The Best Defense Is a Capitalist One

The Best Defense Is a Capitalist One

12/07/2017Ryan McMaken

Political scientist John Mueller is not convinced that nuclear weapons are the driving force behind the lack of major wars in recent decades. His article "The Essential Irrelevance of Nuclear Weapons" in International Security (Fall 1988) offers a informative contrary view to the often-bland assertion that nuclear weapons — and not the highly destructive nature of conventional wars — are what keep world powers away from new wars. 

In the case of the deterrence offered by the United States, Mueller is especially unconvinced, especially since the potential military power of the US government if far greater than anything any other single state can muster. 

It's not just fear of American nuclear weapons that's a deterrent, Mueller notes. It's American economic power that really matters. In discussion of post World War II deterrence against the Soviets, Mueller examines how American economic power inspired fear: 

[E]ven if one accepts these assumptions [i.e., the assumption that American nuclear power restrained the Soviets in Western Europe], the Soviet Union would in all probability still have been deterred from attacking Western Europe by the enormous potential of the American war machine. Even if the USSR had the ability to blitz Western Europe, it could not have stopped the United States from repeating what it did after 1941: mobilizing with deliberate speed, putting its economy onto a wartime footing, and wearing the enemy down in a protracted conventional major war of attrition massively supplied from its unapproachable rear base. 

The economic achievement of the United States during the war was astounding. While holding off one major enemy, it concentrated with its allies on defeating another, then turned back to the first. Meanwhile, it supplied everybody. With 8 million of its ablest men out of the labor market, it increased industrial production 15 percent per year and agricultural production 30 percent overall. Before the end of 1943 it was producing so much that some munitions plants were closed down, and even so it ended the war with a substantial surplus of wheat and over $90 billion in surplus war goods. (National governmental expenditures in the first peacetime year, 1946, were only about $60 billion.) As Denis Brogan observed at the time, "to the Americans war is a business, not an art."

If anyone was in a position to appreciate this, it was the Soviets. By various circuitous routes the United States supplied the Soviet Union with, among other things, 409,526 trucks; 12,161 combat vehicles (more than the Germans had in 1939); 32,200 motorcycles; 1,966 locomotives; 16,000,000 pairs of boots (in two sizes); and over one-half pound of food for every Soviet soldier for every day of the war (much of it Spam). It is the kind of feat that concentrates the mind, and it is extremely difficult to imagine the Soviets willingly taking on this somewhat lethargic, but ultimately hugely effective juggernaut. That Stalin was fully aware of the American achievement-and deeply impressed by it-is clear. Adam Ulam has observed that Stalin had "great respect for the United States' vast economic and hence military potential, quite apart from the bomb," and that his "whole career as dictator had been a testimony to his belief that production figures were a direct indicator of a given country's power." As a member of the Joint Chiefs of Staff put it in 1949, "if there is any single factor today which would deter a nation seeking world domination, it would be the great industrial capacity of this country rather than its armed strength."Or, as Hugh Thomas has concluded, "if the atomic bomb had not existed, Stalin would still have feared the success of the U.S. wartime e~onomy."

After a successful attack on Western Europe the Soviets would have been in a position similar to that of Japan after Pearl Harbor: they might have gains aplenty, but they would have no way to stop the United States (and its major unapproachable allies, Canada and Japan) from eventually gearing up for, and then launching, a war of attrition.

In his book Wartime, Paul Fussell briefly examined the industrial nature of the Second World War. 

[W]hat counted was heavy power and it is the bulldozers, steam-rollers, and the earth graders of the Seabees that constitute the sppropriate emblems of the Second World War. "Perhaps there was a time," says Geoffrey Perrett, "when courage, daring, imagination, and intelligence were the hinges on which wars turned. No longer. The total wars of modern history give the decision to the side with the biggest factories." And in Europe as well as the Pacific, the industrial basis of "victory" was even more clear. As Louis Simpson puts it in his poem "A Bower of Roses," in one battle near Dusseldorf:

For every shell Krupp fired, 

General Motors sent back four.

...One Canadian has remembered: "I knew we were going to win the war when I saw the big Willow Run aircraft factory outside Detroit. My god, but it was a big one."

Thus, for those states, like the United States that benefit from immense capitalist-fueled wealth, global deterrence is built in. Mueller even concludes that a standing army and a ready navy are not even especially important. It is the potential for mobilizing large amounts of warmaking machinery that poses the real deterrence to foreign threats.

Nuclear weapons however, remain relevant since they level the playing field for small states. 

Not all states — or, more importantly, not even all alliances of small states — can access an enormous industrial output that the North Americans can. 

As Mueller explains, those states are already deterred from making war on large wealthy states. Large wealthy states, however, are not deterred from making war on smaller, poorer states. 

Thus, for small states, nuclear weapons do have importance as a defensive weapon. North Korea, for example, can't possibly hope to ever win a war of attrition with even a small industrial power. However, if it can deter attack on itself with even a small number of nuclear warheads that can be delivered to the urban centers of its enemies. 

Naturally, this only works from a defensive point of view. Nuclear weapons offer no offensive advantage:

Both defensive and offensive realists agree, however, that nuclear weapons have little utility for offensive purposes, except where only one side in a conflict has them. The reason is simple: if both sides have a survivable retaliatory capability, neither gains an advantage from striking first. Moreover, both camps agree that conventional war between nuclear-armed states is possible but not likely, because of the danger of escalation to the nuclear level. 

While it's true that maintaining nuclear weapons is somewhat expensive, it's quite cheap compared to maintaining a large conventional navy, air force, and industry from which to produce conventional weapons. 

Ultimately, though, what really grants a state or group of states true power to deter attack and invasion is access to large amounts of capital. 

Lenin wasn't imagining things when he looked around the world and saw that the capitalist powers of the world were waging multiple wars. He was wrong, of course, that capitalism causes war. But, there is no denying the wartime capability is greatly enhanced by the wealth created through the trade, productivity, and wealth generated by capitalists. Unfortunately, this defensive capability has come with vast offensive capability as well. 

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Remembering the Bill of Rights

12/15/2017Ryan McMaken

The Bill of Rights was finally ratified on December 15, 1791. Most of the new Constitution of 1787 was devoted to raising taxes, centralizing government, and destroying self-rule in the independent states. 

The Bill of Rights, however, was a bright spot in an otherwise unhelpful and unnecessary document. 

From 2015's article "The Bill of Rights: The Only Good Part of the Constitution":

Patrick Henry and the Anti-Federalists pointed out — correctly — that the US already had proven it had sufficient means to deal with European powers, and that in the bloody history of states, the true threat to freedom lay not in there being too much freedom, as the Federalists claimed, but in the overweening power of centralized states.

Virtually no one believed that a new constitution was necessary to secure what they had earlier called their "English Liberties," including freedom of speech, a right to due process, jury trials, and more. Those freedoms were already assumed to be assured to all non-slaves. Those freedoms had been won in the Revolution. The people didn't need a more powerful Congress to protect them. If their freedoms were threatened, the people could rely on highly-democratic (for the time) state legislatures and a decentralized militia system.

But, in the end, the Federalists won out after they promised to adopt a Bill of Rights to limit the power of Congress. As we know, though, the Bill of Rights began to break down immediately, and it was only a matter of time until the Alien and Sedition Acts, Jefferson's embargo, and other even worse crimes perpetrated on the states and the people.

It was the Constitution of 1787, after all, that strengthened the institution of slavery, set the stage for the fugitive slave acts, and made provision for the criminal prosecution of those who attempted to help set escaped slaves free.

That's what sort of "pro-freedom" document the Constitution was and is.

What the Constitutions Should Have Said 

The Bill of Rights would never have been necessary, however, if so much power had not been granted to the central government by the constitution of 1787 in the first place

Indeed, the earlier constitution of 1777 (the so-called Articles of Confederation) had itself been too detailed and powerful.

After all, the whole idea of a national constitution had always been sold on really just two premises: 1) It would assist in national defense and 2) it would facilitate trade among the member states.

In other words, it should never have been anything more than a customs union and a mutual defense agreement.

So, in the service of sound political science, I have composed a new constitution for us:
 

Article 1. The United States shall meet every two years in Congress assembled to negotiate terms for the maintenance of a union of independent states. There shall be no duties or taxes imposed on trade among the states or the people therein. The states, in Congress assembled shall set the standards for membership in the United States and provide provision for member withdrawal and the conditions for receiving the benefits of mutual defense as a member of the Union.
The End. 


Nothing more is necessary or prudent. Independent states enter into mutual defense agreements quite frequently, without surrendering their independence, and trade agreements are a quite mundane affair in the history of states.

Any appeal to "patriotism" or lofty ideas of "America" or the fanciful notion that people in Arizona are the countrymen of people in New York has no backing in the day to day realities of living. Never in history was there a group of 320 million people spread across four million square miles who were part of the same community and who shared the same experiences, interests, or even the same economic ties.

In reality, the people of Colorado, for example, have more in common with the people of Saskatchewan — in terms of economic interests, culture, and history — than with the people of Georgia or Delaware of Pennsylvania. People only believe the residents of the US states make up "one people" because they were told as much by their third grade teachers. Actual experience tells us otherwise.

Those who demanded the Bill of Rights had attempted to preserve this idea of government on a human scale: government that reflects the realities of daily life, human relationships, and the necessity of free commerce — rather than the ideological fantasies of nation builders. Even to this day, the idea that the minutiae of life and commerce should be governed by a group of millionaires sitting in luxury 2,000 miles away is repugnant to the the reasonable mind. In preventing this, the Bill of Rights has largely failed, although things most certainly could have been worse.

 

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Europe Isn't Budging on Its Rock-Bottom Interest Rates

12/14/2017Ryan McMaken

This week, the US Federal Reserve raised the target for its key rate — the Federal Funds Rate — to 1.5 percent. That's the highest its been since 2008, although well below 5.25 percent rate reached during the last expansion. Europe, however, has signaled it has no plans to follow the US in moving key rates upward. 

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The Wall Street Journal reports today that European central banks "showed continued caution, leaving policy unchanged":

Despite that stronger outlook, Mr. Draghi once again had to acknowledge that the inflation outlook is “muted.” Indeed, the ECB’s economists don’t expect the inflation target of just below 2% being reached in either 2018 or 2019. This isn’t an ECB-specific problem, but it helps explain why interest rates are set to stay where they are “for an extended period.”

...

The U.K.’s central bank raised it’s key interest rate for the first time in a decade last month, and Thursday confirmed it isn’t in any hurry to follow that up. Policy makers face a unique challenge in the U.K.’s departure from the European Union in 2019, and the path for rates is therefore more uncertain than elsewhere in Europe.

Draghi "repeatedly stressed that what the eurozone is experiencing is no longer a mere 'recovery' but instead an 'expansion...'" One is left wondering, however, why the ECB refuses to let up on the stimulus if the economy is doing so well. 

Over the past decade, central bankers have gotten into a fairly predictable habit of declaring the economy to be "strong" or "robust" while simultaneously refusing to scale back the central bank's stimulus. As numerous commentators have pointed of, though, Europe's monetary policy remains in the service of debt-laden governments which rely on rock-bottom rates to keep debt payments low. Moreover, the threat of a banking crisis in Italy isn't exactly exactly motivating central bankers to raise rates. 

From their perspective, it's better to just keep rates low indefinitely, and hope for the best. 

Not all central banks outside the US are as cautious as the Europeans. The Bank of Canada was raised rates twice in recent months, and is now hinting that it may raise rates again soon:

Financial markets expect the bank to raise rates further in 2018 after hiking in July and September, but analysts are divided over whether the next move will come as soon as Jan. 17.

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The Overreaction on Trump's Proposed Change to Federal Lands

12/14/2017Ryan McMaken

The Trump administration recently announced it was considering a partial reversal of the Obama administration's designation of new national monument lands in Utah. The lands in question were already federal lands, but Obama's move heightened restrictions on the usage of the land, and lessened the likelihood the lands would ever be transferred to state control. 

Trump's announcement brought overreactions from many, some of whom implied that the Trump administration was somehow privatizing the land. This is not at all the case, and there's little reason to believe that the federal lands in questions will stop being federal lands any time soon. See: "Trump's Action on Federal Lands is Not Privatization."

The Blaze called me for some additional comments: 

“There seems to be an overreaction, from both sides, in looking at this as a major change,” [McMaken] said.

From the start, McMaken was irked by the misconception that the issue was being framed as a situation in which public lands were being privatized. Mainstream media organizations “acted as if this was a situation in which public lands were going to be sold off into private hands, and that’s not the case,” McMaken said...

“There’s an assumption among many Americans people in Eastern states that it’s either federal land or it’s private land,” McMaken said. “But when you look at a lot of these Western states, they have lots of state parks and if you poll the local population, what you’re gonna find out is that people love their public land.”

McMaken added: “It’s not a situation where land is being de-federalized. It was federal land, and it’s going to continue being federal land.

“There is a common misconception that federal lands are the only type of public lands,” McMaken said. “This, of course, is not the case. Even if the Trump administration were to turn some federal lands into state lands, the state legislatures in those states would then face enormous pressure from voters to keep those lands as public lands for the use of residents. It is by no means a safe assumption that any lands that cease to be federal lands will become privatized.”

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Congratulations to Dr. Karl-Friedrich Israel

12/14/2017Tho Bishop

Congratulations to former Mises Research Fellow Karl-Friedrich Israel for successfully defending his thesis at the University of Angers in France.

Dr. Israel's academic research has largely focused on monetary policy, monetary theory, and the history of macroeconomics.

At AERC in 2016, he presented a fascinating paper on the history of econometrics and how the concept has changed over the years. In it he highlights that the originator of the term, Pawel Ciompa, considered it a way of illustrating accounting, as a opposed to a means of developing economic theory. The paper can be read on the University of Angers website

Dr. Israel has also written several articles for the Mises Wire, including:

How Much Do Central Banks Cost Us?

Five Reasons for Central Banks: Are They Any Good?

Inflation May Be Causing a Long-Term Rise in Unemployment

Ragnar Frisch: The First Nobel Laureate Chosen over Mises

The "Lucas Critique" Is Misesian at its Core

He has joined Jeff Deist twice on Mises Weekends:

The ECB Has Failed

Yes, You Should Read Human Action

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The Fed's New Inflation Measure Moves Beyond Consumer Prices

12/13/2017Ryan McMaken

If you've been shopping for real estate or stocks lately, you might be wondering how the Fed gets away with all that talk about how inflation is "low," "muted," or "below expectations."

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The reason for this is the Fed largely bases policy on consumer prices, rather than on a broader measure that might include a variety of assets. The Fed often even excludes food and energy from its inflation measure.

Needless to say, this leaves much to be desired from any true measure of inflation. As Brendan Brown has explored multiple times here at mises.org, asset prices are a key indicator of where we are in the business cycle, and are essential in evaluating the real effects of monetary policy.

Recognizing that consumer prices are doing a bad job at giving us a true picture of the economy, the New York Fed in September released a new measure of inflation called the Underlying Inflation Gauge (UIG) which takes into a account a broader range of products, services, and assets.

Not shockingly, the UIG shows a higher rate of inflation than the CPI, and also shows a different trend. the UIG has been increasing in recent years while consumer price trends have been falling.

In October, the CPI measure was 2.0, while the UIG measure was 2.9. Moreover, the UIG measure is at the highest level recorded since September 2006, near the height of the last housing bubble.

The implications for monetary policy can also be seen in the graph. While consumer price growth (according to the CPI) was plummeting in 2014 and 2015 — bottoming out at -0.2 percent in April 2015 — the UIG measure was holding much more steady. It hasn't fallen below one percent since the last recession.

Last week at Bloomberg, Joseph G. Carson delved into what we can learn about monetary policy using the new measure: 

Some may argue that the recent explosion in asset values could be tied to the new technological advances and gadgets. While these new innovations have clearly added value to the economy and created enormous wealth in the process, they cannot fully explain the broad surge in all types of real and financial asset values.

In a fundamental sense, asset values are highly contingent on the current level of and future expectations for inflation and interest rates. To be sure, a persistently low inflation rate suggests little downside risk to the economy, creating a vision of endless and uninterrupted economic growth, boosting investor confidence and risk taking. 

Monetary policy has played a key role in asset price cycles. Not only has the Federal Reserve used its balance sheet to buy trillions of dollars of financial assets, boosting the values of all type of assets and anchoring long-term rates in the process, it also directly linked its official rate decisions to a specific rate of consumer inflation. The transparency of its future policy path has created the impression of an accommodative monetary policy, encouraging more risk-taking in asset markets...

The UIG carries three important messages to policy makers: the obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed; and, the path to normalizing official rates is too slow and the intended level is too low.

Harvard University professor Martin Feldstein stated in a recent Wall Street Journal commentary that “The combination of overpriced real estate and equities has left financial sector fragile and has put the entire economy at risk.” If policy makers do not heed his advice odds of another boom and bust asset cycle will be high -- and this time they will not have the defense mechanisms they had after the equity and housing bubbles burst. 

Here at mises.org, of course, we've explored the problem with the "two-percent" standard for inflation, while noting the problem with ignoring asset prices. 

I do not share the Fed's hope that we can tinker our way to an especially good measure of price inflation via the usual empirical measurement tools. But some measures are indeed better than others, and it is good to see that even the Fed is admitting that the long habit of picking and choosing a quite limited number of consumer prices has been especially bad in analyzing where we are in the boom-bust cycle. 

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Yellen Raises Interest Rates One Last Time

12/13/2017Tho Bishop

​Today Janet Yellen announced that the Federal Reserve is following through with its planned third rate, moving the effective federal funds rate to 1.25-1.5%. This move was widely expected, and considered to be “priced in”. As I noted in October, one of the most surprising winners of Trump’s presidency has been Yellen. Prior to 2017, Yellen’s Fed had consistently whiffed on its projections, eliminating the usefulness of its forward guidance.

As far as the rate hike itself goes, it’s worth noting that the Federal funds rate remains historically low, on par with Greenspan’s policies the mid-2000s.

While today was Yellen’s last FOMC meeting, we should expect to see little change in ideology under Jay Taylor

Fred Funds Rate Dec_1.png
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New Issue of the Quarterly Journal of Austrian Economics: Summer 2017

12/13/2017Ryan McMaken

New Audiobook!

12/12/2017Mises Institute

The Theory of Money and Credit, Ludwig von Mises's 1953 treatise on monetary theory, is now available as a free audiobook narrated by Jim Vann.

In a step-by-step manner, Mises presents the case for sound money with no inflation, and presents the beginnings of a full-scale business cycle theory.

The audio files are currently available on Soundcloud and Mises.org.

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Bovard: Yes, the FBI is America's Secret Police

12/11/2017James Bovard

Politifact delivered a “pants on fire” slam to Fox News on Friday because one of its commentators asserted that the Federal Bureau of Investigation “has become America's secret police.” The FBI has legions of new champions nowadays among liberals and Democrats who hope that its probes will end Donald Trump’s presidency. This is a stunning reversal that may have J. Edgar Hoover spinning in his grave.

In order to boost the credibility of the FBI’s investigations of the Trump team, much of the media is whitewashing the bureau’s entire history. But the FBI has been out of control almost since its birth.

Read more at The Hill

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Bitcoin Loses Steam as Steam Loses Bitcoin

The skyrocketing price of Bitcoin has dominated the financial news for the past few weeks, and the usual suspects are queuing up to offer predictions about its continued rise or inevitable fall. Yet it’s not all good news for fans of the cryptocurrency: in a notable decision, the digital distribution platform Steam has announced that it will no longer be accepting payment in Bitcoin.

In the grand scheme of things, Steam’s new policy will likely have little impact on the use or price of Bitcoin as such. Rather, the decision is significant because it highlights an underlying economic question about the future of the cryptocurrency. Specifically, Steam’s example shows that despite an enormous gain in market value, Bitcoin still has a long way to go before it becomes money.

Money is conventionally defined as a generally accepted medium of exchange, the key part of this definition being “generally accepted.” In order to be adopted on such a large scale, a medium of exchange must fulfil certain basic criteria, the most important of which is that it must be capable of serving as a tool for economic calculation. Entrepreneurs must be able to use a means of payment to compare the costs and benefits of different production plans, and this in turn requires a degree of stability in the value of money. Of course, money’s value is never constant: but it must be dependable. The inability of entrepreneurs to calculate is one reason why extreme price inflation creates widespread social havoc—planning production becomes difficult if not impossible.

One of Mises’s original contributions to monetary theory was the emphasis he placed on money’s role as a medium of exchange. Many others had identified this basic function before Mises, of course, but his approach is distinct in the way it argues that the role of medium of exchange is central, and that money’s other functions—as a unit of account, for example—are derived from it. Money is primarily a means of facilitating peaceful social cooperation, and in this sense is an indispensable part of any advanced division of labor as well as of economic calculation.

This brings us back to Bitcoin. At the moment, Bitcoin is still a minority means of payment, and Steam’s decision helps to illustrate why: Bitcoin does not at the moment satisfy the calculation criterion. As the Steam Team notes:

Historically, the value of Bitcoin has been volatile, but the degree of volatility has become extreme in the last few months, losing as much as 25% in value over a period of days. This creates a problem for customers trying to purchase games with Bitcoin. When checking out on Steam, a customer will transfer x amount of Bitcoin for the cost of the game, plus y amount of Bitcoin to cover the transaction fee charged by the Bitcoin network. The value of Bitcoin is only guaranteed for a certain period of time so if the transaction doesn’t complete within that window of time, then the amount of Bitcoin needed to cover the transaction can change. The amount it can change has been increasing recently to a point where it can be significantly different.

The unpredictable changes in the value of Bitcoin mean that it is now extremely difficult for consumers or producers to gauge the true cost of their transactions, or to make an educated judgment about the best time to buy or sell. Increasing transaction fees for paying in Bitcoin further complicate the issue, especially in regard to relatively small purchases (a major concern for Steam).

At the moment, commentators seem intent on convincing each other of their predictive powers regarding Bitcoin’s price, and everyone wants to be on “right side of financial history.” The vital question though is not around what price Bitcoin will ultimately settle, but if and when it will settle at all, especially compared to its competitors. For the time being, however, the extreme changes in Bitcoin’s price mean that although it might be a good investment, it will not soon become money.

Steam’s decision thus nicely underlines a point that Mises was fond of repeating: entrepreneurs and others who are involved in practical economic affairs often know more about prices and what they mean for the economy than the pundits watching from the wings.

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