By Lew Rockwell

But the problem is that the capacity to imagine freedom — the very source of life for civilization and humanity itself — is being eroded in our society and culture. The less freedom we have, the less people are able to imagine what freedom feels like, and therefore the less they are willing to fight for its restoration.

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by Jake Towne

This talk was originally delivered to a Campaign of Liberty chapter on December 3, 2009.  Video will be available shortly.

Today President Obama will tour Allentown, Pennsylvania, in my home congressional district as part of a “Main Street Tour” to show his concern for economic plight of the masses. Many of the people I have spoken with while campaigning innately realize that government is at fault — or at least complain a lot about how the government should “fix” the economy. Unfortunately, many do not have enough of a grasp of economics to understand exactly how the government is ruining their lives and their childrens’ lives. Speaking for myself, about 2 years ago I would have been included in this category. This is no surprise as most of the press and educational system has been hijacked by the disciples of Lord Keynes (the Keynesians) and the socialist Karl Marx for the past century.

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I had the great privilege recently of attending an economics class at a local college with some of my friends.  Very fascinating, a different way to do school, that’s for sure. Reminds me of Einstein, “The only thing that interferes with my learning is my education.” But I’ll try to keep myself confined to only speaking about Keynesian economics, at least for now.

I met the teacher before the class, so we spoke for a few minutes. I had a chance to look around his office a bit. Didn’t see any Mises or Rothbard, but I glimpsed, “Macro Economics” by Ben Bernanke sitting on his desk.  I was wearing my C4L hat, so he asked me, “What is this Campaign for Liberty?” Well! That the first time anyone had directly asked me about C4L because of my hat. Very thrilling. So I explained what the group was, and mentioned Ron Paul. He said the Ron Paul was an interesting person.  I prodded him a bit, I wanted to know what he actually thought of Ron Paul, and why he wasn’t a Ron Paul fan. Turns out he thinks Dr. Paul is crazy for trying to go back to the gold standard, “and he has some problem with the Federal Reserve.” I pointed out that very few people know what the Fed is. He challenged that, and I said, “hey, I stood on a street corner in Chicago, a few blocks from the Fed, and asked people if they knew anything about the Fed, and most people didn’t have a clue.” I pointed out that we (C4L) believed that the Fed is responsible for the boom-and-bust cycle by their manipulation of the economy. He was impressed, I think, by my knowledge of economics, but not convinced. He mentioned that Milton Friedman is his hero, because of his stand for liberty. I don’t know that much about Friedman, but it seems that he had some major problems in fundamental ideas, and it also seems that Von Mises stood up for liberty far more staunchly than Friedman did, Mises enduring some miserable years at the university in Vienna, and then coming to the US where no one appreciated his work or studies.  I mentioned Von Mises to this teacher, and he said that there was a nice Von Mises website, so I laughed and said I visit it every day.  He said he would look into the Campaign for Liberty, so that is a good thing!

About the actual class. It was far more visually interesting than the classes I take, because usually my classes are audio recording, and there is nothing to look at but the blank computer screen. In this class there was a teacher walking back and forth, drawing on the board, and so forth. With that kind of action, 50 minutes is not long at all. He was talking about labor and labor value.  The Value of the Marginal Product of Labor (VMP) is equal to the Marginal Product of Labor multiplied by the net price. Mostly review, quite familiar with the words and abbreviations, happily, as I was a bit concerned that the Austrians were so marginalized, they used a different set of symbols and abbreviations.  But to my relief, there were the same demand/price/supply graphs and so forth as I’ve used before. I was a little confused at one point because he implied the Law of Diminishing Returns, but didn’t talk about it, or why it is true, so I wasn’t sure if he was going to cover it or not, but turns out they had already talked about it in a previous lecture. I would have liked to hear his explanation of the Law of Diminishing Returns, I suspect it is a bit different than our’s, but oh well. At least it is there. The most amusing part of the class? When the teacher confessed, “recessions just occur in our economy for unknown reasons and they cannot be avoided.”  I think I was the only one who questioned the ability of this teacher to teach economics without being able to explain such a common recurrence in our economy, and I only questioned in my head. Doesn’t anyone else wonder why these teachers can’t understand why recessions happen? I mean, they might as well said, with Keynes, “it is caused by the animal spirits of the investors in the market.” I mean, talk about unscientific!

Okay, one more observation about their economics. There is far more math than I generally do in my economics; maybe that’s why I enjoy Austrian econ so much.  These algebraic equations and so forth make no sense in the real world. How can you apply it in a meaningful and relevant way? The economy cannot be explained by algebraic phrases. I think this was a joke one of the Mises professors used: There was a drunk man searching the ground around a lamp pole. Someone came up and asked him what he was looking for. “My keys,” he said. “I dropped them.” And the person said, “but your car is way down the street, why are you looking here for your keys?” And the drunk replied, “because this is where the light is.”  Suffice to say, I had to do a bit of explaining with this one to apply it to economics. The application is, Keynesians generally use more math in economics because that is what can be understand. They know how to deal with algebraic equations, because they follow a set of rules.  But people are unique, and so the actions that they make are unique. They follow their own set of preferences and principles. Obviously, this makes it a bit more difficult to understand. And don’t misunderstand me, I am not comparing Keynesians to drunkards, I am sure there are some very nice people who are, sadly, Keynesians. And this teacher I met at this college was a very friendly and nice person, it is just we have a little different idea of economics. I don’t mean to insult or offend anyone, and this is not meant to be a personal diatribe against Keynesian teachers. Just a comparison of philosophies.

Another thing that struck me about this class is, I realized the enormous power a teacher has over the students. I’ve always generally known this, but as I teach myself, I’ve never really experienced it. Very disturbing idea. These kids, for the most part, are not free thinkers, they are not prepared to stand up to their teacher, or even to question the validity of the teacher’s statement. Now I understand why some of my friends are so messed up in their economics. This teacher “explains ” and “proves” an argument, and that is the end of it. It must be true, because 1) my teacher is saying it, 2) it is in the official textbook, 3) my teacher said there aren’t any strong arguments for another opinion.  Their opinion makes sense because they’ve never heard anything else in a fair and balanced way. So, I must conclude that the college is a great drone factory, to turn out kids who follow the rules and think just like everyone else.

And people ask me why I don’t, and won’t, go to college. Gee, I wonder.

I have noticed that one of the major problems people have with the free market, is their fear of monopolies. And I do want to point out that if you believe the government should create laws and regulations to prevent monopolies, you do not believe in the free market. You might be a believer in the quasi-free market, but not the real thing.

So, what is it about monopolies that scare people so much? I don’t know for sure, but some people seem to be afraid of Walmart taking over the world as much as Al Gore fears global-warming. Because this is a main argument against the free market, I try to keep track of the arguments against government regulations, so I can show people that we don’t need the government to fix this “problem” that has, ironically, never actually happened yet.

And now I will offer 5 arguments against anti-trust laws, and the like.

1) In the case of an only horizontal monopoly, the companies that sell to the “1 big firm” (i.e., gasp, Walmart!) would not want a monopoly to be created. Why? Because if Walmart has a monopoly they will eventually raise prices, and since the demand for many of their products is elastic, not as many of them will be sold. Walmart will manage to make a profit because of the increased price, but the companies that sell to Walmart will not profit. Example: Tomato Soup, just a random product I thought of. Let’s say that in the competitive market, one can of tomato soup sells for an average of $1.50, okay? If you want the name brand one, a bit more, the cheap one, a little less. Let’s say that a Walmart brand makes the soup, but they have to buy the tomatoes from somewhere, right? Let’s say, from Tomahto Inc., and I am not sure where Tomahto Inc. is based, or where they grow their tomatoes. I really couldn’t care less about tomatoes, so I don’t pay attention to where they are grown. But to keep going. Walmart takes over all the brands of tomato soup on the market. However, they have not taken over Tomahto Inc. Tomahto Inc. know that Walmart will sell the can of tomato soup at $2.00 or more once they completely take over the market. Is this good or bad for Tomato Inc.? They get paid .75 for the tomatoes it takes to make one can of soup. So, now that Walmart has created a monopoly in the tomato soup market, Tomahto Inc. is still getting .75 for each can, but Walmart is charging $2.00 + and making a nice fortune. Most people really don’t have to live on tomato soup, maybe some strange people are addicted to it, but for the most part, if the price goes up to $2.00, people will buy less. In economic terms, the demand for tomato soup is elastic. Now that the price is at $2.00, people only buy 1.5 million cans, not 2 million. So, obviously, Tomahto Inc. has lost a good profit, because they’re only getting .75 x 1.5 million, not x 2 million. But Walmart is making money because of the high price they are charging. Going back to before Walmart has monopolized the market, would Tomahto Inc. want Walmart to monopolize the market?

I know someone is going to ask, “why didn’t Walmart take over Tomahto Inc., and solve all their problems?” Well, yes, in this case, Walmart could have done that, but when you multiply that by every product Walmart sells, it becomes rather clear that it is nearly impossible for Walmart to monopolize the market, horizontally and vertically, by taking over every step of production.

2) If the 1 big firm as a  horizontal and vertical monopoly, it cannot  measure opportunity costs and accurately figure the productivity of production, as there is no outside market to compare it with. This was the argument of Mises against socialism, and against the “1 big firm.” If the world were socialized, and the government controlled every factor of production, it would eventually implode. The reason the USSR lasted so long is because they could look at the free world to measure productivity. Without the consumer “voting” so to speak, on where capital should be allocated, and what is most valuable, it is impossible to know if a capital good is being used for the best ends.

3) This argument is based on F.A. Hayek’s “problem of knowledge.” There is so much knowledge in the market that the bigger a firm is, the less it can keep up with constantly changing demand and preferences in the market. People are always changing their value scales, preferring milk to yogurt, and then cottage cheese to yogurt, but only if cottage cheese is under a certain price, but then…it goes on and on. A localized firm can provide products to its consumers because it is better able to deal with the localized knowledge, i.e., if a number of citizens in a certain town decide that yogurt is bad for them because of an article someone published in the paper, then the firm can quickly respond to that and provide cottage cheese because they know people are avoiding yogurt. Multiply this by the millions of towns in the US, and then think of what would happen if Walmart took over the world…it would be impossible for them to respond to the changing demand in a way that satisfied the consumers.

4) Only the government can truly keep out competition. Only the government can force people to support the 1 big company. In the free market, people can compete with the 1 big firm even on a very local market. Go back to our Walmart and Tomahto Inc. example. If Walmart started charging $2.50 a can for tomato soup, assuming that they did take over Tomahto Inc., then what would stop people from growing their own tomatoes and making their own soup? Or selling tomatoes from their backyard to neighbors and friends, effectively undermining Walmart’s monopoly? The only way Walmart could keep people from doing that is by partnering with the government and making it illegal for people to grow their own food. We know that would never happen though. Hey, wait…what about H.R. 875, the “Food and Safety Modernization Act of 2009″? I thought that would open the door for government regulation of backyard gardens. But then again, I might be wrong. So only big business AND the government working together can create a true monopoly.

5) We can distinguish between competition pricing and monopoly pricing in charts and graphs, but what is the difference in the real world? We don’t know. No one really knows, the definition is subjective. So it is very impractical to attempt to distinguish between the two in the market. Let’s say I decide to start a business selling tomato soup, and I sell it at $1.10, cheaper than anyone else on the market. Is this competitive pricing? Of course everyone wants to offer a lower price for their good. But maybe I am planning to drive everyone else out of business and create a monopoly. Who knows? Who can tell the difference? The answer is, there’s no easy answer, it depends on subjective opinion. So what does it even matter, to talk about anti-trust laws, because we can’t define the difference between competitive pricing and monopoly pricing.

I hope that has helped you understand why the free market does not create monopolies, and why the last thing we need is more government regulation!

I just discovered the Bailout Reader at www.mises.org, and it looks very helpful, I’d recommend going here to get a real look at what’s  been happening lately and what truly caused the collapse last fall.

Mises Daily by David Saied | Posted on 8/11/2009 12:00:00 AM

The principal problem with the current economic crisis is that the authorities are trying to solve the debt crisis by adding more debt — which is akin to trying to cure a viral infection by injecting more viruses. In case some have forgotten, the United States is undergoing a serious credit crisis, that is, a debt crisis.

All sectors of the American economy are suffering from a chronic addiction to credit, which manifests itself as the disease of excess debt. Household, business, and public debt have reached all-time highs. Consequently, it would not seem logical for the federal government to fight the debt crisis by adding trillions of dollars to the national debt and by lowering interest rates to promote even more credit.

A debt crisis can only be solved by paying down and reducing debt; it cannot be solved by compounding ever-more debt on top of an extremely overleveraged economy.

Consumer credit, which in 1950 was only 6% of total gross domestic product (GDP), has by 2009 tripled to 18% of GDP. Bank credit, which in 1947 was 45% of GDP, has by 2009 risen to 67% of GDP. Household debt, which in 1957 was only about 45% of national income, peaked at over 120% of national income by 2007. According to the congressional budget office (CBO), federal debt, which was at an already-high level of 41% of GDP in 2008, is expected to balloon to 200% of GDP by 2038. The CBO expects federal debt to grow to 60% of GDP by 2010.

However, if you read the statements of the policy makers, it would seem that the problem is not excess credit, but exactly the opposite. In their view, the problem is a lack of credit. On April 14 of this year, President Obama made the following remarks about the crisis, stating that

the second step has been to heal our financial system so that credit is once again flowing to the businesses and families. … The heart of this financial crisis is that too many banks and other financial institutions simply stopped lending money … I do agree … that we must provide banks with the capital and the confidence necessary to start lending again.

More recently, on July 21, Federal Reserve Chairman Ben Bernanke stated that “many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit.” And many Republican leaders have given similar statements.

It is clear that policy makers agree on something: they want more credit in the system. But what this means is that, knowingly or unknowingly, policy makers want Americans and the country to go further into debt.

Argentina suffered a similar financial collapse in 2001, when its external debt had risen to over 120% of GDP. As in most countries that have recovered from a financial crisis, total consumer, business, and government debt had dropped significantly once the bubble had burst. For instance, Argentina’s external debt fell to only 46% of GDP by September of 2008. This was no coincidence; reducing their debt was a necessary step in ending the crisis.

However, the United States seems to be headed completely in the opposite direction. As shown above, the federal debt is growing at unsustainable rates, and bank credit — contrary to what many (including the president) believe — has actually continued to grow. Bank credit increased from $9.15 trillion, at the start of the crisis in September 2008, to $9.31 trillion as of June 2009.

The only way to solve a debt crisis — a path demonstrated by other countries that have survived through similar crises — is to drastically reduce the total levels of debt. Individuals, businesses, and the government must all tighten their belts, reduce expenditures, and live well within their means. How can a monetary policy that promotes more credit and a fiscal policy that creates more debt solve the debt crisis? The answer is clear: it cannot.

In a way, the lifestyle of American people and American government has been a denial of reality. For the past 50 years, America has been living on credit and piling up excessive debt. This financial crisis, if left unhampered, would have been a wake-up call. It would have forced the reduction of debt in all sectors. However, policy makers are not allowing this necessary clean up to occur — not just through their fiscal and monetary policies, but also through public policies that prevent various foreclosures and liquidations to occur.

Not only was the apparent economic prosperity of the last 50 years artificial and unsustainable, it was essentially a borrowed prosperity. And worse, the funds were borrowed, not from real savings, but from artificially created money provided by the Federal Reserve.

This is the stark reality of the United States economy today. The prosperity of the last few decades has mostly been a grand illusion generated by artificially created credit. This financial crisis is just the “foreclosure” of the national economy. In other words, the market is simply trying to force the American economy into paying down its debt.

Therefore, any policy that effects the contrary — that is, any policy that promotes or increases debt — will only make matters worse. By piling on trillions to the national debt, the government will have to keep interest rates low for a longer period, promoting ever-greater debt. The result of this must be unsustainably higher levels of debt — and the worst financial crisis ever seen in the history of mankind.

David Saied is a former Securities and Exchange commissioner for the Republic of Panama and and has a masters degree in economic policy from Suffolk University, Boston, Massachusetts.