Bootleggers and Baptists: XLIX- Keynesianism, Stimulus, and Political Manipulation

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Frequently in economics, the views of a specific theorist are exploited for the interests of various political factions. The most salient examples are economic theorists are labeled as “free market” economists. Conservatives generally celebrate Adam Smith as a defender of unfettered commerce but conveniently ignore his concern for the blight of the poor. Smith was too multidimensional to be distilled to a simplistic bumper sticker slogan. The great F.A, Hayek suffered from a similar syndrome as many Conservative and Libertarian pundits disregard the nuances of his work and paint him as radical. However, there are also instances of the intellectual advances of various theorists being embellished by their opponents for partisan purposes. For example, the moderate and subtle rationalizations of James M. Buchanan are characterized as extreme libertarianism. Nancy Maclean is unacquainted[1] with the work of Murray Rothbard!

The inaccurate framing of economic theory for political interests is not limited to right-of-center economists. Many left-wingers exaggerate the beliefs and postulations of their favored economists, the most conspicuous example being the abuse of John Maynard Keynes [2]. Yes, in the eyes of most Conservatives and Libertarians, Keynes had a flawed perception of market processes. Although, he was not communist. Keynes still had some semblance of a pragmatic filter, which placed constraints on his sanguine view of consumption. Keynes did believe that after the end of an economic downturn, deficits should be eliminated. Therefore, Keynes did not advocate for a policy of perpetual deficit spending, most likely would take issue with the massive debts amassed by the United States over the past couple of decades.

It wouldn’t be outlandish to examine the embellishment of Keynesian economics for political gain from the precepts of Bruce Yandle’s Bootleggers and Baptists (1983) coalition paradigm. A political relationship between various factions of policy advocates where some supports sincerely believe in the normative intention of the policy (the Baptists). In contrast, the tacit beneficiaries (the Bootleggers) merely ride the coattails of the moralistic advocates (either silently or vocally alongside the Baptists). The support for various stimulus policies would have its share of Bootleggers and Baptists to defend “stimulus spending”. The most recent examples are the Obama-era stimulus programs (American Recovery and Reinvestment Act of 2009) and multiple rounds of COVID stimulus allocations. Often, Keynesianism is justified when it becomes politically suitable to do so. The most recent examples of economic stimulus initiatives exemplify this point quite well. This observation becomes more striking when you consider that the convergence of our monetary and fiscal policy has amounted to a hand-selected bastard-breed mutation [3] of Keynesian economics and Monetarism. The conception of this flawed system is being spurred by policymakers trying to select the most politically advantageous characteristics of both economic philosophies.

We could consider the founder of Keynesian economics the Baptist of stimulus spending policies. As Keynes envisioned stimulus spending as being a temporary remedy amid an economic downturn. Despite his good intentions, Keynes failed to recognize the political incentives to politicians, bureaucrats, technocrats, activists, and even ordinary voters; factors that only serve to reinforce one of Milton Friedman’s most enduring dictums “There is nothing more permanent than a government program”. While stimulus initiatives come and go, policymakers still keep implementing them as a remedy to soothe economic turmoil. Stimulus policies were adopted with little regard for the implied discipline advocated for by Keynes. After all, he was still an economist and was not ignorant of the discipline’s conceptual pillars. Stimulus spending is an unsound policy, but he never intended for it to be at the regular disposal of politicians and lawmakers. Dating back to the observations of Niccolò Machiavelli, politics is a game of perception, not one of technical proficiency. Conversely, economics is ideally a positive social science unconcerned with popular opinion.

Moral values always enter the equation whenever we enter the realm of actual decision-making, even in economic decision-making. Unfortunately, the line between economic science and public perception is often blurred, especially by the adroit manipulation of politically savvy elected officials, activists, lawmakers, and activists. Promising ever-larger transfer of “free” goods and services to the voting public. Applying the principles of concentrated benefits and dispersed costs, voters believe they have made out like bandits. Thereby, forming a mutually beneficial feedback loop of voters believing they have won and political actors presented in a positive light; as being defenders of the common man. Elected officials portrayed as advocates for the “little guy” helps establish social currency with the voting public. Social currency dovetails nicely with a politician’s incentive to remain in their position of political power.

Foot Notes:

  1. Maclean is aware of Rothbard’s work to a superficial extent, but if she sincerely understood his work, she would not be portraying Buchanan as a radical.
  2. The author is not an exponent of Keynesian economics.
  3. Despite the intense debate between Keynesians and Monetarists, both have their commonalities.

The Economic Lessons From Trading Halloween Candy

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Economist Art Carden wrote a brilliant Halloween-themed essay for the American Institute for Economic Research. In Carden’s essay How Kids Create Wealth By Trading Halloween Candy; he details how voluntary trade makes all participants better off than they previously were. However, Carden uses an unorthodox example to demonstrate this point, children trading Halloween candy. As mundane as this simple example may seem, it serves as a powerful analogy defending unfettered trade. When we opt to exchange one commodity (most commonly money) for another product/service, we tend to value the commodity we are giving up less than the good we seek to obtain. This maxim implicitly validates the  Subjective Theory of value, first formulated during the Marginal Revolution in the 1870s. Children trading candy with their friends demonstrates far more than the subjective nature of value. It also indirectly dispels the flawed arguments of protections, bringing the old king’s gold fallacy to its knees in capitulation. The medium of exchange may intrinsically hold value, but this value rests in the goods and services that we can buy with it. A bar of gold may be valuable to us, however to man isolated on an island in a Robinson Crusoe-style model of autistic exchange (p.84) the gold bar is of little value. A man deserted on an isolated island has nothing to gain in trading the gold bar (no trading partners).  Clearly illustrates the fact that subjective worth of money exists in its utility for economic exchange. For a trick-or-treater who dislikes Twix candy bars, this variety of candy has no value as they would be more satisfied with  Reese’s Peanut Butter Cups. However, their friend who has the opposite candy preferences between the two types of chocolate candy would want a Twix over Reese’s cups. What both trick-or-treaters can do is trade their stock of Reese’s for Twix bars and vice versa. Similar to how we exchange with friendly nations that have a comparative advantage for goods that we desire. But stubbornly holding on to the candy that the trick-or-treats do not prefer is not doing them any favors. Much how forcing domestic production of goods the U.S. does not produce efficiently is economically inefficient and a waste of resources.

If trade isn’t an option, she’s simply stuck with a lot of candy she doesn’t want to eat. With access to a market consisting in this case of her brothers and friends, she can swap the caramel-containing candies she doesn’t want for non-caramel-containing candies she does. She is better off. Her trading partners are better off. There’s an important lesson here: by getting candy into the hands of those who value it most highly, the kids are creating wealth.

It’s a mistake to think that wealth consists of stuff. Wealth, rather, is whatever people value. For someone who likes Snickers bars, Snickers bars are wealth. For someone who doesn’t like Snickers bars, they aren’t wealth–unless they can be traded. If they can, the excess Snickers bars become wealth because they can then be swapped for something better.

https://www.aier.org/article/how-kids-create-wealth-by-trading-halloween-candy/

Bodily Integrity Arguments and Misapplications

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People have the unfortunate tendency of favoring reasoning that is favorable to their preferences. Once an individual encounters the same logic applied to a position they disagree with, the application is assumed to be invalid. The abortion debate is no different in this respect. Pro-Choice advocates basing their stance on the logic of bodily integrity must be willing to extrapolate this same principle to other situations. Anything else would merely be convenient cherry-picking.

For example, advocating for choice regarding bodily integrity also applies to several other controversial topics. Such subject areas include drug use, the right to commit suicide, and objections to vaccine mandates, to name a few. Despite any Pro-Choice advocate’s misgivings about permitting the listed rights above to be consistent, they must begrudgingly accept that these are rights that cannot be prohibited by law. Any counterargument or suggestion to criminalize the above positions is a deviation from the logic of bodily integrity. Permitting an activity does not mean you believe it is moral. Moreover, this argument is predicated on an externalities argument; in a rash attempt to weigh the societal costs.

However, many Pro-Choice proponents may then surmise that individuals defending the decision to use drugs, commit suicide, and decline immunizations must accept abortion as a permissible procedure. Reverse application is not quite so linear and has several complications. Indeed, abortion presents a predicament for exponents of a Lockean conception of self-ownership. In one sense, abortion violates the Lockean notion of self-ownership. As Locke asserts that we cannot “… nobody can transfer to another more power than he has in himself, and nobody has an absolute arbitrary power over himself, or over any other… or take away the life or property of another..”(p.43)[1].

If we define the fetus as a living being, there is a conflict between the mother and the unborn child. Drug abuse, refusing immunization, and suicide confines direct bodily harm to the individual making the decision, thereby comporting with the tenants of the Non-Aggression Principle. Although, even in a legal sense, living children do not have rights[2] as they are under the guardianship of their parents. Also, if we truly own ourselves, can’t we choose which procedures we can have performed on our bodies? There is no easy solution to this complex and taxing quandary. 

Foot Notes:

1.) I omitted the portion of the quote regarding self-destruction. This portion of the doctrine is wholly illegitimate. If we own bodies, we have a right to dispose of ourselves; if God exists, he transferred our spirit to our corporal bodies. Through this transfer, God relinquishes ownership of our essence extending to us full possession of our bodies. Meaning we can maintain our physical bodies how we see fit, including but not limited to drug use and suicide.

2.) See Rothbard pages 97-113.

Suicide as a Natural Right- Part II

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Part I

The Lockean conception of shelf-ownership does not work if we cannot alienate self-hood. In the context of involuntary slavery, our absolute right (p.10) to self-possession is relinquished through coercive force [1]. The notion of natural rights almost always implies that the individual owns. For instance, the right of free speech codified under the First Amendment of the Constitution implies self-ownership. Individuals embroiled in political debate must utilize the very bodies they own and utilize scarce resources (p.2)to engage in the passionate exchange[2]. There is one glaring flaw that most ethical theorists get dead wrong about natural rights. Our negative rights that are part-and-parcel with our personhood may be self-evident, but they are certainly not inalienable. The American Declaration of Independence echoes this sentiment and forever cements it in the public consciousness: 

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.

The claim that these rights are unalienable does not connote ownership of these rights in any meaningful sense. By the inseparable nature of self-ownership and natural rights, we do not truly have unfettered possession of ourselves. The ability to alienate something is that can only be the consequence of ownership. True ownership implies that an individual can transfer, maintain, sell, deface, lease, destroy, etc. the article in question as they see fit. One of the strongest arguments for this radical interpretation of ownership comes from economist and Libertarian theorist Walter Block. Dr. Block writing “..No law should be enacted prohibiting or even limiting in any way people’s rights to alienate those things they own. This is “full monte” alienability, or commodification…” (p. 6) [3]. Block surmises that an unlimited condition of ownership naturally extends to the person, meaning that if an individual chooses to sell themselves into slavery this is legitimate. Unlike the trans-Atlantic slave trade, the individual being sold is consenting to the arrangement [4].

However, most, and moral theorists would suggest that natural rights, especially selfhood cannot be alienated or dispensed with. As our mind and body are typically inseparable; neither can be reallocated nor disposed of. This supposition suffers from an unfortunate fallacy because a person can voluntarily absolve their will and sentience. In the most extreme case, a person could give themselves a lobotomy effectively alienating their will and severing their mind from their corporal body (p.8) [5]. 

There are less extreme examples of people abstractly selling off natural rights in exchange for material gain. One only needs to look to employment contracts to see a ubiquitous example of this selective selling of rights. It is common for employers to include social media policies as a condition of employment. Effectively acting as a voluntarily acknowledged limit on free expression; a right codified under the First Amendment. Regardless of whether this restriction is a temporary sale of this right or permanent alienation it is a legitimate exchange. From the standpoint of Rothbardian contract law, this arrangement fulfills the criteria for an enforceable contract. Under this theory of contract law, the property must be exchanged for the contract to be binding, any other agreement is a mere promise (p.133-135). At the core of an employment contract or conditions of employment, the property is being exchanged. The employer is transferring compensation (monetary and additional benefits) to the employee. This exchange is contingent upon the employee following the company’s internal policies. Indirectly operating as a form of selling or “renting” natural rights in exchange for employment.

Selling property is merely one means of alienating property. Other more drastic measures can achieve this same outcome. The concept that an individual can condemn their property, mirroring the same privilege current held by various tiers of the U.S. government. The only difference is that when the state does it, they do so without the consent of the owner. Even when eminent domain is practiced within the parameters of the takings clause, however, the property owner generally does not have the right to refuse to surrender their property. Regardless of whether they are justly compensated for the relinquishment of their business, land, or home this arrangement is still inherently coercive. In stark contrast, if a property owner dedicates to transfer or otherwise condemn the land they own, this is legitimate. Effectively, suicide is an example of a person opting to condemn themselves. A person choosing to forever dispose of themselves permanently disables their ability to contribute to society; mimicking how governing institutions can decree that land or a build is no longer fit for occupation or commercial use. The state typically initiates such a directive in the context of habitation or use of the property would pose a “safety hazard”. However, a person contemplating “condemning” themselves does not need to fabricate such vague excuses. If they truly own their own body and mind, they do not have to provide any justification for performing such action. Unlike eminent domain, the individual can consent to the decision they have made. 

Most people might argue that allowing others to commit suicide with no mandated intervention would squander human lives [6]. Further supporting this statement by repeating tired platitudes about how it is a permanent solution to a temporary problem. No doubt, suicide does come with a wide array of societal costs. The individual can never be replaced nor can their human capital because no two people have the same experiences. If we set aside the externalities of the act, there’s a deeper conflict at play. There’s a long tradition of property owners having the right to destroy what they own. The right to destroy one’s property has its roots in the doctrines of Roman and English Common law (p.8). Moreover, there is a long-standing tradition that arguably supersedes the concerns of modern environmentalists or other public interest initiatives. The concern for wasting resources was even voiced by John Locke back in the seventeenth century:

The same law of nature, which does by this means give us property, does also bound that property. God has given us all things richly, 1 Tim. vi. 12. is the voice of reason confirmed by inspiration. But how far has he given it to us? To enjoy. As much as anyone can make use of to any advantage of life before it spoils, so much he may by his Tabour fix a property in whatever is beyond this, is more than his share, and belongs to others. Nothing was made by God for man to spoil or destroy. (p.12).

While Locke provides us with prudent advice regarding resource management, it is nevertheless, a suggestion. A just legal system would defend the property owners’ right to dispose of their property how they choose, even if it is considered wasteful. A legal system that has penalties or restrictions impeding the right to destroy one’s property, provides a perverted form of justice. Much like anything else a person owns, they should be able to “destroy” themselves. In a sense, we legally permit other more protracted forms of incremental suicide. For instance, currently, no laws are prohibiting the sale or consumption of sugar-saturated and chemical ladened soft drinks. Although cigarettes are highly taxed and regulated, we still live in a society where smoking is still legally tolerated. Both soda and cigarettes slowly kill the person ingesting either product; despite this fact, these products should remain legal. Following this same logic, if the person should be able to choose what they put into their body, they can choose to also ultimately dispose of their body.

Footnotes

[1]. The account of Slavery in Locke’s Second Treatise of Government (1690).

[2]. An allusion to  Hans-Hermann Hoppe’s theory of Argumentation Ethics.

[3]. In reference to Block’s postulations related to the possibility of voluntary Slavery.

[4]. How slavery was practiced in the United States was a reprehensible institution. The trans-Atlantic slave trade was incompatible with a property rights justification for self-ownership. 

[5]. An example Walter Block borrowed from legal theorist Stephan Kinsella.

[6]. The idea of wasting human life can be applied in an economic sense. The decreasing fertility rates in the Western world present challenges to the labor force and the tax pool. Especially, after all the Baby-boomers die.

Terri Schiavo- From the Perspective of Lockean Property Rights

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Here is a hypothetical situation that presents us with a challenging conundrum that would drive most legal scholars and moral philosophers mad. There is as a person in a vegetive state who is hooked up to a variety of life-sustaining medical equipment (feeding-tube, ventilator etc.). Let’s say that the individual is married, and their spouse has been their legal guardian since they have become clinically brain dead. Does the parents of the incapacitated person have a say over the end-of-life decision making for their child? Should this heavy burden be left to the spouse and rightful guardian? It should be noted that the moral analysis must be separated from the determination of legality. All because something is legal does not necessarily make it moral. For instance, abortion in the United States is sanctioned around quasi-arbitrary timeframes with little consideration for situational context or biological development of the fetus. The decree of legislative fiat does not automatically make a policy moral. There are many legal protections within American statutory law that prevent individuals from facing criminal penalty or ligation. If crimes against persons and property cannot be subjected to restorative justice then there is no point in calling a legal system just.  In other words, we will be reviewing this situation from a philosophical standpoint, specifically from the perspective of individual property rights.

The above scenario is not quite so hypothetical but is a concise description of the Terri Schiavo case. However, one striking difference between the scenario presented above and the Schiavo case is that :

Terri Schiavo breathes on her own. She is not on a ventilator or respirator. Although she swallows, she is sustained through a gastric feeding tube. She is not in distress or imminent danger of death.(P.5).

Despite Schiavo’s lack of cognitive functionality for the most part she was able to “live” in the most basic sense of the term.  It should also be note that prior to her cognitive impairment she made no will directing her “wishes” for medical treatment. Also including end-of-life decisions. Therefore, leaving the variable of individual consent obscured by Schiavo’s incapacitated state. There was a rift between Schiavo’s husband/ guardian wanted to remove her feeding tube while her parents staunchly disagreed with this decision. Ultimately, the courts sided with the husband and Terri ended up dying after having her feeding tube removed. This may have been the legally permitted course of events, but was it moral from the paradigm of individual property rights?

The economist and Libertarian Philosopher Walter Block provides a remedy to this quandary squarely from the standpoint of Lockean property rights. A grown adult who has lost their cognitive faculties is analogous to a child and exist in purgatorial grey area when it comes to the prospect of Lockean ownership (p.5).Block takes the Rothbardian approach to addressing a parents required commitment to child rearing, which in fact allows parents to relinquish this right (p. 6). Much like how Lockean homesteading does not preclude an economic agent from taking ownership of an abandoned patch of land, this analogy can be applied to raising children. If an adult within the community is willing to devout the resources to raising a child discarded in dumpster, this should count as a transfer of guardianship (p.7). Based upon the premise of Lockean homesteading the Supreme Court of Florida was morally wrong in assigning the right to end Terri Schiavo’s life to her husband. Through wanting to end her life with no prior record or request of her wanting such measures taken, he effectively relinquished his guardianship. Clearly he did not do so in the modern legal sense, but he did so within the context of Lockean property rights. If her parents were willing to assume guardianship of their daughter then the court’s decision is nothing more than perverse.

And if they are, then whoever is at first control of her must maintain her; if he refuses, her guardianship reverts to the second closest party, her parents. If they will not homestead her, then perhaps her siblings. If not them, then anyone who wishes to take up this burden. Based on the number of protests at the callous way she is being treated ( Block, 2011, p.7)

Is Fractional Reserve Banking Ethical Part II: Contract Theory and the Naysayers

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See Part I: Click.

Introduction to Part II:

The key arguments against fractional reserve banking being a moral system came from a 1998 paper co-authored by Austrian economists Hans Hermann Hoppe, Jorg Guido Hulsmann, and Walter Block. The white paper entitled Against Fiduciary Media was a response to a previous paper written by George Selgin and Lawrence H. White. Hoppe at al. crafted a repudiation against  Selgin and White’s 1996 paper In Defense of Fiduciary Media or, We are Not Devo(lutionists), We are Misesians. In which both scholars provide a normative and positive defense of fractional reserve banking. Even utilizing Murray Rothbard’s Title-transfer Theory of Contract to defend the practice. However, this application of the Rothbardian contract theory did not sit well with Hoppe and the company. All being devoted and unwavering followers of Rothbard believed that Selgin and White’s interpretation of Title-Transfer Theory of Contract to be incorrect. Making their justification of fractional reserve banking on grounds of contract theory to be inherently flawed. It is worth noting that Hoppe was a direct protégé of Murray Rothbard and even owed his career and position teaching at the University of Nevada, Las Vegas to the late Austrian economist.

Rothbard’s  Title-Transfer Theory of Contract:

Before claims that Selgin and White did not faithfully adhere to or misinterpreted Title-Transfer theory, it is important to thoroughly explain this concept. A reader without a firm comprehension of this idea cannot adequately determine if free-banking proponents of fractional reserve banking suffer from profound confusion. The proceeding section will provide a brief overview of this theory. Hereby providing the reader with the requisite background information to justly assess this debate.  

Before diving into Rothbard’s theory, it is important to note his ideological disposition.  Murray Rothbard was the modern father of an ideological subset of libertarianism known as anarcho-capitalism. Rothbard and his followers hold that there should not be limited government, but rather no government. All services and products can be produced by private industry with no necessity for government intervention. This even includes services that have been traditionally provided by the government. This includes defense/security services, law enforcement services, charity, resource management, infrastructure, private legal adjudication, and so on. Rothbardians even go so far as to assert that the government possesses a monopoly on such services. It is imperative to understand this aspect of Rothbard’s political economy and political philosophy. It illustrates the fundamental philosophical precepts that govern his theory of contract.

Rothbardian Contract Theory is expounded upon in his 1982 book The Ethics of Liberty. Rothbard derides that the concept that all contracts in a just society need to be enforced( P.133). He draws a sharp line of delineation between “promised” and “conditional” contingencies in matters of exchange. Per his logic, the utilization of legal channels to enforce a promise is wholly illegitimate. Constitutes the use of government force in a situation in which no property has been transferred. Making it equivalent to state enforcement of morality (p.133-134). The reason why the property needs to be involved for a contract to be valid pertains to the distinction between what is intrinsically alienable and inalienable to the individual. This has to do with the fact that a person cannot alienate their own will or relinquish control of their mind and body to someone else. Humans can quite easily dispense with tangible property, including money (p.135). Due to the fact enforcing a promise is a compulsion because it interferes with the free will of the individual. It is not technically a breach of contract. On the other hand, if the agreement included a transfer of property for non-compliance then it would be another story.

In instances of conditional contracts and agreements, noncompliance is equal to a form of theft.  One salient example Rothbard provides is the circumstances of service providers receiving advanced payment but never providing the service (p.137). For example, if I were to offer to paint your house and I received an advanced payment of $300.00 and never show up your house that is theft. One contractual contingency that can shift a promise to a conditional agreement would be a performance bond clause within the agreement.  For Rothbard’s example, if a movie theater has a meet and greet event with a famous actor, they can put into the agreement a clause where the actor agrees to pay the theater a sum of money for abdicating this obligation (p.137). Since a property can be transferred and not the will of the actor this is an ethically binding agreement. However, failing to fulfill a property-related obligation is not always necessarily deemed as implicit theft. In instances where a creditor provides immunity to a debtor who cannot pay their bill this is legitimate (P.144). Why?  The creditor reserves the right to forgive debts due to the fact they are the ones who transferred their property under the condition of repayment. Please note that this scenario details circumstances in which the credit lent out their funds.

It should be noted that a Rothbardian conception of contractual property rights does not preclude someone from selling off a portion of their property. For example, if I own 100 acres of land in Montana. It is well within my rights to transfer you 5 acres for $20,000.00. Concurrently, retaining my claim on the residual 95 acres of land. This does not mean that mean I in any way still own those 5 acres. Through the sale of this land, I have effectively transferred ownership to you. In turn, I have relinquished by entitlement to the lands sold.

Page 146:

“Another important point: in our title-transfer model, a person should be able to sell not only the full title of ownership to the property but also part of that property, retaining the rest for himself or others to whom he grants or sells that part of the title. Titles, as we have seen above, common-law copyright is justified as the author or publisher selling all rights to his property except the right to resell it.”

How The Free-Banking Argument For Fractional Reserve Banking Violates Contract Theory:

Selgin and White claiming that fractional reserve banking is consistent with Title-Transfer Theory suffer from some blind spots. Blind spots that are fully magnified by Hoppe et al. One of the fundamental chinks in the armor of the Free-Banking argument is that fractional reserve banking inherently violates Title-Transfer Theory. It assumes that two people can own the same piece of property simultaneously (p.21). By the very nature of how fractional reserve banking engages in lending, it creates ambiguity regarding ownership. Through issuing more promissory notes both the bank and the customer assume ownership of the same banknote, which is fraudulent by nature (p.22).  Creating more claims to money against the present supply of money will not create more money (p.22). Rather, will only serve to redistribute the present supply of actual currency from client to client without increasing the amount of money in the vaults (p.22). Effectively creating fiduciary media (money-substitutes issued by a bank that is not backed by gold or paper money) out of thin air without transferring assets or liabilities (p.22). As detailed in Rothbard’s theory, we can sell off a portion of our property. However, we relinquish our own once we transfer it to the party purchasing it.

This illusory arrangement also conflates property with property titles (p.23). Treating and categorizing banknotes( fiduciary media, money claims) as money (physical property). This only enables this fallacy to continue. Keeping in tune with the Austrian tradition the Regression Theorem states that all money had a prior use value (p.34-36). For instance, tobacco and nails at various times in human history have been used as money. Meaning that these banknotes cannot be money in the actual sense, but a claim or title to money. Through this categorical fallacy, the banks can divorce titles from ownership resulting in the redistributive practices of fractional reserve lending (p.23). Even going so far as to promising future entitlement to goods against present goods that may or may not be fulfilled. It would be honest to label these claims to future goods or debt claims, but not a claim to money (p.24).

An inquisitive observer may question why it is dishonest or even outright fraud to categorize future claims to money as money titles or even as money? Hoppe et al. frame this from the standpoint of we cannot claim or transfer ownership from a title to a car for anything but a car and the same applies to money (p.25). If we were using more precise language what banks and customers have truly agreed to is debate claims versus money titles. Per the authors of  Against Fiduciary Media Selgin and White adopted a hyper-subjective interpretation of contracts to side-step this discrepancy (p.26). The misrepresentation engaged in by practitioners of fractional reserve banking extends beyond labels of goods, but to actual quantities as well. By treating fiduciary media as money, it creates the false perception that clients own more than what they truly due on paper. The fabricated money quantities do not reflect the amounts present in the vaults of the bank (p.27). Free-banking proponents may believe that fractional reserve banking isn’t so much the problem, rather government intervention. As long as the withdrawal requests are fulfilled it cannot be tantamount to fraud. However, even without state interference, the transfer practices of fractional reserve banking blur the lines of definitive ownership (p.29). Making the system incompatible with upholding property rights or just contract enforcement.

Gresham’s Law Explained

 

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Much like the physical sciences, economics has immutable laws. The Law of Supply and Demand is equally as well known as Newton’s Law of Gravity. In this essay, I will expound upon an economic law that is not as well known to the general public. Arguably, it is just as important as the Law of Supply and Demand. That is Gresham’s Law. Have you ever wonder why people invest in gold or tend to hang on to their cryptocurrency? Outside of legal constraints and vendors opting not accepting such mediums of exchange, Gresham’s Law provides some insight.

 

Colloquially Gresham’s Law has been oversimplified to being defined as “bad” money drives out “good” money. Essentially the introduction of “bad” money will replace “good” money in circulation. It is important to clarify what is meant by “good” and “bad” money.  Bad money is a currency that has a higher nominal value than intrinsic value, making it overvalued (Sparavigna, 2014, P.1) [1]. Vice versa is true of “good” money or undervalued currency. Gresham’s law does not come into effect until legal-tender laws designate that both varieties of money have the same exchange value (Sparavigna, 2014, P.1) [2]. The undervalued currency tends to exit circulation in one of two ways. People either start to hoard the undervalued money (Sparavigna, 2014, P.3) [3]. The undervalued currency leaves circulation through exportation. In the case of monetary metals, the coins are melted down and the bullion is sold abroad (Fetter, 1922, P.46)[4].

 

The general premise behind Gresham’s Law predates its namesake. Tudor-era financier Sir Thomas Gresham. One of the earliest recorded observations of what became known as Gresham’s Law dates back to ancient Greece. In Aristophane’s play  The Frogs a parallel is drawn between the substitution of gold coins for copper coins and the declining quality in politicians (Sullivan, 2005, P.5) [5]. In the 1300s King Charles, the Fifth of France enlisted the help Nicole Oresme to resolve the economic instability caused by the fluctuation in the value of the French coinage. Oresme made the observation that when two coins present having the same face value but different intrinsic value, the higher value coin leaves circulation. The coins of a higher metal content were melted down and the bullion was sold abroad. Oresme believed that government-sanctioned monetary laws should prevent currency debasement (Sparavigna, 2014, P.6) [6].

 

Another theorist who posited a nascent form of Gresham’s Law was no other than Copernicus. He perceived money as ultimately as an estimated indicator of value. If the value was artificially manipulated would cause disruptions in the market (Sparavigna, 2014, P.7) [7]. Copernicus suggested from a policy standpoint that any new money introduced into circulation should be of the same nominal and intrinsic value as the old money. If not the old currency will move out of circulation (Sparavigna, 2014, P.7) [8].  Then there was Sir Thomas Gresham whom this economic law is named after. In 1858,  Henry Dunning Macleod officially named this economic phenomenon after Gresham (Sparavigna, 2014, P.1) [9]. Gresham famously wrote a letter to Queen Elizabeth concerning how reducing the weight of minted coinage encouraged the export of the older coins. Despite popular misconception and clumsy interpretation of Gresham’s letter, there was a stipulation. Good doesn’t necessarily drive out bad. Bad money will remain in circulation providing that the “baser” coins are produced in limited quantity and do not exceed “trade needs” (Sparavigna, 2014, P.9) [10].

 

The misapplication of Gresham’s Law due to careless interpretation has lead to many faulty claims. Attempts to invalidate the law or restructure its conditions have been predicated on such flimsy grounds (Selgin, 2003) [11]. American economist Frank Fetter reinforces Gresham’s stipulation in his 1922 book Modern Economic Problems:

 

The law applies only under certain conditions and within certain limitations. The “ good” will be driven out only if the total amount of money in circulation is in excess of what would be needed if all were of full weight and of the best quality. Paradoxically speaking, if there is not too much money altogether, the bad money is just as good as the good money. But, even if good money is driven out, it may not leave the Country. It may behoarded, or be picked out by banks and savings institutions to retain as their reserves or be melted for use in the arts. (Fetter, 1922, P.42-43) [12].

Making it crucial to properly interpret the conditions under which Gresham’s Law holds. Good money drives out bad money is a far too rudimentary presentation of this economic law.

 

One novel interpretation of Gresham’s Law came from the grandfather of Anarcho-capitalism himself, Murray Rothbard. He stated that Gresham’s Law could not happen in a purely free market. That govenment intervention would be necessary to artificially overvalue one currency and then undervalue another other. That retaining full redemption value of even worn coins versus intentionally debased coins only takes place due to government decree. Valuing a new coin and worn coin at the same nominal value operated as a form of “imposed price control” (Rothnard, 1980, P.19) [13]. Due to the fact that the government is setting a firm pricing floor and ceiling for the value of the worn coins. When by the pure monetary weight they have lost value.

 

Gresham’s Law certainly is an underappreciated economic law.  Generally only acknowledged by monetary economists, gold enthusiasts, cryptocurrency enthusiasts, and proponents of the Austrian School of Economics. To really put it into context please consider the following example. An American Silver Dollar or Silver Eagle has a face value of $1.00. A 2020 edition of the U.S. Silver Dollar retails between $20.00-$25.00 [14]. Which is substantially larger than its nominal value. This is why Silver Dollars are held and sold by collectors rather than used to buy a Big Gulp at the local 7-11 convenience store. Current Silver Dollars are approximately 99.9 % pure silver, 1 ounce by weight. The price of silver today (3/31/20) is $14.29 per ounce [15].