle. They are doing this by burning fossil fuels and deforestation. Unless this stops, the earth will continue heating up, causing icebergs to melt and ocean levels to increase. This in turn will cause more floods and more weather distortions, the end result being a climate catastrophe.

AGW environmentalists claim to have definitive scientific evidence for this. One data example they use is the ice core data, first gathered 1985 in Vostok. According to this information, it was assumed that carbon dioxide levels determine the temperature. Later, the same method was used, only to discover that “temperature changes precededCO₂ changes by an average of 800 years.”⁴ The temperature was dictating the natural carbon cycle, not the other way around.

Satellite measurements of temperature are another source of evidence. These measurements are deemed to be probably the most trusted data, but they only go back so far as 1979. They have shown no warming in the southern hemisphere, and since 2001, the temperatures in the northern hemisphere have fallen.⁵

Other controversial evidence put forward by the environmentalists is the hockey stick theory. American climatologist Michael E. Mann reconstructed a pattern of warming, showing the earth to be relatively warm up to 1900, and then have the temperatures increase sharply. Because this formed a hockey stick-like figure, it was later named the “hockey stick” theory.⁶ The idea behind it was that industrial advances of the 18^thand 19^th century dependent on the burning of fossil fuels intensified CO₂ emission severely, thereby causing global warming. The reconstruction, however, soon plunged into controversy for different reasons. The main criticism was that Mann had left out two important meteorological periods: the so-called Medieval Warm Period (AD 800 to 1400) and the Little Ice Age (AD 1600 to 1850).⁷

Nothing was more devastating to the AGW credibility, however, than the recent climate scandal – the Climategate. On November, 2009, a hacker broke into the systems of Climatic Research Unit and released thousands of e-mails and documents that evidenced “conspiracy, collusion in exaggerating warming data, possibly illegal destruction of embarrassing information, organized resistance to disclosure, manipulation of data, private admissions of flaws in their public claims and much more.”⁸ After the scandal, polls in U.S. indicated a drop in the belief in AGW among the public.⁹

But even if the world is warming, and a global catastrophe is to come – are humans really responsible for it? Or is this all a natural disaster, like earthquakes or volcanoes, for which we don’t have any accountability and can only hope for the best? A consensus regarding this question doesn’t exist either. Mathematician and astronomer, Khabibullo Abdusamatov, said that“unusually high level of solar radiation and a lengthy … growth in its intensity” are one of the causes.¹⁰ Professor of Civil and Petroleum Engineering, George V. Chilingar, cited “(1) solar radiation ..., (2) outgassing as a major supplier of gases to the World Ocean and the atmosphere, and, possibly, (3) microbial activities ...” as the possible natural causes.¹¹

There is no doubt that the world is warmer now than it was hundred years ago. But these temperature fluctuations don’t say much about a future AGW with catastrophic consequences. Some economists have even claimed that the world is better off warmer.¹² In the 1970s there was a similar climate-change panic concerning globalcooling. The alarm didn’t last long, however, and archaic computer models were discredited as scientific foundations for any empirical evidence.

Do Governments Really Have the Solution?

For those who share the skeptics’ side, whether the world recognizes plainly that AGW is no serious threat is of no main importance. What is more concerning is the increased role of government in the form of “tackling” climate change. The skeptic sees the additional regulations and taxes – disguised as moral and responsible action on the part of politicians – as the very classic expansion of the state. In this, the skeptic asks: Does the government really have the solution? The skeptic is concerned about another “war on climate change,” just like the “war on terror,” simply because of the horrible experiences with them. Apparently all that these statist witch-hunts do is undermine civil liberties and violate private property. It’s no rocket science to realize that when these two fundamental principles of preserving humanity are breached, the reduction of social welfare is customary. While government compulsion has a historic record of producing failure, many scientists have said that even if the proposed schemes are to be implemented “successfully,” the impact that humans can have in mitigating AGW is microscopic.¹³ Failure to kill the monster aside, let’s see some government actions that lie on the table.

Probably the most famous proposal is cap-and-trade. The idea behind it is for government to set a limit (a cap) on the overall level of carbon that can be emitted. After that, they start selling permits (or credits) to companies and organizations which emit carbon. Permits will be priced “accordingly” with the level of carbon that they allow. Companies can then trade these permits in the market, with more intensive carbon-emitting ones buying from others that pollute less. Because this has been labeled as a “market idea,” many economists have jumped on the bandwagon to support it. Politicians are also very much in favor, since it gives them a way to implement their goals without having to increase taxes – their number one nausea. After a brief analysis, however, one can see that this is nothing but a disguised trick to make people think that they’re not paying for compulsory carbon reduction, and that this is convenient for everyone. Setting a limit on carbon emission is a direct control of the market, and selling permits to pollute is simply a tax. Government attempts to create scarcity out of thin air can’t work, especially if the effect whose product they’re prohibiting is widely demanded. We’ve seen this movie with the prohibition of drugs, and cap-and-trade will only produce similar effects. With the supply of permits fixed, and the ever increasing need for intensive carbon-emitting means of energy, the price of these permits will quickly skyrocket. This will make the proposal even more costly than a straightforward flat tax or otherwise. However, the reason so many people endorse it is not its efficiency, but its political correctness.

Another example is the so-called “cash for clunkers” government program in the U.S., and in some countries in Europe. The idea behind it is that old, junky cars with low miles-per-gallon polluting the environment should be replaced with more efficient, eco cars whose CO₂ emissions are smaller. The program offered people up to $4,500 (or €2,500 in Europe) if they turned over these cars, as a form of helping them to acquire new, better ones that are friendlier to the environment. Now this sounds all nice, but for those familiar with Frederic Bastiat’s broken window fallacy and the unseen costs of government spending know that something is fundamentally wrong with these kinds of programs. What is seen here is that people who couldn’t previously afford cars and were driving old ones are now able to get new ones. What is also seen here is that the new cars, which are undoubtedly more efficient, are not damaging the environment as much as the old cars. However, what is not seen is all the tax-payer money which was extorted from productive and rational owners and invested into channels which the government bureaucrats deemed as more important. Imagine all the products and services (including eco cars) that could have come into the market with the use of those funds, but couldn’t because they were allocated in channels that somebody other than the buyers and sellers dictated so. It is another way of telling the people that they don’t know where to spend the money right, and that they should it hand over to these all-knowing gods so they can re-distribute it better. The economic “reasoning” goes, “people will buy more cars and that’s good for business and the overall economy.” Wouldn’t it then make sense for the government to take all our money and subsidize computers, tables, furniture, food or anything else that they think is inferior (such as the old, junky cars) and give us all superior goods instead? Glazier’s business would also make profits if we were to break the glasses of every shop so that he can repair them, with our own money. Of course this is absurd, but the $2 billion program makes total sense.

Another idea is having the government spend on urban planning, more I should add. According to the proponents of this idea, “inefficient land-usedevelopment practices have increased infrastructure costs as well as the amount of energy needed for transportation, community services, and buildings.”¹⁴ Now they believe the government should step in to regulate places in which you can build, what you can build, and how you can build it – as if it’s not doing it enough. They want the very same government that has problems running public transportation or airport security to do more public planning.

All these government actions contain ethical problems ahead of economic problems in the first place. The issues of freedom of choice and the ever-present risk of missing accountability for its failures make all these actions socialist in nature. Geoengineering, for example, raises moral issues for those who believe bureaucrats shouldn’t play god at people’s expense.

On the economic level, these actions will hurt industries highly dependent on fossil fuels, the prime source of world energy. In attempts to curb carbon emission, they will increase costs and decrease efficiency for many companies. It’s no exaggeration to say that they have the potential to roll back the 20^th century industrial and technological advances that increased people’s standard of living if they are to be pushed through aggressively and consistently. Finally, the fallacious idea of the “omnipotence of government” will unfold at the expense of a century-long accumulation of capital.

Is Government-Business Partnership Fooling Us, Again?

The skeptic doesn’t only think of the government as a child whose arrogance way exceeds its capacity to “contribute” to society. The skeptic knows that many politicians out there posing as Messiahs sent to save humans from their inability to manage themselves are nothing other than unscrupulous fraudsters serving special interests. The very nature of the politician occupation is that of a deceiver, and with little money to be made from their redundant and pathetic jobs, they often use the legitimacy of the state to get it from under the table. The case of AGW is no different; it too provides an excellent opportunity for some individuals and some companies to make profits at the expense of the poor tax-payer. As soon as the Byzantine rules are legally established and hefty sums are allocated for subsidies, the now common game of rent-seeking in corporatist America will begin. I can already picture some energy companies begging the Congress for financial support so that they can switch from carbon-emitting machines – which were so useful yesterday but have become a poison today – into means of energy that are friendly to the environment. These will probably be the companies that aren’t doing well and want an easy fix because they can afford to transform their current relatively small capital into using other sources such as solar energy. In the same way companies specialized with the construction of nuclear energy plants, for example, will be favored over other type of energy companies. So will be the companies that produce or sell parts for wind energy. Elsewhere, EU already allocated a hefty €7 billion for carbon capture and storage (CCS) technology.¹⁵ Sweden planned subsidies for the new eco cars at a potential cost of 1.4 billion kronor (roughly $190 million).¹⁶ In all these deals that are financed by the public there is a winner, one appointed by the bureaucrats and legitimized by their court scientists. Did we see this image before? Yes, with CEOs of GM, Chrysler and Ford who staged a puppet show in Congress for a cool $17.4 billion under Bush, and then another $21.6 billion under Obama. It’s interesting to note that the cash for clunkers program, apparently done mainly for the sake of the environment, came at a time when the Big Three ran into trouble.

It’s not hard to imagine the politicians sitting there in big expensive tables and discussing their heroic plans to make the world green again. But make no mistake; they’ll also make sure their wallets are greener too! When you see the climate-change action plans being discussed and you analyze them, what comes out the other way of the scanner is private deals to serve private individuals involved in them. It doesn’t have to do much with the environment; it’s about money and business.

I can’t talk about AGW, however, and not mention the leading superstar in the warmingbusiness – Al Gore. The man who told us the inconvenient “truth” is doing very well for himself by heavily investing in green energy companies. Of course nothing is wrong with this, until the Energy Department gets involved. Last year they announced a grant of $3.4 billion, of which $560 million went to utilities in which Gore’s company Silver Spring has contracts.¹⁷ The list of winners, however, doesn’t stop here. There are many to win from these changes, but only because a lot more others will lose.

The Libertarian Alternative

Now by here, the average reader will probably think of me with both anger and confusion. “How can trying to protect the environment be bad?” Well, apparently it can, and mainly because politicians out there are not in it for the environment. They’re in it for themselves first, and then if there’s something left you can have it. But “what other alternative is left then?” one may ask. I say the libertarian alternative.

The libertarian solution to environmental problems is grounded on respect for freedom of choice, private property rights and distrust of people who tell you they can manage your life better than you. Now, a lot of people are skeptical about the idea that the free market (which often reminds them of anarchy, which in turn reminds them of chaos and turmoil) has the capacity to protect the environment better than a centralized body of compulsion. But if you bear with me for a bit more and see through my points, I think you and I can be on the same page regarding the idea that we don’t need the government to play nanny in order for us to live in a cleaner world.

Just like any demand that exists out there in the market, the need for a cleaner environment is a demand too. Just as you want safety when you’re considering buying a vehicle, you may also want one which has a smaller carbon-emitting engine. Slowly, with the increasing awareness of pollution, we are sophisticating this demand. On the other end, businesses whose entire game-plan lies on serving us (the consumers) are also doing their part to come up with satisfactory solutions. The same relationship that exists between a consumer that needs food and buys it can also exist between people conscious of protecting the environment and businesses offering them solutions. Consider Toyota’s Prius eco car, for example. Did government compulsion mandate Toyota to build such a car? While political pressure was undoubtedly present, the key drive behind Toyota was the consumer. They simply capitalized on what they saw as a growing trend of people becoming environment-conscious. There was no regulation or directive; it was the demand that drove it towards completion. Do you think that if governments abolished their laws which mandate car companies to have the security belt installed we wouldn’t have them anymore? Obviously the law has nothing to do with it, the consumer has. Consumers profess their sovereignty by buying or abstaining from buying a certain product. It is this which guides businesses and their production. Any government interference will only distort this relationship. In this sense, if consumers are really worried about the environment, companies will have to adjust to their desires or go bust. Nothing is more merciless and rigorous than the free market, yet many want to trust people with fairness and calculations which they simply can’t do.

While the free market is the best platform for people to get what they need – including a cleaner environment – the role of private property rights is probably even more fundamental in providing people with security. Private property rights are the backbone of Austro-libertarianism because they form the core of a social system in which conflicts are minimized to their fullest. Even though these rights exist to some degree in the world, they are not practiced consistently and with the same regard as one Austro-libertarian would want to. In fact, Western countries that often accuse the rest of the world for human rights abuses violate these rights continuously to the detriment of their own citizens. On the other hand, if these rights were first properly defined and then properly respected, we would not have the kind of pollution we have today. Just as one violates your property rights by forcibly throwing a bag of garbage in your garden, factories that pollute villages with smog (and in the process distort the carbon cycle) are also doing the same thing. However, we find it very easy to understand how you can deal with the garbage thrower, but not so easy how to sue these “mass” polluters. Well, one reason for this is that these mass polluters are either owned or extensively controlled by the state, which makes it hard to sue them because winning the lawsuit would unveil the incompetence of statism in managing these companies. In addition, you can’t expect fairness and justice when the person you’re suing is also the one who makes the court rules and then hands you the final verdict. While it is true that most of these polluters are privately-owned companies, the state is again to blame because it doesn’t act in its self-professed capacity to defend property rights. When an individual commits a crime and gets away with it, our outrage is directed more towards the people responsible to pursue and punish the criminal than the criminal himself. This, however, is not the case when we deal with big companies that open factories in small villages and choke them with pollution. In this case we totally forget who the responsible agency for the protection of property rights is. Instead, we commit all the logical fallacies by blaming deregulation and capitalism. But you can’t expect the government to secure you these property rights when they violate the most important property right of all – the human body. It is imperative, therefore, for the government to stop violating them in order to be able to protect them. Companies continue their irresponsible behavior simply because they know that the government always fails to protect these rights and that at the end of the day they can always bribe. It would be naïve and childish to think we can educate people into being morally responsible, in this case the polluting companies. However, it would make more sense that we ask the government one last time to either protect these rights, or let us do it ourselves.

As you can see the libertarian alternative rests not only on sound economic factors, but first and foremost on ethical foundations that uphold the natural rights above everything else. Compulsory action, therefore, always acts against these principles and cannot produce utility on the net. Ludwig von Mises mirrored this fact when he acknowledged that the government is anything but the negation of liberty. In this we can elaborate: whenever the government uses people’s money to favor some individuals, it will always leave others worse off. Its inability to create additional capital (wealth) means that it can only move the existing one. Because by doing so it overrides the choices of individuals (who in a free market would make those decisions according to their specific needs and wants), the government doesn’t only fail to create something positive on the net but it also destroys that which already exists. And the bigger it is, the more access and power will immoral individuals have on it. It’s vital to understand that the existence of any form of government implies a trade-off between us and the government regarding the control of our lives. The more we leave to the state, the less we get to decide about ourselves. Controlling the environment is no different.

If tackling this anthropogenic global warming had no or little costs, it would be wise to stay wary and implement those proposed measures just in case. However, both when one realizes that the idea itself is not convincing – and that the proposed actions are immoral, uneconomic and perverted – one should know that if we are to care for humanity we must oppose them strongly. At the end of the day it’s suspicion that hands you a quality-check, whereas naivety leaves you blind and manipulated. I don’t know how global warming is working for you out there, but I’m just about freezing these days.

References