On the Record | Trump Awakens the Entrepreneurial Spirit

Please see my latest post for the Quarterly Review, ‘Trump Awakens the Entrepreneurial Spirit’:

Businessmen don’t understand politics. Success in the marketplace doesn’t necessarily follow in the political arena. Early criticism of Donald Trump’s presidential campaign were variations on this theme, from the first day he rode down the escalator at Trump Tower to announce his candidacy. How that tune has changed. Trump’s business acumen may prove his greatest political asset to an America that elects him president.

He may be learning on the fly the science of politics, but Trump instinctively comprehends the craft of intuiting the people’s discontent and offering them an alternative to the Capitol Hill duopoly. Whether on illegal immigration, terrorist threats, endless wars, or disappearing jobs, Trump reads the American mood like the practised pols of old. What he lacks in sophistication he more than compensates with gut instinct.

His outsider status is Trump’s self-proclaimed ace card — he’s not a politician but he understands how they operate, since he’s been negotiating with them all his life as a mega-developer. It’s these transformative skills that he exploits in his White House bid. ‘I’ve been very lucky. I’ve led a great life,’ he told an audience Sunday in Greeley, Colorado. ‘Now I want to give back to the country which has been so good to me.’

Read more . . .

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It may surprise that a student of the political careers of Benjamin Disraeli, Earl of Beaconsfield, and Sir John A. Macdonald would take such a dim view of protectionism. I simply refer you to 19^thcentury French economic journalist Frédéric Bastiat’s Economic Sophisms and his rigorous deconstruction of the protectionist argument.

With respect to Donald Trump and his policy of border tariffs, as I suggest in this article (and my two columns to which I link), Trump has offered two alternative methods of addressing American business decline: an end to global currency manipulation and entrepreneurial innovation.

And it is Trump’s appeal to the entrepreneur and to the ‘law of markets’ in which ‘demand is constituted by supply’ where great opportunity lies.

So my approach has been much like Kennedy’s attitude to Khrushchev’s conflicting messages during the Cuban Missile Crisis: ignore the one full of bluster and bellicosity, and focus instead on the note promising hope and a way forward. Take Trump’s protectionist threat as a negotiating bid with other nations (and U.S. industries) while defending and encouraging his call to entrepreneurs.

Conservative essayist Joseph Sobran limned the political divide between nomocracy with its simple plan to enforce the ‘rule of law’ and teleocracy with its vision of the perfect society to foist upon an unsuspecting public.

Donald Trump is, in my view, a nomocrat, as evidenced by his ‘America First’ presidential campaign. As such, he should be criticised when he errs and, if elected President, be subject to the checks and balances of American constitutional federalism; but Trump should also be praised when in the right and given all the support and assistance of the American people.

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My thanks to editor Dr Leslie Jones of the Quarterly Review.

Unleash prosperity by giving full rein to capital accumulation

As the health of America’s economy remains mired in the doldrums, a new organisation débuts to refresh the winds of forward movement: the Committee to Unleash Prosperity.

An inaugural press release announces that the Committee ‘was founded to combat America’s “growth gap” by promoting an agenda that will revitalize America’s economy.

In the past decade and a half, under both Republican and Democratic presidents, U.S. economic growth has diminished to roughly 2% annually—a significant decrease from its Post-World War II average of 3.5%.

This subpar growth rate has come at tremendous cost to American families, household incomes, employment opportunities, investment, and poverty levels. Above all, the lack of growth has led some to doubt the attainability of the American Dream and to wonder if our current economic climate is the new norm.

The Committee has six main objectives: (1) a broad-based, low rate, flat tax; (2) limited government spending; (3) decreased regulation; (4) sound money; (5) free trade; and (6) rule of constitutional law. Given the aim of unleashing prosperity, the Committee has effectively laid out a programme for capital accumulation.

But, as a necessary first step toward economic growth, the state must be constrained to its constitutional duties — a programme which would have won the approval of Calvin Coolidge, the last American president whose adherence to limited government and low taxes encouraged the longest period of exceptional economic performance: average real growth of 4.82 per cent during his tenure. As he wrote in his second ‘State of the Union’ address delivered to Congress:

Nothing is more likely to produce that public confidence which is the forerunner and the mainstay of prosperity, encourage and enlarge business opportunity with ample opportunity for employment at good wages, provide a larger market for … products, and put our country in a stronger position to be able to meet the world competition in trade, than a continuing policy of economy.

The vision offered by capital accumulation

The source of prosperity in the West, noted Ludwig von Mises — the foremost economist of the twentieth century — was the initiation of capital accumulation. ‘The historical period in which the smooth working of the market economy was again and again interrupted through expansionist ventures was an epoch of continuous economic progress,’ he wrote in his magnum opus, Human Action. ‘The steady advance in the accumulation of new capital made technological improvement possible. Output per unit of input was increased and business filled the markets with increasing quantities of cheap goods.’¹

Savings and investment are the sources of new capital, which investors and entrepreneurs employ to satisfy consumer wants with better methods of industrial production or with the introduction of new goods and services. But additional capital equipment cannot come into existence if surplus earnings, either of individuals or corporations, are taxed away by government to fund present demands, usually in the form of redistributionist policies to combat the bugbear of ‘income inequality’.

If the United States is to enjoy capital formation and the ensuing prosperity the Committee wants the country to unleash, then it needs limited government, restrained from tampering with the spontaneous order of the market, as a first step; low taxes and minimal regulation — and the end of cronyism which feeds on favouritism — are corollaries of the minarchist state. But will Americans support a suspension of their entitlement culture?

The seductive illusion of government intervention

Modern governments in the post-Keynesian era create only the illusion of general prosperity, by taxing those who have (wealth creators) and redistributing to those who have not (wealth eaters). The importance of saving surplus earnings for investment purposes was deemed ridiculous by the Depression chimera that too-much savings was a major cause of unemployment. Reflating the work rolls through government spending and make-work projects was championed as the easy route to riches for all.

But genuine prosperity can only be assured by actual employment and an increase in real wage rates — both of which are dependent upon capital accumulation above the level of employment. Job opportunities and greater productivity result, in addition to fueling entrepreneurial incentive. But the threat of intervention dissipates incentive: whether through punitive income taxes, capital gains taxes, or corporation and dividend taxes, or the equally damaging loss of confidence which constant interference engenders. The Manhattan Institute reports that GDP for 2015 is projected to be less than 2 per cent, with investment a negligible 0.6 per cent.

Moreover, if capital is consumed and not replenished, then previous accumulations — in the form of factories, equipment, and the other means of production — wear out, are depleted, or become obsolete through change in technology or consumer wants. Production stagnates, while entrepreneurs and innovation go without the necessary tools for growth. Employment stalls and prices rise.

In addition, capital accumulation can falter if governments promote, through loose monetary policy, goods and services which do not satisfy consumer needs: what von Mises termed ‘malinvestment’. Any capital thus dedicated to specious demand is wasted, as it is not fungible and cannot be rededicated to more useful purposes. The Committee to Unleash Prosperity is wise, then, to target low taxation and a stable currency as necessary conditions for capital accumulation.

‘The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology’, states Human Action.

The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.²

The task before the Committee is to demonstrate to a sceptical populace, beguiled by government legerdemain, that capital accumulation is the true philosophers’ stone of prosperity. ‘What determines the course of a nation’s economic policies is always the economic ideas held by public opinion,’ cautioned von Mises. ‘No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.’³

Enlightening people about the true source of wealth and prosperity

The trouble is that for many Americans the generally accepted ideology is the welfare state; those Americans who receive more from government than what they pay in taxes, nearly 50 per cent of whom pay no income taxes at all. For them, self-interest militates against reform away from redistribution toward individual effort. ‘‘In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens,’ wrote von Mises.

Today the majority of the citizens look upon government as an agency dispensing benefits ...expect[ing] to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption [emphasis added].⁴

This is the dilemma of democratic government: when states, formerly charged with maintaining the rights of private property, weaken to popular appeals to redistribute wealth through confiscatory taxation, dressed up in the language of ‘fairness’ or ‘equality’ or the more brutally honest ‘soak the rich’ mentality — social justice in the form of the ‘clientele’ state. It was a contest foreseen by the legendary French economist, Frédéric Bastiat:

‘…when plunder is organised by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws,’ he wrote in his classic pamphlet on spoliation.⁵ ‘According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: either they may wish to stop lawful plunder, or they may wish to share in it.’

It is the pre-eminent political contest facing the United States. Do Americans want to continue spending to-day the profits of capitalism, or will they choose to save for to-morrow and reap the benefits of capital investment? Upon the answer rests the American Dream and the ultimate success of the Committee to Unleash Prosperity.

ENDNOTES

^1. Ludwig von Mises, Human Action: A Treatise on Economics [1949], 4^th rev. ed., Bettina Bien Greaves, ed. (San Francisco: Fox & Wilkes, 1996), 561.

^2. Human Action, 575.

^3. Human Action, 850.

^4. Human Action, 849-50.

^5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 26-27.

The perpetual protest against economic error

Just a single posting for review, ‘The Infernal Resilience of Economic Fallacies’, examining the British government’s 2014 Budget and various commentaries on it, good and less good. Frédéric Bastiat, the French classical economist, once wrote that confronting bad economics was a ‘perpetual protest’ — a point illustrated in the necessity to correct the recurrent errors inherent in Keynesian policies of state intervention and protectionist trade programmes.

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#DMI_Reads Update — Here is a list of current reading, since the last message in February; perhaps it will lead to some interesting discussion:

• Frédéric Bastiat, Economic Sophisms—Second Series, in The Bastiat Collection, 2^nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011) [masterful short essays that demolish mercantilism and protectionism];
• Christopher Hibbert, The Destruction of Lord Raglan: A Tragedy of the Crimean War, 1854-55 (Boston and Toronto: Little, Brown, 1961) [I cannot read Hibbert’s account of Lord Raglan’s misadventures in the Crimea without picturing Sir John Guilgud’s marvellous portrayal in The Charge of the Light Brigade];
• Henry Hazlitt, The Inflation Crisis, and How to Resolve It (New York: Arlington House, 1978) [Hazlitt’s writings on the illusions of inflationary salvation are an education in themselves];
• C. Brad Fraught, The Oxford Movement: A Thematic History of the Tractarians and Their Times (University Park, PA: Pennsylvania State University Press, 2003) [a lovely overview of Newman, Keble, Froude, and Pusey and their impact upon the Victorian Church of England];
• Friedrich Gentz, The Origin and Principles of the American Revolution, Compared with the Origin and Principles of the French Revolution, John Quincy Adams, trans., Peter Koslowski, ed. (Indianapolis: Liberty Fund, 2010 [1800]) [Gentz’s summary of the causes of the American revolt is seminal in understanding the War of Independence]; and
• Stephen Macedo, The New Right v. The Constitution, 2^nd ed. (Washington, DC: Cato Institute, 1987) [a fascinating critique of conservative attempts to read the U.S. Constitution according to ‘democratic’ principles].

I have also been trying to catch up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

The Infernal Resilience of Economic Fallacies

If only economic fallacies were characteristic of economic goods — and scarce! Unfortunately, this is not so, and fallacies in favour of protection and stimulus flourish and spread their noxious untruths. For Frédéric Bastiat, it was the task of political economists to do battle against them in a ‘perpetual protest’¹.

Sometimes, though, the source of the economic fallacy surprises, as it did when reading a brief John Redwood commentary on Britain’s latest Budget from its Chancellor of the Exchequer, George Osborne.

Redwood, once a protégé to Thatcher and a respected scholar and politician, understands the dynamism which underpins the Laffer curve², writing that ‘tax revenues are rising ... by allowing more tax revenue to arise naturally through the growth of the economy’, underlining the fact that higher taxes do not necessarily result in higher revenues:

Where the government has tried higher tax rates on income and capital gains it has actually damaged the revenues, not increased them. If any government tried to reduce the deficit quickly through a series of tax rate rises, considerable damage would be done to the economy and tax revenues might fall.

Plus, he advocates a route to balanced budgets through such growth, which ‘...has always been the main requirement to help correct the large imbalances in the economy without pushing it into deep recession.’ Yet in the same paragraph, Redwood lauds government fiscal interventions that are just as likely — depending upon the steps taken — to be impediments to the economic growth he favours. ‘We need more exports, more homes, more domestically produced goods to replace imports, ‘he asserts. ‘The budget seeks to help bring that about.’

Export expansion, for instance, can benefit from reductions in regulations that artificially raise the price of British goods. As for housing, such regulatory reform would doubtless be of more benefit than the Chancellor’s ‘help-to-buy’ initiative: ‘The chancellor’s sub-prime subsidies risk further inflating the housing market,’ warns Richard Wellings. ‘More households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.’

All things being equal, Redwood goes off the beam, though, in his condemnation of foreign trade which he views as a threat to domestic industry or, nearer the mark, British employment. The organic ramifications of trade are by no means static, as Geoffrey Wood outlines in Fifty Economic Fallacies Exposed:

Producers are guided by the prices they see confronting them to produce what is most profitable for them and to do so as cheaply as they can. Prices thus direct resources to where they are most useful, as those producers to whom they are most valuable will pay most for them. If an economy is trading freely, without tariffs, its resources are making the most of the opportunities prescribed to them by the patterns of prices in the rest of the world.

The economy’s resources will thus be used where it is most productive, relative to the rest of the world, for them to be. The economy will be making the most of the opportunities available to it.³

In an harmonious trading environment, then, countries produce according to their strengths, and buy from countries with respective productive advantages. Far from a zero sum transaction as Redwood suggests, this is an economic policy with positive sum benefits — and a respectable pedigree: David Ricardo called it ‘the law of comparative advantage’, whereas for Ludwig von Mises it was ‘the law of association’.

But for sheer entertainment in slaying this protectionist bugbear, one must return to Bastiat, who doubtless would have relished a go at Redwood’s economic faux pas. From his essay ‘Domination through Industrial Superiority’, we can imagine how he would set upon Redwood’s admonition against imports:

We produce at home neither tea, coffee, gold, nor silver. Does this mean that our industry as a whole thereby suffers some diminution? No; it means only that, in order to create the equivalent value needed to acquire these commodities by way of exchange, we employ less labor than would be required to produce them ourselves. We thus have more labor left over to devote to satisfying other wants. We are that much richer and stronger. All that foreign competition has been able to do, even in cases in which it has absolutely eliminated us from a particular branch of industry, is to save labor and increase our productive capacity.⁴

Bastiat acknowledged that even the best are tripped up by economic fallacies, due to their sheer tenacity (and controversy over balance-of-trade issues is among the most intractable). Fortunately for Redwood (and us), there remain those political economists who can diagnose these errors and prescribe the needful antidotes. The Chancellor of the Exchequer himself would do well to schedule an appointment.

ENDNOTES

^1. Frédéric Bastiat, ‘Property and Law’, in Selected Essays on Political Economy, George B. de Huszar, trans., Seymour Cain, ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 115.

^2. See Arthur Laffer, The Laffer Curve and the Failure of Stimulus Spending, Lecture delivered to the Institute of Economic Affairs, London, 27 June 2012.

^3. Geoffrey E. Wood, Fifty Economic Fallacies Exposed (London: Institute of Economic Affairs, 2002), 34.

^4. Frédéric Bastiat, ‘Domination through Industrial Superiority’, in Economic Sophisms, Arthur Goddard, trans. & ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 268.