(This interview originally appeared on the website of “The Daily Bell,” June 17, 2013)

Where are gold and silver prices going?

Daily Bell: Thanks for sitting down with us again, Richard. What is going on with gold and silver? The markets seem to be diverging between paper and physical.

Richard Ebeling: In the long run, gold and silver remain the historically important hedges against inflation and government confiscation of wealth through depreciation of paper currencies. The decline in the prices of gold and silver, especially since the beginning of this year, are partly indicative of the short-run fluctuations that always affect commodities because of day-to-day and month-by-month changes in supply and demand conditions.

It is also indicative of the fact that markets are hesitant and uncertain about the future course of central bank monetary policy. The Federal Reserve, the US central bank, has been sending out mixed signals about the course of monetary policy over the remainder of this year and into next.

At the end of last year, the Fed announced that it would continue for an indefinite period its policy of “monetary easing,” with planned purchases of US Treasuries and home mortgages at an average amount of $85 billion per month – which would amount to over $1 trillion in the current year − for as long as the government-measured unemployment rate remained above 6.5 percent and CPI-measured price inflation remained no higher than 2 percent at an annual rate.

Yet over the last couple of months, the Fed has been sending out new signals that it may possibly step back from its “cheap money” policy during the second half of the year, even though the unemployment rate is still around 7.5 percent and the latest CPI-measured price inflation was not much above 1 percent.

If the Fed reduces its purchases of Treasuries and mortgages, interest rates will no doubt start rising from their artificially low levels. As estimated by the St. Louis Federal Reserve Bank, the discount rate and the one-year Treasury bills, when adjusted for price inflation, for a long time have been in the negative range. That is, expansionary monetary policy has resulted in banks being awash in loanable funds such that they are lending money nearly for free to credit-worthy borrowers in the private sector.

This has fed the stock market and bond market booms. But with the uncertainty whether “free money” will continue to be available into next year, people are wondering how much price inflation may or may not pick up in the US.

The doubt is also reinforced by another factor. While the Federal Reserve authorities refuse to admit it, their easy money policy has enabled the US Treasury to finance its trillion-dollar-a-year deficits at rock bottom borrowing costs over the last four years. The government is now estimating that at least for the next few years its borrowing needs will fall noticeably below that annual trillion-dollar level. This means that the Federal Reserve will not have to be as “accommodating” to assure that enough new money has been created to easily “monetize” the government’s borrowing.

But if one takes a wider political and ideological perspective, there is nothing that suggests, either in the US or in Europe, for instance, that governments are likely to reduce the amount of their spending. In the European Union, in particular, all the talk is about ending “austerity,” which is merely “code” language for increasing government expenditures, raising taxes and running up more and larger budget deficits.

In the United States, even if the government’s projections of smaller budget deficits for the next couple of years is correct, the fact remains that everyone knows that the driving force behind the growth in government expenditures are the “entitlement” programs – Social Security, Medicare-Medicaid and soon-to-be fully implemented ObamaCare – with the trajectory of government spending pointing only in the direction of higher and higher taxes and more and more borrowing to fund all of these redistributive promises. This will inevitably mean turning on the monetary spigot in the years and decades to come – if nothing happens to radically reduce and/or abolish the Welfare State.

American Exceptionalism: Individualism, Free Markets, and the Pursuit of Personal Happiness

Daily Bell: It seems like a symptom of a larger dysfunction. You wrote an article recently implying the US was slipping into fascism. Is that a present danger, in your view?

Richard Ebeling: The “larger dysfunction,” as you express it, arises out of a number of factors. The primary one, in my view, is a philosophical and psychological schizophrenia among the American people. While many on “the left” ridicule the idea, there is a strong case for the idea of “American exceptionalism,” meaning that the United States stands out as something unique, different and special among the nations of the world.

That uniqueness arose out of the fact that the American Founding Fathers constructed a political system in the United States based on a concept on which no other country was consciously founded: the idea of individual rights.

In the rest of the world, and for all of human history, the presumption has been that the individual was a slave or a subject to a higher authority. It might be the tribal chief; or the “divinely ordained” monarch who presumed to rule over and control people in the name of God; or, especially after the French Revolution and the rise of modern socialism, “the nation” or “the people” who laid claim to the life and work of the individual.

But the American Revolution and the US Constitution hailed a different conception of man, society and government. Each individual, by his nature and his reason, had a right to his life, his liberty and his honestly acquired property. Governments did not exist to give or bestow “rights” or “privileges” at its own discretion. Governments were to secure and protect each individual’s rights, which he possessed by “the nature of things.”

The individual was presumed to own himself. He was “sovereign.” Self-government in this American tradition did not only or primarily mean the right of people to freely elect those who held political office for the enforcement of rights-protecting laws and legislation – though this was understood to be an essential aspect to a free society.

The real and fundamental notion of “self-government” referred to the right of each individual to rule over himself. That is, as long as the individual did not violate the equal rights of others to their life, liberty and property, each person was free to shape and guide his own future, and give meaning and value to his own life as he considered best in the pursuit of that happiness that was considered the purpose and goal of each man during his sojourn on this Earth.

It is not an accident or a coincidence that during the first 150 years of America’s history there was virtually no Welfare State and relatively few government regulations, controls and restrictions on the choices and actions of the free citizen. Such non-interference with each individual was a logical and necessary corollary of a view of man as possessing a right to his own life and the fruits of his own labor. To compel him to do things or sacrifice things against his will for some presumed national or social good was diametrically opposed to the “American ideal.”

But for more than a century, now, an opposing conception of man, society and government has increasingly gained a hold over the ideas and attitudes of people in the US. It has been a “counter-revolution” against this American ideal. It was “imported” from Europe in the form of modern collectivism. The individual was expected to see himself as belonging to something “greater” than himself. He was to sacrifice for “great national causes.”

He was told that if life had not provided all that he desired or hoped for, it was because others had “exploited” him in some economic or social manner, and that government would redress the “injustice” through redistribution of wealth or regulation of the marketplace. If he had had financial and material success, the individual should feel guilty and embarrassed by it, because, surely, if some had noticeably more, it could only be because others had been forced to live with noticeably less.

These two conflicting conceptions of man, society and government have been and are at war here in the United States. It is what is behind all the “crises” around us. They are the crises of the Interventionist-Welfare State: the attempt to impose reactionary collectivist policies of political paternalism and redistributive plunder on a society still possessing parts of its original individualist and rights-based roots.

The Decay of Freedom in Europe and Socialist Critique of Capitalism

Daily Bell: How about for the West at large?

Richard Ebeling: The euphoria in the West with the fall of the Soviet Union more than two decades ago and the belief that “capitalism” had triumphed over “socialism,” in fact, was only partly justified.

Yes, there are few proponents anymore of old Soviet-style socialist central planning. But I would argue that the “specter of communism” continues to haunt the world. Not, as I said, in the form of a call to return to a comprehensive command and control economy as in the Soviet Union or Nazi Germany. Rather, it is in the form of communism’s and socialism’s critique of capitalism.

Unregulated capitalism leads to “unearned” and “excessive” profits; unbridled markets generate the business cycle and the hardships of recessions and depressions; left on its own, free competition tends to evolve into harmful monopolies and oligopolies, with the wealthy “few” benefiting at the expense of the “many.”

One finds far fewer defenders of free-market capitalism (what historically was known a “classical liberalism”) in Europe, because the collectivist mindset runs far deeper there than in the US. Most Europeans cannot imagine a life without the State caring for them from “cradle to grave.”

It has been captured in all those pictures of “anti-austerity” demonstrations in many European countries. The cries are all the same: “Please don’t take away my government job, don’t take away my government pension, don’t take away my government health care, my government-guaranteed wage and work conditions, my government mandated month’s vacation, my government provided . . . everything!”

From where or from whom the wealth and resources are to come to maintain the unsustainable? Well, from somewhere and from someone. Just don’t take it away. And if it cannot be gotten and guaranteed through the redistributive mechanisms of the European Union and the euro, well, maybe we should return power to our own nation-states to provide the jobs, the social “safety nets” and the financial means to pay for it through, once again, printing our own national paper currencies.

This is the political-philosophical bankruptcy of the West and the dead ends of the collectivist promises of the last 100 years.

Why Socialism or the Regulated Economy Must Result in Failure

Daily Bell: Let’s ask you some political questions. Please relate what we are asking to Mises and his great work, Socialism. Is the EU starting to collapse, or just the euro?

Richard Ebeling: Well, Ludwig von Mises’s book, Socialism: An Economic and Sociological Analysis, originally published in 1922, demonstrated how and why a socialist, centrally planned system was inherently unworkable. The nationalization of productive property, the abolition of markets and the prohibition of all competitive exchange among the members of society would prevent the emergence and operation of a price system, without which it is impossible to know people’s demands for desired goods and the relative value they place on them. It also prevents the emergence of prices for the factors of production (land, labor, capital) and makes it impossible to know their opportunity costs – the value of those factors of production in alternative competing uses among entrepreneurs desiring to employ them.

Without such a price system the central planners are flying blind, unable to rationally know or decide how best to utilize labor, capital and resources in productively efficient ways to make the goods and services most highly valued by the consuming public. Thus, Mises concluded, comprehensive socialist central planning would lead to “planned chaos.”

Mises also extended his criticisms of socialism to the interventionist-welfare state. Government control of prices and/or regulation of production do not completely prevent markets from working, but it is like “sand in the machine.” Government intervention prevents prices from “telling the truth” about the real supply and demand conditions thus leading to imbalances and distortions in the market. Government production regulations, controls, restrictions and prohibitions prevent entrepreneurs from using their knowledge, ability and capital in ways that most effectively produce the goods consumers actually want and at the most cost-competitive prices possible. Thus, the interventionist state leads to waste, inefficiency and misuses of resources that lower the standards of living that we all, otherwise, could have enjoyed.

You asked about the euro and its future. The first thing we need to keep in mind is that the euro and the US dollar are currencies subject to monetary central planning. They are monopoly monies controlled and issued by central banks. Their quantity is determined by the decisions of the monetary central planners who oversee them; they influence the amount of “reserves” banks have for lending purposes, and through this control over the supply of money in the banking system can manipulate a variety of interest rates, especially in the short run.

As a consequence, financial markets do not work like real markets. We cannot be sure what the amount of real savings may be in the society to support real and sustainable investment and capital formation. We cannot know what the “real cost” of borrowing should be, since interest rates are not determined by actual, private sector savings and investment decisions. And, therefore, there is no guarantee that the amount of investments undertaken and their time horizons are compatible with the available resources not also being demanded and used for more immediate consumer goods production in the society.

This is why countries around the world periodically experience booms and busts, inflations and recessions − not because of some inherent instabilities or “irrationalities” in financial markets, but because of monetary central planning through central banking that does not allow market-based financial intermediation to develop and work as it could and would in a real free-market setting.

The divisions in the European Union go beyond monetary policy alone, of course. It is closely connected, as I said earlier, with the fiscal crisis in the EU due to the contradictions and conflicts within the welfare state.

Daily Bell: Can the ECB save it with more monetary stimulation?

Richard Ebeling: The European Central Bank only could “save” the euro if it stopped playing central planner, that is, if it stopped manipulating the money supply and interest rates. This is highly unlikely, given the economic philosophy that guides those who run the ECB and the political demands of the member governments. So monetary mismanagement in Europe will continue to persist.

Given the more “conservative” views of the governments of some of the member countries on the question of monetary “stimulus,” I think it is highly unlikely that the ECB will follow a monetary policy course, in the foreseeable future, which would threaten hyperinflation.

The False Meaning of “Austerity” in Europe and America

Daily Bell: What is happening to the IMF’s austerity? That didn’t work very well.

Richard Ebeling: What is “austerity”? I think most ordinary people, when they hear the word, think that it means that someone has been spending too much, has gotten themselves into unsustainable debt and now has to significantly get their personal finances in order so as not to “go under” – that is, lose their home, be delinquent on their credit cards and face bankruptcy.

The individual has to “trim” his current spending out of income: find ways to cut corners and reduce buying those things that he decides are of a lower priority and which he can get by without. At the same time, he might see if there are any avenues to try to earn some extra income to help take the pressure off their budgetary problems.

But in the United States and especially in Europe, government “austerity” means merely temporarily reducing the rate of increase in government spending, slowing down the rate at which new debt is accumulating and significantly raising taxes in an attempt to close the deficit gap.

The fundamental problem is that over the decades, the size and scope of governments in the Western world have been growing far more than the rates at which their economies have been expanding, so that the “slice” of the national economic “pie” eaten by government has been growing larger and larger, even when the “pie” in absolute terms is bigger than it was, say, 30 or 40 years ago.

Too many European governments, in general, take the view that “austerity” means squeezing the private sector more through taxes and other revenue sources to avoid any noticeable and significant cuts in what government does and spends. So there is “austerity” for the private sector and a mad rush for financial “safety nets” for the government and those who live off the State.

Now, don’t get me wrong, some governments have had to make cuts in social benefits and redistributive programs simply because the money is not there to cover all that has been promised and citizens have been used to receiving. But the attitude of those affected by any such “trimming” is that it should be reversed, preferably immediately, since they can’t conceive of life without what the government provides and guarantees; and those in political power clearly view it all as an “emergency” to get over, so that when “normal” times return, the “trend line” of growing government can be restored and continued.

In reality, of course, it is the burdens of government regulation, taxation and impediments to more flexible labor and related markets that have generated the high unemployment rates and the retarded recovery from the recession.

Leaving the European Union?

Daily Bell: Will Britain leave the EU?

Richard Ebeling: I think that if a referendum was held many people would vote for departure or reconsideration of Britain’s membership in the EU. However, such critics of the European Union have a wide variety of reasons for wanting Britain to withdraw.

In my view, the fundamental reason for “disappointment” with the EU is that it has strayed from an earlier conception that it was meant to offer opportunities for mutual improvement and reduced conflicts that might lead to war by establishing a system of freedom of trade among the member countries.

Instead, the “common market” ideal has been transformed into the goal of a European Union “Super-State” to which the individual countries and their citizens would be subservient and obedient. The tentacle of regulations, restrictions and politically-correct social controls are spreading out in every direction from Brussels and its European-wide manipulating and mismanaging bureaucracy.

What Britain and Europe should have as its goal is the ideal of the classical liberal free traders of the 19th century – non-intervention by governments in people’s lives, at home and abroad. That is, a de-politicization of society, so people may freely work, trade and travel as they peacefully wish, with government merely the protector of people’s individual rights.

We are a long way from that ideal in both domestic and foreign affairs. But it is the alternative that friends of freedom should be espousing for a truly better world for tomorrow.

Daily Bell: What do you make of UKIP?

Richard Ebeling: As with many political movements and parties, there are various strains of policy views. The issue is why does the UKIP support withdrawing from the EU? What would they want Great Britain to be like “outside” of the European Union? Listening to some UKIP supporters quoted in the media, one has the impression that too many want to reduce or limit trade with Europe and “protect” British industry through trade barriers.

Or they express anti-immigrant sentiments that ignore the benefits that “new” blood can offer to a society – risk-taking entrepreneurs, those who will take jobs that British subjects may be reluctant to perform, skilled and unskilled labor that helps keep market wages from significantly rising and therefore keeping costs down so British industry can become more effective in both its domestic market and in foreign lands.

The “problem” with free immigration into Britain from other EU countries is not the arrival of more hands to do work that can be done. Rather, it is the availability of incentive-destroying welfare and related benefits that undermine the incentive for too many people to find productive employment.

Take the benefits away and tell people they are free to come and work to support themselves and their families. Restore more flexibility and competitiveness to labor markets and reduce taxes and business regulations. Then those who come to Britain’s shores will be those wanting freedom and opportunity without being a burden upon others.

But in the eyes of some UKIP members and supporters, Britain needs more and better welfare guarantees and more government financial supports. Needless to say, these that got Britain and many other nations, to begin with.

Daily Bell: There is now a German version of UKIP. Are the Germans rebelling against the EU finally?

Richard Ebeling: Many Germans resent that other members of the European Union expect Germany to pick up the tab for the loans to be made to cover the financial embarrassment of those countries far more fiscally irresponsible than the Germans.

Furthermore, many Germans wish the Mark had not been abolished as their own national currency. One indication of this is that according to publications like Der Spiegel, people in Germany use over 30 regional and local alternative “private” currencies in place of the euro.

I think there are a significant number of Germans who see the benefit of open commerce and trade with any and all of their European neighbors. But they do not believe that the EU serves, any longer, as the vehicle to sustain and secure it.

Why Mises Was Right on European Integration

Daily Bell: Mises was correct, wasn’t he?

Richard Ebeling: On issues of European economic integration, Mises was a strong advocate of free trade in goods, money and people. But he believed that this was unlikely to come about through intergovernmental bureaus, agencies and departments. What was needed was a change in ideas from the statist mentality to one of individual freedom and unhampered free markets.

In an epoch of collectivist ideas, don’t be surprised if governments regulate, control, intervene and redistribute wealth. And it does not matter if such policies are introduced by national governments or super-national political entities such as the European Union. The greater danger from the EU structure is that bad polices get introduced in all of Europe at the same time. Where political control is decentralized into the hands of the traditional nation-states, one country may follow an especially foolish economic policy direction; but the surrounding countries need not do so, also. The lessons from implementing wrong and misguided policies can be learned before other countries going down the same bad path.

Why Keynesian Economics Persists

Daily Bell: How come, despite Mises’s contributions, nation-states around the world use Keynesian formulas?

Richard Ebeling: Keynesian policies offer people and politicians what they want to hear. Claiming that any sluggish business or lost jobs are due to a lack of “aggregate demand,” Keynes argued that full employment and profitable business could only be reestablished and maintained through “activist” government monetary and fiscal policy – print money and run budget deficits.

In the name of assuring “national prosperity,” politicians could spend money to buy the votes that get them elected and reelected to government offices. And every special interest group could make the case that government-spending programs that benefitted them were all reasonable and necessary to assure a fully employed and growing economy.

Furthermore, the Keynesian rationale for government deficit spending enabled politicians to seem to be able to offer something for nothing. They could offer, say, $100 of government spending to voters and special interest groups but the tax burden imposed in the present might only be $75, since the remainder of the money to pay for that government spending was borrowed. And that borrowed money would not have to be repaid until some indefinite time in the future by unspecific taxpayers when that “tomorrow” finally arrived.

This type of fiscal sleight-of-hand can work and go on for a long time. But eventually, the debt comes due and it is discovered that someone is going to have to pay the bills for all the previous years of government spending with borrowed money.

This is the bill that too many European governments are finding it hard to pay – without either dramatically cutting spending or raising taxes. In other words, as Ludwig von Mises warned more than once during his lifetime, eventually you reach the longer-run consequences of short-run policies. That is where we are today.

Daily Bell: The biggest problem that Keynes had, from our point of view, is that he never defined how a depression or recession comes about. What was his explanation, if he had any?

Richard Ebeling: In a nutshell, Keynes argued that the market economy’s inherent “instability” arose from the “animal spirits” of businessmen, who were subject to irrational and unpredictable waves of “optimism” and “pessimism.” This set off waves of unsustainable investment spending followed by a prolonged period of money hoarding by people in the society that pulled money out of the economy, which caused the fall in “aggregate,” or economy-wide, demand that could only be filled by government borrowing the sums of unspent hoarded savings, or by printing money.

Keynes also claimed that workers would not accept cuts in their money-wages to make themselves less costly to hire because of “money-illusion.” That is, the idea that workers only thought about the nominal amount of money in their paychecks, and not that at a time of falling prices in a depression, they could accept lower money-wages and be no worse off in real terms if the prices of the goods they bought had decreased more or less by the same amount as their wages had gone down.

Thus, the economy could get stuck in a prolonged depression or recession with a relatively high level of unemployment, unless cured by the “stimulus” of government borrowing and spending.

The “Austrian” Explanation of Inflation and Depression

Daily Bell: Contrast that to Mises, please.

Richard Ebeling: Mises argued that there was nothing inherent in the market economy to bring about these swings of economic booms followed by periods of depression and unemployment. If markets got out of balance with the necessity of an eventual correction in the economy to, once again, set things right, the source of this instability was government monetary policy.

Central banks too often followed a policy of trying to create “good times” in the economy by expanding the money supply through the banking system. With new, excess funds created by the central bank available for lending, banks lower rates of interest to attract borrowers. But this throws savings and investment out of balance, since the rate of interest no longer serves as a reliable indicator and signal concerning the availability of real savings in the economy in relation to those wanting to borrow funds for various investment purposes.

Due to the artificially lower rates of interest, investment projects of various time durations are undertaken which, in retrospect, will be found to be unable to be completed or operated on a profitable basis because the savings needed to finish the projects or operate them profitably does not exist. The economic crisis comes when it is discovered that all the claims on resources, capital and labor for all the attempted consumption and investment activities in the economy are greater than the actual and available amounts of such scarce resources.

The price inflation that usually accompanies a monetary-generated economic boom period is an indicator that people are trying to purchase and use more of the scarce resources of the society than are available for all the investment projects attempted.

The recession period, in Mises’s view, is the necessary “correction” period when in the post-boom era, people must adapt and adjust to the newly discovered “real” supply and demand conditions in the market. Any interference with the “rebalancing” of the economy by government raising taxes, imposing more regulations, or new artificial government “stimulus” activities merely makes it more difficult and time-consuming for people in the private sector to get the economy back on an even keel.

Daily Bell: How come Keynes retains any credibility at all?

Richard Ebeling: In my opinion, it is because of the theory’s naïve and superficial simplicity. People are out of work,businesses are operating at less than full capacity and goods are not selling at the retail end of the market? Nothing is simpler than to believe that all can be set right if only “someone” – the government – is out spending more money so the goods on the shelves can be sold and profits can once more be made by getting the machines working in the factories and hiring back unemployed labor to get the necessary work done.

Plus, as I explained already, it is a convenient explanation for politicians to use as a rationale for increased government spending with borrowed money to feed the special interests the politician needs to stay in office. As one of Franklin D. Roosevelt’s staff members said during the New Deal Days of the 1930s, “Spend, spend, spend – elect, elect, elect.”

Daily Bell: Does printing money ever work? What are the effects?

Richard Ebeling: The most concise answer is: No. Of course, the central bank can create money out of thin air and governments can proceed to spend it. This may put people to work, producing what the government is spending that money on. And after a while, prices in general – “price inflation” – can emerge as one of the symptoms.

But in the longer run the jobs created in this way by the monetary “stimulus” are totally dependent on its continence. That is, it more or less requires government continuing to spend sums of money on the same particular goods, and on the basis of which businesses find it profitable to hire specific types of workers to do particular jobs that produce the goods the new money is being spent to buy.

Thus, once any spending with this newly created money is slowed down or stopped, the very jobs “created” by the government in this way inescapably start disappearing, resulting in emerging unemployment. As Mises’s longtime friend and colleague, the Austrian economist and Nobel Prize winner, Friedrich A. Hayek, once observed, unemployment is not “caused” by stopping an inflation, but rather inflation induces the artificial employments that cannot be sustained and which inevitably disappear once the inflation is reined in.

Daily Bell: Why are the Japanese now embarking on it? What will be the end result?

Richard Ebeling: The Japanese government has been very clear over the last several months since it came into office. They want to create a price inflation equal to at least two percent a year to try to push up “aggregate demand” and “create” jobs. In my view, the end result will be the same as everywhere else: a short-run impact that sets the stage for another downturn in the future.

The Federal Reserve and How America Got into the Recession

Daily Bell: How about in the US? We are told that Bernanke saved the US economy by printing money. Can Bernanke now engineer a soft landing by gradually withdrawing the stimulus? Or would that put the US in another deeper recession/depression? Is the US really recovering?

Richard Ebeling: The recession of 2008-2009 was the result of several years of central bank stimulus. From 2003 to 2008, the Federal Reserve increased the money supply by about 50 percent. Interest rates for much of this time, when adjusted for inflation, were either zero or negative.

Awash in cash, banks extended loans to virtually anyone, with no serious and usual concern about the borrower’s credit-worthiness. This was most notably true in the housing market, where government agencies like Fannie May and Freddie Mac were pressuring banks to make mortgage loans by promising a guarantee that they would make good on any bad home loans.

Since 2008-2009, the Federal Reserve has, again, turned on the monetary spigot, increasing its own portfolio by almost $3 trillion, by buying US Treasuries, US mortgages and other assets. So why has there not been a complementary explosion of price inflation?

In some areas there has been, most clearly in the stock market and the bond market, But the reason why all that newly created money has not brought about a higher price inflation is due to the fact that a large part of all newly created money is sitting as unlent reserves in banks. This is because the Federal Reserve has been paying banks a rate of interest slightly above the market interest rates to induce banks not to lend.

In my view, the idea of a “soft landing” is an illusion based on the idea held by central bankers, themselves, that they have the wisdom and ability to know how to “micro-manage” all the changes and adjustments resulting from their own manipulations of the monetary aggregates. They do not have this wisdom and ability. So hold on for what is most likely to be another rocky road.

Daily Bell: What about employment? Why hasn’t employment rebounded in the US or Europe?

Richard Ebeling: European Union unemployment is at historical highs. This is the worst jobs recovery in US post-World War II history. Among the reasons for the sluggish jobs growth in the US are: (a) general “regime uncertainty,” that is, no one knows what government policy will be tomorrow; will ObamaCare be fully implemented after January 2014?; (b) what will taxes be for the rest of the current president’s term in the White House; (c) what will the regulatory environment be like for the next three years – in 2012, the government implemented around 80,000 pages of regulations as printed in the Federal Registry; (d) how will the deficit and debt problems play out between Congress and the White House and will it threaten the general financial situation in the country; and (e) what wars, if any, will the government find itself involved in, in places like the Middle East?

In Europe taxes are high, regulation is pervasive and “activist,” labor market rules make it difficult to fired workers, new debt crises could break out at any time and no one knows for sure what is likely to happen with the euro and the EU as a whole. This is not a positive economic environment for job creation.

The Coming “Bust” in China’s Economy

Daily Bell: Will the Miracle of China continue or is that economy headed down?

Richard Ebeling: I was in China for a brief time in January 2013. First impressions when you are in Shanghai are of a modern society whose people are striving to catch up with and match the West. But a little bit more observation and questioning of people makes it clear that this is still a controlled and commanded society, with a government that works hard to try to determine what people read, see and think.

A bit of travel around the country also makes it clear that China is facing the danger of its own economic bubbles bursting. The vast construction boom is far out of any proportion to what the society is wealthy enough and economically developed enough to efficiently utilize.

Impressive row after row of skyscraper apartment complexes everywhere one looks in cities and on the roads between cities are often dark and empty at night, with vacancy rates of 80 or 90 percent. Shopping malls and government-planned entertainment and “restaurant rows,” with literally dozens of restaurants and bars next to one another, are practically all empty even on a Friday or Saturday night.

All these building projects have been brought into existence by a government that not only controls the money supply and manipulates interest rates but also heavy-handedly tells banks whom to specifically loan to and for what investment activities. Central planning is alive and well in China, with the motives being both power and profits for those inside and outside the Communist Party having the most influence and connections in “high” places.

In my opinion, China is heading for a great economic crisis, resulting from a highly imbalanced and distorted economic system still guided far more by politics than sound market decision-making. Whether China’s bubbles burst next month, or two years from now, it did not seem that there was anyway for them to spend their way out of these wide and unstable mismatches between supply and demand.

This makes it highly unlikely that their currency, the yuan, has any chance of becoming a major monetary player in global financial markets in any foreseeable future. It is a money that still primarily exists to serve the political purposes of those who sit in the “inner circles” of power in Beijing.

Another worrisome impression is that Chinese leadership is determined to play the closely controlled “nationalist” card to maintain the loyalty and obedience of the population. Students at universities, I discovered, know little about the history of their own country other than what the Communist Party sees that they know.

There was surprise and shock among some Chinese students when in my lectures at a university in the industrial city of Wuxi I explained to them the costs in lost human lives under Chairman Mao in the name of building socialism – estimated at 80 million innocent men, women and children who were shot, worked to death, or starved to death in government-caused famines.

Their understanding and view of the West, including America, is one designed by tightly controlled government educational propaganda. And most people don’t want to find out anything different from what the government wants them to know. This is partly because they “don’t want trouble,” and partly because they just want to focus on getting a good job and becoming wealthy if they can.

The “Great Leap Forward” or the “Cultural Revolution” that destroyed tens of millions of lives to serve Mao’s purposes? Well, they know just that it happened a long time ago, are bad things that happened to a grandfather, that it is not relevant to the young student’s life. As for Tiananmen Square in June 1989 . . . almost none ever heard of it and know nothing about it.

But what is known is that while corruption is rampant and power is everywhere abused, the leaders are working hard to make China strong on the international scene, to restore China’s rightful place as a “great power” to be feared and respected. The young Chinese can feel pride and loyalty to the government that is undoing the humiliations China long suffered at the hands of the Western powers in the 19th and 20th century.

The Importance of Principles and Ideas to Restore Freedom

Daily Bell: Where does the West go from here … a gradual, continual unraveling?

Richard Ebeling: If there is one thing that history can teach us, it is that the future course of human events is unpredictable in all their detail. One hundred years ago, in 1913, how many could have predicted that a year later a European-wide war would break out that would lead to the destruction of great European empires and set the stage for the rise of totalitarian collectivism that resulted in an even worse global war two decades later?

In the 1970s, how many predicted the end of the Soviet Union before the end of the 20th century and that it would end not in a terrible global nuclear conflict but through a domestic economic implosion with relatively little loss of life in bringing about its disappearance from the map of the world?

How will the West get through its current cultural, political and economic crisis, looking toward the rest of the 21st century? That will depend upon the power and influence of ideas in the context and circumstance of actual unfolding events.

No one knows the answer to that. It will, no doubt, seem “obvious,” when a historian looks back at our time from the perspective of, say, the year 2113. But we who are living through that history cannot completely or confidently see what tomorrow fully holds in store for us.

A major reason for this uncertainty is that it depends upon what we decide to do. In other words, our ideas and deeds will determine the shape of things to come. It does not already exist in some “big book in the sky,” from which nothing can deviate. Each of us, in our own corners of life, gets to help, in big ways and small, to make that history.

Thus, whether, at the end of the day, freedom triumphs and the future is one of liberty and prosperity is partly on each one of us. Near the end of his great book, Socialism, Ludwig von Mises said:

“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore, everyone, in his own interest, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us . . . Whether society shall continue to evolve or where it shall decay lies . . . in the hands of man.”

The circumstances and the specific battles have changed since Mises wrote these words in the context of the, then, challenge of comprehensive socialist central planning of man and society.

But it no less rings true for our time, as we fight over the right of individuals to be free men, instead of puppets at the end of the strings manipulated and pulled by the political paternalists who still assert that they know better than we do, how we should live our lives.

Daily Bell: Thanks again for your time.

One of the most sacred ideas in our democratic era is the belief in the universal and equal right of all citizens to have the voting franchise.  Yet, some have argued against this “right.” But their challenge to an unlimited right to vote has not been based on grounds of gender, age, or property ownership.

One such critic was the famous British social philosopher and political economist, John Stuart Mill. In his 1859 book, Reflections on Representative Government, (Chapter 8, ‘Of the Extension of the Suffrage’), Mill argued that those who received “public relief” (government welfare) should be denied the voting franchise for as long as they receive such tax-based financial support and livelihood.

Simply put, Mill reasoned that this creates an inescapable conflict of interest, in the ability of some to vote for the very government funds that are taxed away from others for their own benefit. Or as Mill expresses it:

“It is important, that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people’s money, have every motive to be lavish and none to economize.

“As far as money matters are concerned, any power of voting possessed by them is a violation of the fundamental principle of free government . . . It amounts to allowing them to put their hands into other people’s pockets for any purpose which they think fit to call a public one.”

Mill went on to explain why he considered this to be especially true for those relying upon tax-based, redistributed welfare dependency, which in 19th century Great Britain was dispersed by the local parishes of the Church of England. Said Mill:

“I regard it as required by first principles, that the receipt of parish relief should be a peremptory disqualification for the [voting] franchise. He who cannot by his labor suffice for his own support has no claim to the privilege of helping himself to the money of others . . .

“Those to whom he is indebted for the continuance of his very existence may justly claim the exclusive management of those common concerns, to which he now brings nothing, or less than he takes away.

“As a condition of the franchise, a term should be fixed, say five years previous to the registry, during which the applicant’s name has not been on the parish books as a recipient of relief.”

I would suggest that the same argument could be extended to all those who work for the government, for as long as they are employed by the government they are directly living off the taxed income and wealth of others.

And if it is said that government employees pay taxes, too, the reply should be that if you receive a $100 salary from the government and pay in taxes, say, $30, you remain the net recipient of $70 of other people’s money and are not a contributor to the costs of government.

Extending this logic a little further, I think that the same case could be made that all those who live off government expenditures in the form of government contracts or subsidies, should likewise be excluded from voting for the same conflict of interest reasons.

Such individuals and their private enterprises may not be totally dependent upon government expenditures for their livelihood. A rule might be implemented that to be eligible for the right to vote: no individual or the private enterprise from which he draws an income should receive (just for purpose of example), say, more than 10 percent of his or her gross income from government spending of any sort. 

If such a voting restriction had been in affect 100 year ago, it is difficult to see how the government could ever have grown to the size and cost that it now has in society.

In turn, if there were any way to implement such a vote-restricting rule, it is equally hard to see how the current, gigantic interventionist-welfare state could long remain in existence. Government, no doubt, would soon be cut down to a far more limited and less intrusive size.

Our dilemma, today, is that, to use John Stuart Mill’s phrase, we have a political system in which many who have the right to vote, use it “to put their hands into other people’s pockets for any purpose which they think fit to call a public one.”

Unless some way is found to escape from our current political situation, to use Frederic Bastiat’s words, in which the State has become the “great fiction” through which everyone tries to live at everyone else’s expense, we are facing a fiscal and general social crisis that may truly be destructive of society in the coming years.

Karl Marx was born on May 5, 1818 in the German Rhineland town of Trier, and died on March 14, 1883 in London.It is worth recalling, also, that there was a time when Marx was an anti-communist.

It is said that by its fruit you will know the tree. The last one hundred years is a clear testament to the consequences of Marx’s influence on modern history.

Accepting the “classical” labor theory of value, he concluded the workers were “exploited” by the “capitalists.” Marx claimed that “profit” was a portion of the workers’ output extracted by the property owners as the “price” the workers had to pay to have access to the privately owned physical means of production, without which they could not produce and survive.

The Austrian economist, Eugen von Boehm-Bawerk, in Capital and Interest (1884) and Karl Marx and the Close of His System (1896), demonstrated that Marx had confused “”profit” with “interest.” In a competitive market, profit is a temporary discrepancy between selling price and costs-prices, eventually competed away by businesses bidding up wages for workers (and other resource prices) to work for them, and those same businesses then competing for consumers to buy their output by offering their wares at better selling prices than their rivals.

What Marx had failed to fully understand was that production takes time, and that if workers would not or could not wait until the product was finished and sold to consumers to receive their wages, then someone had to “advance” those wages to them over the production period.

That, Boehm-Bawerk showed, is what the employers did, so that what workers received while working was the discounted value of their marginal product. The “gain” received by employers over their costs of production, even in long-run equilibrium, was the implicit interest for having ‘waited” for the product to be finished and sold, when they might have done other things with the “savings” they had advanced to those workers during the period of production.

If it is recognized that “time” has value, and, therefore, an intertemporal price, the notion that workers were or could be “exploited” in open, competitive markets for resources and finished goods was fundamentally wrong.

On this foundation of sand, Marx constructed his theory of the “injustice” of capitalism that has, in various forms, continued to plague the ideas and policies of countries around the world.

In the 20th century, it inspired the communist revolutions that led to the deaths of tens of millions of innocent men, women, and children. For those not aware of the magnitude of this human catastrophe, I recommend, The Black Book of Communism (1997), written by former French socialists and “fellow-travelers, that tells the horrific tale of “socialism-in-practice,” wherever those guided by Marx’s ideas came to power.

Or Paul Hollander’s edited volume, From the Gulag to the Killing Fields (2007), that brings together excerpts from the personal accounts of those who lived through the “building” of the brave new worker’s paradise, with all their tragic details about the fate of those considered “enemies of the people,” or merely expendable cogs in the wheel of socialist central planning.

Many on the “left” have tried to rationalize away Marx’s responsibility by arguing that these policies and practices were not what Marx “really meant.” But it was Marx who, in Critique of the Gotha Program, (1875), called explicitly for the “Dictatorship of the Proletariat” in the “transition” stage of socialism leading to the final historical epoch of post-scarcity communism.

The responsibility of the revolutionary vanguard managing the socialist state in the name of the people, would be to “re-educate” the workers to free them from the residues of their “false consciousness” left over from the capitalist epoch now past. The revolutionary socialist state would also have to be vigilant in “suppressing” the remnants of the capitalist class in the new socialist society.

The socialist state would implement all the elements of the modern welfare system. And it was Marx who called for the socialist central planning system to replace the “anarchy” of decentralized market competition, and therefore required the socialist state to become the most powerful of all monopolies over everything and everyone.

Nothing that Lenin or Stalin implemented in Soviet Russia or Mao in China, for example, was not called for or implied in Marx’s own writings and arguments. For the socialist horrors of the 20th century, there is only one verdict to be pronounced against Marx: guilty as charged.

The heart of Marx’s hatred for capitalism was his belief that it was the highest stage of an “alienating” division of labor, in which the worker was separated from ownership of the tools with which work was done, and separated from other workers by each specializing in different lines of production.

His wistful “golden age” was that ancient primitive time when mankind existed in small collectivist bands — living in common, working in common, sharing in common. The individual was inseparable from the tribe, and the tribe enveloped the individual totally with no life, existence, or meaning outside of “the group.”

The idea of the distinct and unique, and self-motivated and self-interested individual was the essence of a corrupt and immoral society, in Marx’s eyes. And the historically “inevitable” coming of socialism and communism would once again confine the individual human being within the tightly woven tapestry of a collectivist society.

But it should remembered that there was a time before Marx was, well, a “Marxist.” In October 1842, when Marx was the editor of the Rheinische Zeitung [Rhineland Times], he wrote in an editorial:

“The Rheinische Zeitung . . . does not admit that communist ideas in their present form possess even theoretical reality, and therefore can still less desire their practical realization or even consider it possible.”

Tragically for mankind, rather than continuing to consider communist ideas to not possess any “theoretical reality” and to be not desirable in “practical realization,” in a few years Marx built up his own presumed version of a “scientific socialism” that when brought into “practical realization” resulted nothing but  death and misery for untold millions around the world.

The following economic case for right-to-work is an enlarged excerpt from a joint report prepared by a group of faculty members associated with Northwood University and Central Michigan State for the Michigan Chamber of Commerce entitled, 2012 Michigan Economic Competitiveness Study. This part of the report was written by Richard M. Ebeling, professor of economics at Northwood University.

The current economic crisis that has gripped the United States over the last several years has been especially negative in its affects on the levels and opportunities for employment in various parts of the country. Michigan has been one of the hardest hit states, with unemployment levels significantly above the national average.

A number of states attempting to recover from the severity of the recession have been looking at policy changes and economic reforms that could improve the labor market in terms of job creation. One of these policy changes has been reconsideration of Right-to-Work Laws. (Moore and Newman, 1985)

The Principle of Freedom of Association
An underlying and fundamental principle in the American political and economic system is the idea of freedom of association. Individuals should have the personal liberty to freely associate with any other members of society for lawful and commonly shared goals, purposes, and activities.

This principle also implies it’s opposite: that individuals may not be compelled or coerced into joining or participating in any association without their voluntary consent. The underlying premise of a free society is the right of individuals to say, “No,” whether this involves joining a church, entering into a contract, participating in any social club or group, or membership in a labor union. (Baird, 1988)

Historically, the idea of a right-to-work emerged out of the medieval system of compulsory guilds, under which employment and training within various professions, occupations, and trades were strictly controlled and regulated by urban associations of “masters” who limited entry of “apprentices” into their corners of the market. The occupational guild system artificially narrowed employment opportunities, restricted supply of goods and services, and limited competitive alternatives for buyers. (Epstein, S., 1991)

Beginning in the 16th and 17th centuries, the guild systems were slowly weakened and abolished. By the second half of the 18th century, the ideal had become each individual’s right to work at any line of employment that he freely chose to enter. (Robbins, 1978, pp.5-13; Dickman, 1987, pp. 28-39). The idea was captured in the words of Adam Smith in his famous work, The Wealth of Nations, in which he spoke of “the obvious and simple system of natural liberty” under which:

“Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” (Smith, [1776] 1937, p. 651)

This principle of economic liberty and freedom of association became the hallmark of the American enterprise system. As urbanization and industrialization slowly developed and then accelerated in 19th century America, workmen in a variety of skilled occupations formed trade unions to negotiate for better work conditions and improved salaries.

However, under common law practices labor unions were not allowed to compel membership in their organizations for those seeking to work in a particular industry or occupation; nor could employers be forced to enter into union contracts if mutually agreed upon terms could not be found. (Reynolds, 1987, pp. 5-9)

Trade Unions and the Right-to-Work
This began to change in the late 19th and early 20th centuries. The Sherman Anti-Trust Act of 1890, which was meant to prevent monopoly restraint of trade by companies entering into cartel arrangements to limit competition and raise prices charged to consumers, was also applied to labor unions in a number of cases that came before the courts.

However, in the Clayton Act of 1914, unions were exempt from anti-trust prosecution under the assertion that “labor” was a commodity different from ordinary goods and services bought and sold on the market. The special privileging of labor unions to establish union representation over all workers employed on the basis of a majority vote by employees in a company was reinforced by the Norris-LaGuardia Act of 1932, and, then, with the establishment in 1935 of the National Labor Relations Act. (Boarman, 1963; Epstein, R., 2004)

In 1947 the National Labor Relations Act was amended allowing state governments to have the legislative authority to limit union representation by passing Right-to-Work Laws, freeing workers from compulsory union membership (the “closed” or “union” shop) or payment of mandatory union dues (the “agency” shop) to remain employed as a non-union member.  (Hartley, 1947; Petro, 1957, pp. 138-148; Schmidt, 1973; Reynolds, 1984, pp. 92-132). Currently almost half of the states have passed Right-to-Work Laws.

Critique of Union Arguments for Compulsory Membership
Broadly, the arguments against an individual employee’s right to work without membership in a union has been of three general types: (a) Only unified union membership can protect all workers against the superior bargaining power of the employer; (b) Only compulsory membership can protect other workers from the “unfair” competition of non-union members that may result in the wages of all workers in that industry being pushed below their “fair market value”; and (c) Only mandatory union membership (and dues paying) prevents non-union members from a “free ride” at the expense of union workers in a company or industry.

(a) The supposed superior bargaining power of the employer. The inferior position of the individual worker is claimed to be due to a number of factors. First, it is argued that the individual worker must accept the wage offered to him by the employer, since if he does not accept it, there are always many other workers looking for jobs ready to take his place. This ignores the fact that competition is two-sided in virtually every modern, developed market, and especially in a country like the United States. Thus, any employer who fails to offer a wage that tends to reflect the anticipated value that the worker contributes to a company’s profitability runs the risk that the potential employee with useful and productive skills will search out alternative employment where his skills are more highly valued by another employer wishing to get ahead of his competition.

The same applies to a currently employed worker who, if he believes that he is not receiving a wage commensurate with his actual market value, will see the advantage of changing employers in the same or a related market. This will force any employer attempting to “low ball” his workers to raise his wage offers, or run the risk of losing a growing number of qualified workers without whom he may not be able to retain his market position relative to his rivals.

Another argument sometimes used to claim that the individual worker has the inferior bargaining position says that the individual worker cannot “wait” to look for a better job. First, if the worker does not earn wages he cannot eat. The employer can wait to find a worker willing to take any salary he wishes to offer because, he has “capital” to live off until a worker comes along who will accept the lower wage the employer wishes to pay. Second, it is stated that labor is a perishable “commodity.” It cannot be “stored” to sell on another day. So if the worker does not take the wage offered, that lost day’s labor can never be regained.

However, that are limits to any such claimed “waiting” advantage on the part of the employer. First, every day of less output produced because needed workers are not yet hired is a day with lost sales revenues resulting from less output than could have been produced and sold on the market. Thus, waiting to find workers who might be willing to accept wages less than their real market value imposes a cost on the employer in the form of smaller profits and less market share that could have been acquired, if a wage more in line with workers’ worth was offered and accepted.

Second, financial capital may be “stored” rather than invested in hiring workers and producing output. It can be held as cash or loaned out (short-term) for some interest return. But delaying the hiring of workers who would otherwise have gladly worked at reasonable market-valued wages results in the prospective employer earning neither profit nor interest if a part of his financial capital is held as cash. And even if lent out to earn short-term interest, the potential employer loses every day the difference between the interest he may earn and the greater profits that could have been his if he had not delayed hiring needed workers for productions that could have been manufactured and sold. (Hutt, 1954; 1973, pp. 61-76; Machlup, 1952, pp. 348-352; Chamberlin, 1951, pp. 168-187)

(b) Unions protect wages from unfair non-union competition. It is argued that unions are able to collectively negotiate wages above what they would be in a market if workers were individually negotiating with prospective employers. If non-union workers could compete for union jobs, those union-secured, higher wages would be competed down. Thus, all workers will be better off with gainful employment in a market by being required to join and jointly negotiate through the representing union.

Labor, however, like every other good or service offered on the market, is subject to the law of supply and demand. If a union successfully negotiates a wage above the one that would have been competitively established on the market, fewer workers might be employed since the higher the wage the less profitable the number of workers potential employers find it attractive to hire (or retain). In other words, wages that compulsory unions may successfully impose runs the risk of pricing some workers out of the market. (Velasco, 1973)

In this instance, the “conflict” is not between “labor” and “management,” but instead between union workers and non-union workers. In effect, compulsory union membership serves as a mechanism to limit the available supply of workers willing and able to offer their services to potential employers in that unionized sector of the market. The union “locks out” members of the labor force who would have been willing to work for prospective employers on terms mutually attractive to the two sides.

This forces the locked out and displaced workers unable to find employment at the mandatory union-imposed wages to search out alternative gainful employment in jobs and with employers that are less well paying and not as attractive. The union members’ gains are, as a consequence, at the expense of other workers, who must enter other markets for employment and thereby pushing down wages in that alternative part of the labor market below what would have prevailed if the union had not locked them out, with the resulting “over-supply” of labor in the alternative labor market.

This process can and often does entail workers having to migrate out of the state where they had previously found work, or where they would have chosen to reside, if not for compulsory union membership rules pushing non-union workers out of that part of the labor market, and that part of the country in which “closed shop” conditions prevail. (Hayek, 1960, pp. 267-284; Knight, 1959, pp. 21-45)

(c) The Need for Union Membership to Avoid Non-Union Free Riders. The argument for compulsory unionism also has been based on the rationale that the higher wages and better working conditions negotiated by the labor union benefits not only the union members but all other workers in the company or industry who are covered by the union terms of employment. If non-union members are able to benefit from the “positive” results of union activities it is only reasonable that they should be required to bear a part of the costs of obtaining those favorable work conditions and wages. Thus, non-union workers should be, if not required to join the union,  at least obligated to pay union dues to assist in defraying the organizational and related expenses to provide those benefits.

At the same time, the potential for “free riding” reduces the incentive to belong to a union, and thus can result in fewer union members, and therefore weaker unions unable to effectively negotiate on behalf of workers’ interest. (Ickniowski and Zax, 1991)

The free rider problem can only arise when the gains from the actions of some cannot be prevented from benefiting others who have not participated in covering the costs that have generated those “positive” results. However, excludability is possible in the case of union-generated wages or work conditions by simply stipulating in the negotiated union contract that the terms of that contract only apply to union members.

If non-union workers are unable to obtain from the employers wages and work conditions equal to or better than those arranged by the union that will act as a positive incentive for non-union employees to find it in their own interest to, then, join the union. If, however, non-union employees are able to negotiate for themselves wages and work conditions not much different from (or even superior to) those covered by the union contract that would be, in itself, a clear demonstration that union membership and dues is superfluous. (Baird, p. 37)

The Benefits from Right-to-Work Laws
A number of arguments have been offered in support of Right-to-Work Laws, among them are: (a) The case for personal freedom; (b) The gains from competition; (c) The benefits from labor mobility and workplace flexibility; and, (d) An efficient use of scarce resources for improved productivity.

(a) The case for personal freedom. The hallmark of a free society is the extent to which the individual has the liberty to make decisions guiding his own life, including the occupation or profession he chooses to follow to earn a living and given meaning and enjoyment to his daily activities. By definition, then, union exclusion of workers who would, otherwise, find gainful employment on the basis of free and voluntary contract between themselves and willing employers is a restraint not only on trade, in general, but a restriction on the personal freedom of workers to enter into consensual association with others for peaceful and lawful mutual benefit.

The same applies to compulsory payment of union dues as a “tribute” to a union for the right to work for a particular employer or in a specific industry (the “agency shop”). Indeed, it can be argued that it is a form of imposed tax for the privilege of working within the “jurisdiction” over which the union claims authority.

The union is asserting “ownership” over the jobs within the sector of the economy or industry in which they acquire compulsory membership. As such, it is not only an abridgement of the non-union members’ liberty of choice in employment, it is also an infringement on the freedom of the employer’s right to enter into contracts and hire any and all workers with whom he may reach mutually agreeable terms. Indeed, it implies that the union claims control over a vital element of entrepreneurial and managerial decision-making. (Richberg, 1957, pp. 114- 126)

(b) Compulsory unionism limits labor market competition. “Closed shops” have historically had one essential goal, anti-competitive and monopoly restriction on segments of the labor market. (Simons, 1944, pp. 121-159) The purpose is to limit the supply in various occupations, professions, and trades as a means to raise the price of labor above the levels at which the free interactions of market supply and demand would have set wages.

As such, closed shop unionism directly raises the cost of employing workers within companies and industries, and as a result indirectly raises the prices of the goods and services bought my consumers on the market. Compulsory union-dominated industries, therefore, potentially limit the supply of consumer-desired goods and services and raise the prices consumers may pay for that more limited supply.

Companies or cartels that attempt to act in a monopolistic manner bear the cost of leaving a portion of their capital and equipment idle precisely to withhold potential output with the hope of deriving a sufficiently higher net revenue by selling less at a higher price. They must weigh the cost of underutilized plant and equipment relative to the higher price with the decreased output.

Compulsory unions however restrict entry into their market to reduce the supply and raise the price of labor – wages – but bear no such cost. Their responsibility and “costs” extend no further than a weighing of the advantages and disadvantages to the workers who remain employed under the union wage and work condition rules negotiated on the basis of collective bargaining. Those workers priced out of employment in the closed shop are no longer voting or dues-paying members, and therefore no longer an element in the union leadership’s decision-making.

The burden of the compulsory union’s actions, as a result, falls on the shoulders of the excluded workers. They bear a cost they had not bargained for or agreed to. And, thus, the unemployment or less valued employment that these displaced workers now face are a negative “externality” that these unions impose on others without their agreement or consent.

Right-to-Work Laws reduce (if not eliminate) union’s anti-competitive and potentially monopolistic practices in the labor market. The number of workers employed in an industry, occupation and trade reflects the consumer demand for the products workers can produce. As long as the value of the product is greater than workers’ opportunity costs of being employed in some other way of earning a living, the supply of workers will increase, the output of the desired goods and services will expand in supply and the prices at which those goods are offered to consumers on the market will decline.

(c) The benefits from labor mobility and workplace flexibility. Compulsory unionism and the closed shop tend to reduce and limit labor mobility between industries and regions of the country. Competitive markets,inevitably, experience constant change, and therefore continual adjustment and adaptation to new circumstances. Consumer demands change, resource availabilities are modified, capital investments shift from one line of production to another, and technological innovations transform how and where goods and services can be profitably supplied and in what amounts.

Union restrictions retard the required adaptations and adjustments that must constantly be undertaken in different ways and different places if markets are to be continuously moving in the direction of sustainable balance and stability.

Under Right-to-Work Laws, workers and employers have the flexibility and openness to find the “right” patterns of worker employment, to perform the tasks and types of work in and between industries that the shifting conditions of market supply and demand suggest are the most profitable and advantageous for both employees and employers.

This also means that more flexible labor markets, where Right-to-Work Laws are present, are likely to offer the adaptability and profitability to attract more industry into regions and states that allow labor markets to effectively function. At the same time, a more competitive labor market  is likely to attract qualified and energetic workers from other areas who are looking for more attractive and gainful employment.

The difficulty is that closed shop unionism prevents both employers and employees from using their knowledge and talents in ways that they discover are most advantageous. On the other hand, a Right-to-Work area offers the openness that permits workers to have the ability to find more gainful employment in less contractually restrictive ways. The formerly excluded or constrained workers and their potentially matching employers can dynamically better meet both domestic and foreign competition for successful employment and wage opportunities, and for the supplying of better and less expensive goods and services for the consumers of that state and the nation as a whole.

(d) More efficient and productive labor under Right-to-Work Laws. Right-to-Work environments enable labor, as well as other resources and capital, to be effectively allocated and employed where best business judgments suggest in a world that is always changing and in which, therefore, that is an irreducible amount of uncertainty and risk.

It is not that businessmen never get it “wrong” or workers never have second thoughts about jobs they’ve taken. It is rather that given the inescapable fact that some decisions will always turn out to be wrong, what labor markets, as well as all other resource and capital markets, must have is the greatest potential to readjust and transform what, how, and where production is undertaken and job opportunities are now found to exist.

It has become a cliché to say that America now exists in a far more competitive, global economy. It is nonetheless very true. Any state or country that wishes to meet this challenge, not only by retaining businesses and jobs, but in  attracting new investment and an expanding workforce, needs to offer business and workers the type of economic environment that makes that place an attractive magnet.

Conclusions on Right-to-Work
In spite of the impressions sometimes created, Right-to-Work Laws are not “anti-labor” or “anti-union.” The economic literature strongly suggests that worker opportunities for the greatest number of people is most likely to be present in an “open shop” market-setting, rather than in which labor markets are “closed.”

The flexibility and adaptability in labor markets that comes with “Right-to-Work” legislation, can serve as an important aspect of a policy focused on job maintenance and job creation, when combined with other vital reforms in the wider setting of fiscal and regulatory policy.

References:

Baird, Charles W. (1988), “Varieties of ‘Right to Work’,” Managerial and Decision Economics, Winter, pp. 33-43.

Boarman, Patrick M. (1963), Union Monopolies and Antitrust Restraints. Washington, D.C.: Labor Policy Association.

Chamberlin, Edward H. “The Monopoly Power of Labor,” in David McCord Wright, ed., The Impact of the Union. New York: Harcourt, Brace.

Dickman, Howard. (1987), Industrial Democracy in America: Ideological Origins of National Labor Relations Policy. La Salle, Ill.: Open Court.

Epstein, Richard. (2004).  Free Markets Under Fire. London: Institute of Economic Affairs.

Epstein, Steven. (1991), Wage and Labor Guilds in Medieval Europe. Chapel Hill, N.C.: University of North Carolina Press.

Hartley, Fred A. (1947), Our New Labor Relations Policy.  New York: Funk & Wagnall.

Hayek, Friedrich A. (1960), The Constitution of Liberty. Chicago: University of Chicago Press.

Hutt. William H. (1954), The Theory of Collective Bargaining. Glencoe, Ill.: Free Press.

——————–  (1973), The Strike-Threat System: The Economic Consequences of Collective Bargaining. New Rochelle, N.Y.: Arlington House.

Ichniowski, Casey and Zax, Jeffrey S. (1991), “Right-to-Work Laws, Free Riders, and Unionization in the Local Public Sector,” Journal of Labor Economics, vol. 9, No. 3.

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The Declaration of Independence, signed by members of the Continental Congress on July 4, 1776, is the founding document of the American experiment in free government. What is too often forgotten is that what the Founding Fathers argued against in the Declaration was the heavy and intrusive hand of big government.

Most Americans easily recall those eloquent words with which the Founding Fathers expressed the basis of their claim for independence from Great Britain in 1776:

“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 – That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed – That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

But what is usually not recalled is the long list of enumerated grievances that make up most of the text of the Declaration of Independence. The Founding Fathers explained how intolerable an absolutist and highly centralized government in faraway London had become. This distant government violated the personal and civil liberties of the people living in the 13 colonies on the eastern seaboard of North America.

In addition, the king’s ministers imposed rigid and oppressive economic regulations and controls on the colonists that was part of the 18th-century system of government central planning known as mercantilism.

“The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States,” the signers declared.

At every turn, the British Crown had concentrated political power and decision-making in its own hands, leaving the American colonists with little ability to manage their own affairs through local and state governments. Laws and rules were imposed without the consent of the governed; local laws and procedures meant to limit abusive or arbitrary government were abrogated or ignored.

The king also had attempted to manipulate the legal system by arbitrarily appointing judges that shared his power-lusting purposes or were open to being influenced to serve the monarch’s policy goals. The king’s officials unjustly placed colonists under arrest in violation of writ of habeas corpus, and sentenced them to prison without trial by jury. Colonists often were violently conscripted to serve in the king’s armed forces and made to fight in foreign wars.

A financially burdensome standing army was imposed on the colonists without the consent of the local legislatures. Soldiers often were quartered among the homes of the colonists without their approval or permission.

In addition, the authors of the Declaration stated, the king fostered civil unrest by creating tensions and conflicts among the different ethnic groups in his colonial domain. (The English settlers and the Native American Indian tribes.)

But what was at the heart of many of their complaints and grievances against King George III were the economic controls that limited their freedom and the taxes imposed that confiscated their wealth and honestly earned income.

The fundamental premise behind the mercantilist planning system was the idea that it was the duty and responsibility of the government to manage and direct the economic affairs of society. The British Crown shackled the commercial activities of the colonists with a spider’s web of regulations and restrictions. The British government told them what they could produce, and dictated the resources and the technologies that could be employed. The government prevented the free market from setting prices and wages, and manipulated what goods would be available to the colonial consumers. It dictated what goods might be imported or exported between the 13 colonies and the rest of the world, thus preventing the colonists from benefiting from the gains that could have been theirs under free trade.

Everywhere, the king appointed various “czars” who were to control and command much of the people’s daily affairs of earning a living. Layer after layer of new bureaucracies were imposed over every facet of life. “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance,” the Founding Fathers explain.

In addition, the king and his government imposed taxes upon the colonists without their consent. Their income was taxed to finance expensive and growing projects that the king wanted and that he thought was good for the people, whether the people themselves wanted them or not.

The 1760s and early 1770s saw a series of royal taxes that burdened the American colonists and aroused their ire: the Sugar Act of 1764, the Stamp Act of 1765, the Townsend Acts of 1767, the Tea Act of 1773 (which resulted in the Boston Tea Party), and a wide variety of other fiscal impositions.

The American colonists often were extremely creative at avoiding and evading the Crown’s regulations and taxes through smuggling and bribery (Paul Revere smuggled Boston pewter into the West Indies in exchange for contraband molasses.)

The British government’s response to the American colonists’ “civil disobedience” against their regulations and taxes was harsh. The king’s army and navy killed civilians and wantonly ruined people’s private property. “He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people,” the Declaration laments.

After enumerating these and other complaints, the Founding Fathers said in the Declaration:

“In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.”

Thus, the momentous step was taken to declare their independence from the British Crown. The signers of the Declaration then did “mutually pledge to each other our Lives, our Fortunes and our sacred Honor,” in their common cause of establishing a free government and the individual liberty of the, then, three million occupants of those original 13 colonies.

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property. Never before was a society founded on the ideal of economic freedom, under which free men may peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life. Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

(This article originally appeared on Northwood University’s blog, “In Defense of Capitalism and Human Progress” in July 2010)

On Friday, June 29, 2012, political scientist, Vincent Ostrom, passed away at the age of 92. Dr. Ostrom was one of the leading experts on the structure and content of American constitutional federalism. Born in 1919, he earned his PhD in political science at UCLA in 1950. He took up a teaching position at Indiana University in 1964, and co-founded the Workshop in Political Theory and Policy Analysis with his wife, Elinor Ostrom, and who was awarded the Nobel Prize in Economics in 2009 and died at the age of 78, three weeks before her husband’s death.

Vincent Ostrom’s outstanding work on the American constitutional order, The Political Theory of a Compound Republic (1971, 2nd ed., 1987) is a masterpiece of scholarly exegesis in understanding and interpreting the unique qualities and conceptions of a “self-governing” people based on a careful reading of “The Federalist Papers.” The essays in his The Meaning of American Federalism: Constituting a Self-Governing Society, (1991) elaborate and extend this same theme in a variety of directions.

But his true masterwork is The Meaning of Democracy and the Vulnerability of Democracies: A Response to Tocqueville’s Challenge (1997). It is a superb interdisciplinary blending of political philosophy, economics, sociology, history and the theory of language in society. What he shows is that if a free society is to be viable it is necessary to go “beyond supply and demand” (to use Wilhelm Roepke’s phrase).

The free democratic society is more than elections, and legislative procedures, or a written constitution (if it is to be more than a piece of paper). It is, as Ostrom liked to quote Alexis de Tocqueville, based upon the “habits of the heart” and the “character of the mind.” That is, it is dependent upon a wide network of “structures of shared meaning” among the members of a society. Self-governance emerges out of and depends upon how individuals view themselves and others around them. They must believe in and share meanings of human worth, the dignity of each individual, a respect for and tolerance of the diversity of men’s dreams, wishes, hopes and values.

And, they must, most importantly, share a belief-system (which Vincent Ostrom emphasized must be embedded in the language that people use so it guides the way they think about themselves and others) that is based on the idea that it is possible and desirable for men to find ways to peacefully and collaboratively associate and cooperate in the pursuit of their common purposes without violence, oppression, manipulation, deceit, or corruption (including the corruption of language in social and political discourse).

What Ostrom highlighted was that the self-governance of the political democratic process is only one element in a wider meaning and setting of self-governance and a “spirit of democracy.” The character and integrity of democratic governance rises and falls with the stability and sustainability of the social sense of cooperative self-governance by free men in a free society of voluntary association.

Among the weaknesses in maintaining such a self-governing social order is that there is no intergenerational “self-governance gene” that can be passed on. It must be learned and adapted by each new generation. And it can be weakened or lost if the required “habits of the heart” and “character of the mind” are not successfully renewed.

Edward Shils, in his book, Tradition, (1981) pointed out that the traditions and customs of society can only be preserved if there is a three-generational overlap — the child, the parent, and the grandparent — through which the wisdom, insights, understandings and beliefs that only experience and reflection provide can be passed on to the young.

It is not that custom and tradition are forever “frozen.” They change and are modified over the generations. But they do so through that intergenerational sharing of those habits of the heart and character of the mind.
Ostrom’s warning cry was that we have been losing those habits and elements of character upon which a society of self-governing individuals may survive and thrive. They have been weakening because of an alternative mentality of political paternalism and social engineering through the growth and controls of the interventionist and welfare state.

The language of liberty — the language of a free, and self-governing people – is being lost. And it is through our language that we think about ourselves, our relationships to others, and the general social order that we share.

Victor Klemperer, a German Jew, who survived life in Nazi Germany, wrote a book after the war called The Language of the Third Reich. He argued that virtually everyone in Nazi Germany was a Nazi – whether or not they considered themselves to be National Socialists, including many of the victims of the regime (including German Jews).

Why? Because they had been captured by and had adapted in their thoughts and beliefs the ideas and ideology of their Nazi masters. They found it difficult to think about life and morality in any other way; that is, to reason in a way independent of the language of words and political phrases reflecting the Nazi conceptions of man, “race” and society. In their minds, Klemperer was suggesting, they were no longer self-governing human beings, but slaves of the regime since they thought and acted in terms of the lexicon and logic of Hitler’s National Socialism.

Ostrom’s works have tried to warn us to not become “other-governed” individuals before it is too late. Too many of our fellow citizens are captives of such mind and language control: “entitlement,” “unearned income,” “social justice,” and a dictionary of similar terms.

Whether we succumb to collectivist paternalism or preserve the language and ideas of freedom will determine whether or not the great American experiment in self-governance, which so impressed Alexis de Tocqueville when he travelled in America in the 1830s, will endure.

Vincent Ostrom’s writings not only explain the nature and logic and premises of American self-governance. They also direct us to appreciate the uniqueness in human history of this great American experiment of liberty through divided and decentralized political power; and what a tragic loss it will be if American’s give it up.

He leaves a profound legacy of writings devoted to the philosophy of freedom, with his brilliant analysis of the political institutions and socially shared ideas without which liberty cannot endure.