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Four words: “Follow the rules exactly.”

That’s it? That’s it.

Any system? Any system.

There are reasons for this. These reasons are universal.

First, every institution assumes voluntary compliance in at least 95% of all cases. This may be a low-ball estimate. Most people comply, either out of fear or lack of concern or strong belief in the system and its goals.

Second, every institution has more rules than it can follow, let alone enforce. Some of these rules are self-contradictory. The more rules, the larger the number of contradictions. (There is probably a statistical pattern here – some variant of Parkinson’s law.)

Third, every institution is built on this assumption: partial compliance. Not everyone will comply with any given procedural rule. There are negative sanctions to enforce compliance on the few who resist. They serve as examples to force compliance. Conversely, very few people under the institution’s jurisdiction will attempt to force the institution to comply exactly with any procedural rule.

These three laws of institutions – and they really are laws – offer any resistance movement an opportunity to shut down any system.

JAMMING THE GULAG

When we think of institutional tyrannies, few come close to matching the system of concentration camps in the Soviet Union: the Gulag. They operated from 1918 until after the Soviet Union collapsed in December 1991. It took time to close them in 1992.

In his book, To Build a Castle, Vladimir Bukovsky provides one of the finest descriptions of institution-jamming ever recorded. He organized it.

What you are about to read is like nothing you have ever read. I have spent over 45 years studying bureaucracies in theory and practice. I have seen nothing to match it.

Bukovsky spent well over a decade in the Soviet gulag concentration camp system in the 1960s and 1970s. He was arrested and sentenced in spite of specific civil rights protections provided by the Soviet Constitution – a document which was never respected by the Soviet bureaucracy. But once in prison, he learned to make life miserable for the director of his camp.

He learned that written complaints had to be responded to officially within a month. This administrative rule governing the camps was for “Western consumption,” but it was nevertheless a rule. Any camp administrator who failed to honor it risked the possibility of punishment, should a superior (or ambitious subordinate) decide to pressure him for any reason. In short, any failure to “do it by the book” could be used against him later on.

Bukovsky became an assembly-line producer of official protests. By the end of his career as a “zek,” he had taught hundreds of other inmates to follow his lead. By following certain procedures that were specified by the complaint system, Bukovsky’s protesting army began to disrupt the whole Soviet bureaucracy. His camp clogged the entire system with protests – hundreds of them per day. He estimates that eventually the number of formal complaints exceeded 75,000. To achieve such a phenomenal output, the protestors had to adopt the division of labor. Bukovsky describes the process: “At the height of our war, each of us wrote from ten to thirty complaints a day. Composing thirty complaints in one day is not easy, so we usually divided up the subjects among ourselves and each man wrote on his own subject before handing it around for copying by all the others. If there are five men in a cell and each man takes six subjects, each of them has the chance to write thirty complaints while composing only six himself.”

The complaints were addressed to prominent individuals and organizations: the deputies of the Supreme Soviet, the regional directors, astronauts, actors, generals, admirals, the secretaries of the Central Committee, shepherds, sportsmen, and so forth. “In the Soviet Union, all well-known individuals are state functionaries.”

Each complaint had to be responded to. The camp administrators grew frantic. They threatened punishments, and often imposed them, but it did no good; the ocean of protests grew. Bukovsky’s description is incomparable.

The next thing that happens is that the prison office, inundated with complaints, is unable to dispatch them within the three-day deadline. For overrunning the deadline they are bound to be reprimanded and to lose any bonuses they might have won. When our war was at its hottest the prison governor summoned every last employee to help out at the office with this work-librarians, bookkeepers, censors, political instructors, security officers. It went even further. All the students at the next-door Ministry of the Interior training college were pressed into helping out as well.

All answers to and dispatches of complaints have. to be registered in a special book, and strict attention has to be paid to observing the correct deadlines. Since complaints follow a complex route and have to be registered every step of the way, they spawn dossiers and records of their own. In the end they all land in one of two places: the local prosecutor’s office or the local department of the Interior Ministry. These offices can’t keep up with the flood either and also break their deadlines, for which they too are reprimanded and lose their bonuses. The bureaucratic machine is thus obliged to work at full stretch, and you transfer the paper avalanche from one office to another, sowing panic in the ranks of the enemy. Bureaucrats are bureaucrats, always at loggerheads with one another, and often enough your complaints become weapons in internecine wars between bureaucrat and bureaucrat, department and department. This goes on for months and months, until, at last, the most powerful factor of all in Soviet life enters the fray – statistics.

As the 75,000 complaints became part of the statistical record, the statistical record of the prison camp and the regional camps was spoiled. All bureaucrats suffered. There went the prizes, pennants, and other benefits. “The workers start seething with discontent, there is panic in the regional Party headquarters, and a senior commission of inquiry is dispatched to the prison.”

The commission then discovered a mass of shortcomings with the work of the prison’s administration, although the commission would seldom aid specific prisoners. The prisoners knew this in advance. But the flood of protests continued for two years.

The entire bureaucratic system of the Soviet Union found itself drawn into this war. There was virtually no government department or institution, no region or republic, from which we weren’t getting answers. Eventually we had even drawn the criminal cons into our game, and the complaints disease began to spread throughout the prison – in which there were twelve hundred men altogether. I think that if the business had continued a little longer and involved everyone in the prison, the Soviet bureaucratic machine would have simply ground to a halt: all Soviet institutions would have had to stop work and busy themselves with writing replies to US.

Finally, in 1977, they capitulated to several specific demands of the prisoners to improve the conditions of the camps. The governor of the prison was removed and pensioned off. Their ability to inflict death-producing punishments did them little good, once the prisoners learned of the Achilles’ heel of the bureaucracy: paperwork.. The leaders of the Soviet Union could bear it no longer: they deported Bukovsky.

FROM GANDHI TO ALINSKY

You may have heard of Saul Alinsky. He died in 1972. He gets more publicity these days than he ever got in his lifetime. That is because he was the model for ACORN, the now-defunct community organizing organization. At one stage in his career as a community organizer, Barack Obama worked with ACORN.

Alinsky was a follower of Gandhi. That means he refused to use violence in his protests. He was a radical. He was a revolutionary. But he was an opponent of violence. There was a crucial difference between Gandhi’s tactics and Alinsky’s. Gandhi had a genius for analyzing the British system of controls. He then broke a specific law. That forced the British to arrest him. That gave him a public platform. He spent years in various prisons. This was a high-cost system of resistance. It made him a celebrity. He gained followers. He was world famous.

Alinksy realized early that very few people will pay the price that Gandhi paid. So, he devised a system of resistance that lowered the risk, thereby lowering the cost. He understood the economists’ law: “When the cost of producing anything falls, more will be supplied.” More of what? Resistance.

His system involved at least one of two tactics: (1) violating a rule to which only a minimal negative sanction was attached, (2) follow the organization’s procedural rules to the letter in a Bukovsky-like manner.

He tested his non-violent strategy and tactics in the 1960s in Chicago. He wrote a book on his system, Rules For Radicals (1972). He wrote this.

Let us in the name of radical pragmatism not forget that in our system with all its repressions we can still speak out and denounce the administration, attack its policies, work to build an opposition political base. True, there is still government harassment, but there still is that relative freedom to fight. I can attack my government, try to organize to change it. That’s more than I can do in Moscow, Peking, or Havana. Remember the reaction of the Red Guard to the “cultural revolution” and the fate of the Chinese college students. Just a few of the violent episodes of bombings or a courtroom shootout that we have experienced here would have resulted in a sweeping purge and mass executions in Russia, China, or Cuba. Let us keep some perspective.

We will start with the system because there is no other place to start from except political lunacy. It is most important for those of us who want revolutionary change to understand that revolution must be preceded by reformation. To assume that a political revolution can survive without a supporting base of popular reformation is to ask for the impossible in politics. Men don’t like to step abruptly out of the security of familiar experience; they need a bridge to cross from their own experience to a new way. A revolutionary organizer must shake up the prevailing patterns of their lives – agitate, create disenchantment and discontent with the current values, to produce, if not a passion for change, at least a passive, affirmative, non-challenging climate. “The revolution was effected before the war commenced; John Adams wrote. “The Revolution was in the hearts and minds of the people. . . . This radical change in the principles, opinions, sentiments and affections of the people was the real American Revolution.” A revolution without a prior reformation would collapse or become a totalitarian tyranny.

It would be difficult to exaggerate Professor Murray N. Rothbard’s influence on the movement for freedom and free markets. He is the living giant of Austrian economics, and he has led the now-formidable movement ever since the death of his great teacher, Ludwig von Mises, in 1971. We are all indebted to him for the living link he has provided to Mises, upon whose work he has built and expanded. But many are less aware of Rothbard’s political influence. Some would say that while he is undoubtedly an excellent economist, his political efforts have been less than successful. I would deny this.

Rothbard is the founder of the modern libertarian movement, and of the Libertarian Party which is its political incarnation, and he thus has built the necessary foundation for liberty by inspiring the most important third-party movement ever. And in my own political work, I have been profoundly influenced by the lucid and brilliant works of Rothbard. In his first correspondence with me after I was elected to office, Rothbard expressed surprise and delight to find a real Congressman who wrote that “taxation is theft,” and approvingly quoted his article, “Gold vs. Fluctuating Exchange Rates.” I, of course, was thrilled to hear from someone whose works I had studied and admired for so many years.

The aura that has traditionally surrounded American politics in this century has turned to suspicion during the past decade. The scandals of Watergate (and, let us hope, Iran-Contragate as well) convinced the public, for a time, that it is naive to trust any mainstream politician. Rothbard was delighted with the whole event, saying in 1979 that, “it is Watergate that gives us the greatest single hope for the short-run victory of liberty in America. For Watergate, as politicians have been warning us ever since, destroyed the public’s ‘faith in government’ — and it was high time, too. “Rothbard rejoices, saying, “government itself has been largely desanctified in America.”

No one trusts politicians or government anymore; all government is viewed with abiding hostility, thus returning us to that State of a healthy distrust of government that marked the American public and the American revolutionaries of the eighteenth century.” For the sake of liberty, let us hope this hostility isn’t just a passing phase.

Most understand that what a politician says during his campaign is rarely compatible with his performance. Still, this broad — and healthy — cynicism does not translate into a clear public understanding of the lies of the average politician.

It is incredible how a politician can maintain an image while the facts clearly point in the opposite direction. Many still see President Reagan as a budget-cutter while he has proposed the largest budgets and deficits in our history.

While it is perhaps understandable that the public remains naive about the realities of politics, given the Establishment media conspiracy to hide the truth, but the tendency of scholars to gloss over facts and misrepresent realities is absolutely inexcusable. Academics tend to cling to old interpretations, or worse, old Statist ideals which blur their view of reality. And when prevailing historical orthodoxy is challenged, those who have an interest in maintaining myths attempt to silence their opponents.

Just one example from his works is the case of Murray Rothbard’s revisionist analysis of Herbert Hoover’s pre-Depression years. When Rothbard set out to tell the story of Hoover, consider what he was up against. Republicans, who for the most part opposed Roosevelt’s New Deal, blame the enormous growth of government that occurred during those years on the Democrats. Conversely, the Democrats, who are proud of the New Deal, take credit for it. Thus Republicans are taught that “Hoover’s only problem was that he did not have a Republican Congress,” and Democrats are taught that government should solve any crisis that “socially Darwinian free markets inevitably cause,” just as Roosevelt did. And intellectuals are notoriously stubborn about accepting new historical interpretations, especially if the revision favors free markets over government planning.

It is a tough job to change historical interpretations — no matter how false — which have been solidified for generations in the minds of State-protecting partisans. Nevertheless, Rothbard announced in 1963: “Herbert Clark Hoover must be considered the founder of the New Deal in America.” And in fact “Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor.”

Rothbard’s analysis is stunning and exhaustive. He set out to prove his proposition and did so without question. Hoover was an interventionist. He was philosophically committed to using the coercive machinery of government to bring about full employment, insure the survival and influence of labor unions, manipulate the price level for farmers’ benefit, maintain wage levels and deport immigrants, prevent bankruptcies, and above all to inflate the money supply. Hoover did this in spite of the “bitter-end liquidationists” who thought the Depression represented a necessary correction in the malinvestment of the previous decade.

And indeed, against all odds, Rothbard has made inroads to changing the way history treats Hoover. The eminent British historian Paul Johnson, who became the darling of the conservative movement with his massive study on the history of Christianity and his history of the world during the twentieth century, Modern Times, was directly influenced by Rothbard’s reconstruction of Hoover. In Modern Times, Johnson calls Hoover’s fiscal and monetary policies “vulgar Keynesianism,” a point upon which Rothbard had previously elaborated.

Idols for Destruction, a scholarly work by Herbert Schlossberg now causing much talk in conservative and evangelical circles, enthusiastically echoes Rothbard’s historical revision of Hoover. “Herbert Hoover amazingly referred to even by historians as a partisan of laissez-faire, energetically supported … a powerful central State that would coordinate the efforts of the business.”

The New Deal was not new after all. It was hatched in the decade prior to Roosevelt’s ascension to power. Rothbard’s analysis, directly and indirectly, has led many to be more objective when evaluating partisan politics, both now and in the past.

Years before I ever thought of running for Congress, I came across Rothbard’s America’s Great Depression. Before reading it, my thinking was clouded by the temptation to divide these issues and ideas into partisan terms. Rothbard fixed that.

America’s Great Depression was a key book in my conversion to pure free-market, libertarian thinking. The confidence I gained with ammunition supplied by Rothbard encouraged my entry into politics since I needed the reassurance that my intuitive allegiance to liberty was shared by great thinkers. Rothbard taught me to always keep the distinction between peaceful market activity and State coercion in my mind. It served as a constant guide once I was in office.

I wanted to see the brilliant writings of theoreticians such as Rothbard translated into practical political action. To my surprise, there was a strong constituency for these views, and I was elected to four terms. Even a person familiar with only a small part of the vast work Rothbard has produced during his career knows his attitude towards politics. Like Mises, he labels the State as the “social apparatus of violent oppression.”

How do we minimize the role of the State? To bring about radical and permanent change in any society, our primary focus must be on the conversion of minds through education. This is a task to which Rothbard has dedicated his life. That’s why he was such a willing participant on so many occasions in the educational functions I held for interns, staffers, and Members of Congress. After speaking at a seminar I held, he expressed delight at the large turn-out, saying it “shows the extent to which our ideas have permeated politics and public opinion, far more than I had hoped or believed.”

But because Rothbard sees education as the primary vehicle for change, that does not mean, of course, that he is opposed to getting directly involved in political action towards a libertarian society. As he had said, “since the State will not gracefully convert itself out of power, other means than education, means of pressure, will have to be used.”

That’s why I asked his help when I was appointed to the U.S. Gold Commission, and Rothbard produced brilliant material on American monetary history in the nineteenth century, especially as related to gold and the evils of central banking. These are issues that Rothbard has refused to compromise on, despite enormous pressure from inside and outside the movement. To this day, he remains the most persuasive monetary theorist and consistent critic of inflation and fiat paper money. When gold is once again restored to a central place in our monetary system, we will owe a gigantic debt to the work of Rothbard.

In fact, Rothbard’s work with the Gold Commission helped us get on the road to a gold coin standard because out of the Gold Commission came support for my legislation to mint the American Eagle Gold Coin. And his encouragement and support helped me make up my mind to run for the Presidency of the United States on the Libertarian Party ticket.

In a multitude of ways, Rothbard’s work has given not only me but all of us the ammunition we need to fight for the American dream of liberty and prosperity for all mankind.

This is a chapter from Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, edited with an introduction by Walter Block and Lew Rockwell.

Our country is beset by a large number of economic myths that distort public thinking on important problems and lead us to accept unsound and dangerous government policies. Here are ten of the most dangerous of these myths and an analysis of what is wrong with them.

Myth #1

Deficits are the cause of inflation; deficits have nothing to do with inflation.

In recent decades we always have had federal deficits. The invariable response of the party out of power, whichever it may be, is to denounce those deficits as being the cause of our chronic inflation. And the invariable response of whatever party is in power has been to claim that deficits have nothing to do with inflation. Both opposing statements are myths.

Deficits mean that the federal government is spending more than it is taking in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

Some policymakers point to the 1982–83 period, when deficits were accelerating and inflation was abating, as a statistical “proof” that deficits and inflation have no relation to each other. This is no proof at all. General price changes are determined by two factors: the supply of, and the demand for, money. During 1982–83 the Fed created new money at a very high rate, approximately at 15 percent per annum. Much of this went to finance the expanding deficit. But on the other hand, the severe depression of those two years increased the demand for money (i.e. lowered the desire to spend money on goods), in response to the severe business losses. This temporarily compensating increase in the demand for money does not make deficits any the less inflationary. In fact, as recovery proceeds, spending will pick up and the demand for money will fall, and the spending of the new money will accelerate inflation.

Myth #2

Deficits do not have a crowding-out effect on private investment.

In recent years there has been an understandable worry over the low rate of saving and investment in the United States. One worry is that the enormous federal deficits will divert savings to unproductive government spending and thereby crowd out productive investment, generating ever, greater long-run problems in advancing or even maintaining the living standards of the public.

Some policymakers have once again attempted to rebut this charge by statistics. In 1982–83, they declare, deficits were high and increasing, while interest rates fell, thereby indicating that deficits have no crowding, out effect.

This argument once again shows the fallacy of trying to refute logic with statistics. Interest rates fell because of the drop of business borrowing in a recession. “Real” interest rates (interest rates minus the inflation rate) stayed unprecedentedly high, however — partly because most of us expect renewed heavy inflation, partly because of the crowding, out effect. In any case, statistics cannot refute logic; and logic tells us that if savings go into government bonds, there will necessarily be fewer savings available for productive investment than there would have been, and interest rates will be higher than they would have been without the deficits. If deficits are financed by the public, then this diversion of savings into government projects is direct and palpable. If the deficits are financed by bank inflation, then the diversion is indirect, the crowding-out now taking place by the new money “printed” by the government competing for resources with old money saved by the public.

Milton Friedman tries to rebut the crowding-out effect of deficits by claiming that all government spending, not just deficits, equally crowds out private savings and investment. It is true that money siphoned off by taxes could also have gone into private savings and investment. But deficits have a far greater crowding, unfortunately out effect than overall spending, since deficits financed by the public obviously tap savings and savings alone, whereas taxes reduce the public’s consumption as well as savings.

Thus, deficits, whichever way you look at them, cause. grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden on the American people to pay for the mounting interest payments, a problem aggravated by the high-interest rates brought about by inflationary deficits.

Myth #3

Tax increases are a cure for deficits.

Those people who are properly worried about, unfortunately, offer an unacceptable solution: increasing taxes. Curing deficits by raising taxes is equivalent to curing someone’s bronchitis by shooting him. The “cure” is far worse than the disease.

For one reason, as many critics have pointed out, raising taxes simply gives the government more money, and so the politicians and bureaucrats are likely to react by raising expenditures still further. Parkinson said it all in his famous “Law”: “Expenditures rise to meet income:’ If the government is willing to have, say, a 20 percent deficit, it will handle high revenues by raising spending still more to maintain the same proportion of deficit.

But even apart from this shrewd judgment in political psychology, why should anyone believe that a tax is better than a higher price? It is true that inflation is a form of taxation, in which the government and other early receivers of new money are able to expropriate the members of the public whose income rises later in the process of inflation. But, at least with inflation, people are still reaping some of the benefits of exchange. If bread rises to $10 a loaf, this is unfortunate, but at least you can still eat the bread. But if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit. The only result is that the producers’ money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around.

No, the only sound cure for deficits is a simple but virtually unmentioned one: cut the federal budget. How and where? Anywhere and everywhere.

Myth #4

Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall).

The financial press now knows enough economics to watch weekly money supply figures like hawks; but they inevitably interpret these figures in a chaotic fashion. If the money supply rises, this is interpreted as lowering interest rates and inflationary; it is also interpreted, often in the very same article, as raising interest rates. And vice versa. If the Fed tightens the growth of money, it is interpreted as both raising interest rates and lowering them. Sometimes it seems that all Fed actions, no matter how contradictory, must result in raising interest rates. Clearly, something is very wrong here.

The problem here is that, as in the case of price levels, there are several causal factors operating on interest rates and in different directions. If the Fed expands the money supply, it does so by generating more bank reserves and thereby expanding the supply of bank credit and bank deposits. The expansion of credit necessarily means an increased supply in the credit market and hence a lowering of the price of credit, or the rate of interest. On the other: hand, if the Fed restricts the supply of credit and the growth of the money supply, this means that the supply in the credit market declines, and this should mean a rise in interest rates.

And this is precisely what happens in the first decade or two of chronic inflation. Fed expansion lowers interest rates; Fed tightening raises them. But after this period, the public and the market begin to catch on to what is happening. They begin to realize that inflation is chronic because of the systemic expansion of the money supply. When they realize this fact of life, they will also realize that inflation wipes out the creditor for the benefit of the debtor. Thus, if someone grants a loan at 5% for one year, and there is 7% inflation for that year, the creditor loses, not gains. He loses 2%, since he gets paid back in dollars that are now worth 7% less in purchasing power. Correspondingly, the debtor gains by inflation. As creditors begin to catch on, they place an inflation premium on the interest rate, and debtors will be willing to pay. Hence, in the long-run anything which fuels the expectations of inflation will raise inflation premiums on interest rates; and anything which dampens those expectations will lower those premiums. Therefore, a Fed tightening will now tend to dampen inflationary expectations and lower interest rates; a Fed expansion will whip up those expectations again and raise them. There are two, opposite causal chains at work. And so Fed expansion or contraction can either raise or lower interest rates, depending on which causal chain is stronger.

Which will be stronger? There is no way to know for sure. In the early decades of inflation, there is no inflation premium; in the later decades, such as we are now in, there is. The relative strength and reaction times depend on the subjective expectations of the public, and these cannot be forecast with certainty. And this is one reason why economic forecasts can never be made with certainty.

Myth #5

Economists, using charts or high-speed computer models, can accurately forecast the future.

The problem of forecasting interest rates illustrates the pitfalls of forecasting in general. People are contrary cusses whose behavior, thank goodness, cannot be forecast precisely in advance. Their values, ideas, expectations, and knowledge change all the time, and change in an unpredictable manner. What economist, for example, could have forecast (or did forecast) the Cabbage Patch Kid craze of the Christmas season of 1983? Every economic quantity, every price, purchase, or income figure is the embodiment of thousands, even millions, of unpredictable choices by individuals.

Many studies, formal and informal, have been made of the record of forecasting by economists, and it has been consistently abysmal. Forecasters often complain that they can do well enough as long as current trends continue; what they have difficulty in doing is catching changes in trend. But of course, there is no trick in extrapolating current trends into the near future. You don’t need sophisticated computer models for that; you can do it better and far more cheaply by using a ruler. The real trick is precisely to forecast when and how trends will change, and forecasters have been notoriously bad at that. No economist forecast the depth of the 1981–82 depression, and none predicted the strength of the 1983 boom.

The next time you are swayed by the jargon or seeming expertise of the economic forecaster, ask yourself this question: If he can really predict the future so well, why is he wasting his time putting out newsletters or doing consulting when he himself could be making trillions of dollars in the stock and commodity markets?

Myth #6

There is a tradeoff between unemployment and inflation.

Every time someone calls for the government to abandon its inflationary policies, Establishment economists and politicians warn that the result can only be severe unemployment. We are trapped, therefore, into playing off inflation against high unemployment and become persuaded that we must therefore accept some of both.

This doctrine is the fallback position for Keynesians. Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money.

The tradeoff doctrine is based on the alleged “Phillips curve,” a curve invented many years ago by the British economist A. W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.

By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas nowadays unemployment ranges between eight and 11 percent and inflation between five and 13 percent. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation-unemployment tradeoff.

But ideologues seldom give way to the facts, even as they continually claim to “test” their theories by facts. To save the concept, they have simply concluded that the Phillips curve still remains as an inflation-unemployment tradeoff, except that the curve has unaccountably “shifted” to a new set of alleged tradeoffs. On this sort of mind-set, of course, no one could ever refute any theory.

In fact, inflation now, even if it reduces unemployment in the short-run by inducing prices to spurt ahead of wage rates (thereby reducing real wage rates), will only create more unemployment in the long run. Eventually, wage rates catch up with inflation, and inflation brings recession and unemployment inevitably in its wake. After more than two decades of inflation, we are all now living in that “long run.”

Myth #7

Deflation — falling prices — is unthinkable, and would cause a catastrophic depression.

The public memory is short. We forget that, from the beginning of the Industrial Revolution in the mid-18th century until the beginning of World War II, prices generally went down, year after year. That’s because continually increasing productivity and output of goods generated by free markets caused prices to fall. There was no depression, however, because costs fell along with selling prices. Usually, wage rates remained constant while the cost of living fell, so that “real” wages, or everyone’s standard of living, rose steadily.

Virtually the only time when prices rose over those two centuries were periods of war (War of 1812, Civil War, World War I), when the warring governments inflated the money supply so heavily to pay for the war as to more than offset continuing gains in productivity.

We can see how free market capitalism, unburdened by governmental or central bank inflation, works if we look at what has happened in the last few years to the prices of computers. A computer used to have to be enormous, costing millions of dollars. Now, in a remarkable surge of productivity brought about by the microchip revolution, computers are falling in price even as I write. Computer firms are successful despite the falling prices because their costs have been falling, and productivity rising. In fact, these falling costs and prices have enabled them to tap a mass market characteristic of the dynamic growth of free market capitalism. “Deflation” has brought no disaster to this industry.

The same is true of other high-growth industries, such as electronic calculators, plastics, TV sets, and VCRs. Deflation, far from bringing catastrophe, is the hallmark of sound and dynamic economic growth.

Myth #8

The best tax is a “flat” income tax, proportionate to income across the board, with no exemptions or deductions.

It is usually added by flat-tax proponents, that eliminating such exemptions would enable the federal government to cut the current tax rate substantially.

But this view assumes, for one thing, that present deductions from the income tax are immoral subsidies or “loopholes” that should be closed for the benefit of all. A deduction or exemption is only a “loophole” if you assume that the government owns 100 percent of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy. Lowering the overall tax by abolishing deductions for medical care, for interest payments, or for uninsured losses, is simply lowering the taxes of one set of people (those that have little interest to pay, or medical expenses, or uninsured losses) at the expense of raising them for those who have incurred such expenses.

There is furthermore neither any guarantee nor even likelihood that, once the exemptions and deductions are safely out of the way, the government would keep its tax rate at the lower level. Looking at the record of governments, past and present, there is every reason to assume that more of our money would be taken by the government as it raised the tax rate back up (at least) to the old level, with a consequently greater overall drain from the producers to the bureaucracy.

It is supposed that the tax system should be roughly that of pricing or incomes on the market. But market pricing is not. proportional to incomes. It would be a peculiar world, for example, if Rockefeller were forced to pay $1,000 for a loaf of bread — that is, a payment proportionate to his income relative to the average man. That would mean a world in which equality of incomes was enforced in a particularly bizarre and inefficient manner. If a tax were levied like a market price, it would be equal to every “customer,” not proportionate to each customer’s income.

Myth #9

An income tax cut helps everyone because not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut.

This is the so-called “Laffer curve; set forth by California economist Arthur Laffer. It was advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy their tax cuts, be happy at the balanced budget, and still receive the same level of subsidies from the government.

It is true that if tax rates are 99 percent, and they are cut to 95 percent, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District’s gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to their chagrin and confusion, they had to repeal the tax.

But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.

There are some problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If — a big if — we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that “optimum” point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.

Myth #10

Imports from countries where labor is cheap cause unemployment in the United States.

One of the many problems with this doctrine is that it ignores the question: why are wages low in a foreign country and high in the United States? It starts with these wage rates as ultimate givens, and doesn’t pursue the question why they are what they are. Basically, they are high in the United States because labor productivity is high — because workers here are aided by large amounts of technologically advanced capital equipment. Wage rates are low in many foreign countries because capital equipment is small and technologically primitive. Unaided by much capital, worker productivity is far lower than in the U.S. Wage rates in every country are determined by the productivity of the workers in that country. Hence, high wages in the United States are not a standing threat to American prosperity; they are the result of that prosperity.

But what of certain industries in the U.S. that complain loudly and chronically about the “unfair” competition of products from low-wage countries? Here, we must realize that wages in each country are interconnected from one industry and occupation and region to another. All workers compete with each other, and if wages in industry A are far lower than in other industries, workers — spearheaded by young workers starting their careers — would leave or refuse to enter industry A and move to other firms or industries where the wage rate is higher.

Wages in the complaining industries, then, are high because they have been bid high by all industries in the United States. If the steel or textile industries in the United States find it difficult to compete with their counterparts abroad, it is not because foreign firms are paying low wages, but because other American industries have bid up American wage rates to such a high level that steel and textile cannot afford to pay. In short, what’s really happening is that steel, textile, and other such firms are using labor inefficiently as compared to other American industries. Tariffs or import quotas to keep inefficient firms or industries in operation hurt everyone, in every country, who is not in that industry. They injure all American consumers by keeping up prices, keeping down quality and competition, and distorting production. A tariff or an import quota is equivalent to chopping up a railroad or destroying an airline — for its point is to make international transportation artificially expensive.

Tariffs and import quotas also injure other, efficient American industries by tying up resources that would otherwise move to more efficient uses. And, in the long run, the tariffs and quotas, like any sort of monopoly privilege conferred by government, are no bonanza even for the firms being protected and subsidized. For, as we have seen in the cases of railroads and airlines, industries enjoying government monopoly (whether through tariffs or regulation) eventually become so inefficient that they lose money anyway, and can only call for more and more bailouts, for even more of a privileged shelter from free competition.

Originally published in The Free Market Special Issue (1984)

From Lewrockwell.com, here.