Is Debt Necessary for Recovery?

Tomado de mises.org
Mises Daily: Thursday, November 03, 2011 by Robert P. Murphy


Since the crisis began, one of the dominant themes in arguments over proper government policy has been the Keynesian view that it is crucial to prop up total spending. The added twist during this particular recession is the crushing burden of private-sector debt, which allegedly makes it all the more urgent for governments to run fiscal deficits.

In a previous article I dealt with so-called deleveraging and argued that it was a good thing, both for the indebted individual or firm, as well as the general economic recovery.

However, prompted by a recent scolding given by Paul Krugman, it's important to revisit the topic in a more elementary fashion. When Krugman, et al., casually claim that debt reduction would by sheer accounting cause total spending to fall, they are simply wrong. Thus their mistake is twofold: their faulty Keynesian economics leads them to worry needlessly about nominal spending, while their sloppy accounting leads them to champion debt as necessary for investment.


Krugman on Debt Reduction

In a post ironically entitled "Arithmetic Has a Well Known Keynesian Bias" — ironic because his Keynesian bias leads him to make an elementary accounting mistake — Krugman explains that an exasperated British pundit was reacting to Cameron's statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall.

But then, this kind of obliviousness is very widespread, and my experience is that if you try to point out the problem — if you try to explain that my spending is your income and vice versa — you get a belligerent response. Y=E is seen as a political statement, which in a way it is if one side of the political spectrum insists on believing things that can't be true. (emphasis added)

As I mentioned in the opening, this claim has been repeated ad nauseam during the last three years. Specifically, the opponents of government deficit spending have been beaten over the head with the alleged "fact" that as a matter of simple accounting, widespread debt reduction implies a reduction in spending and hence a reduction in income.

The second part of the claim is true, as far it goes. Every time someone spends a dollar in a transaction it is, at the same time, part of someone else's income. In my previous article, I argued that this tautology does not make the Keynesian case for government deficit spending.

Yet Krugman's quotation above contains an even worse mistake. He is taking it for granted that if people in Britain began paying down their debts, then that necessarily would lead to a reduction in total British spending. He is simply wrong here, as I'll show in the next section.


Debts and Spending: A Simple Fable

Imagine a simple world with three people: Cathy the Capitalist, Larry the Landowner, and Willy the Worker. Initially we are in a stable pattern where every period, the following transactions occur:

•Larry pays Willy $1,000 to work on his land and harvest food.

•Willy pays $100 in finance charges on his outstanding debt of $500 to Cathy, which is rolling over at the interest rate of 20 percent per period. (Willy each period just pays the finance charges, keeping the outstanding carried balance intact at $500.)

•Willy spends his remaining $900 on buying some of the food from Larry.

•Cathy spends her $100 in interest income on buying some of the food from Larry.

•Larry eats the remaining food that he hasn't sold to Cathy or Willy.

In this scenario, every period $1,000 is spent on food, the only finished good or service. As officially measured — notice that it misses Larry's "home consumption" — gross domestic product (GDP) for this simple economy is $1,000 per period.

Now suppose that Willy listens to Dave Ramsey and decides to become debt free. In this particular period, the following might happen:

•Larry pays Willy $1,000 to work on his land and harvest food.

•Willy pays $100 in finance charges on his outstanding debt of $500 to Cathy, which is rolling over at the interest rate of 20 percent per period.

•In addition, Willy pays another $500 to Cathy to extinguish his debt to her.

•Willy spends his remaining $400 on buying some of the food from Larry.

•Cathy spends her $100 in interest income, and her $500 in principal repayment, on buying some of the food from Larry.

•Larry eats the remaining food that he hasn't sold to Cathy or Willy.

Now in this scenario, total spending is still $1,000, and measured GDP is still $1,000. Larry the Landowner wouldn't see a drop in demand for his food. Willy reduced his consumption and saved much more out of his income this period, but this didn't affect even nominal income because Cathy's consumption filled the gap.

Maybe our scenario isn't likely, depending on various assumptions we can make concerning Cathy's spending habits, but it is certainly possible. So we see that an economy can start out with one person having a large debt, then becoming debt free, without necessarily altering total spending or total income, even when measured in nominal (i.e., dollar) terms.

Let me be fair to Krugman. He might concede that the above scenario is what someone like Cameron (or Dave Ramsey for that matter) has in mind when calling for people to "pay down their debts," but if we're technical about it — so Krugman might argue — there really wasn't net aggregate debt reduction in the above scenario. Yes, Willy paid down his debt by $500, but Cathy in a sense "dissaved" by letting her own financial assets fall by $500. If we like, we can say Cathy's debt started out at -$500, and then ended at $0, meaning her debt "increased" by $500.

Okay, I am happy to give Krugman that escape hatch. As we'll see, it doesn't rescue him. I can still show how Willy can pay off his debt without causing total money expenditures to fall, and without anyone in the community even suffering a drop in financial assets.

To see this, revert to our original scenario, where Willy owes Cathy $500. As before, Willy decides to pay off his debt, through much higher saving. But this time, imagine the following occurs:

•Larry pays Willy $1,000 to work on his land and harvest food.

•Willy pays $100 in finance charges on his outstanding debt of $500 to Cathy, which is rolling over at the interest rate of 20 percent per period.

•In addition, Willy pays another $500 to Cathy to extinguish his debt to her.

•Cathy spends her $100 in interest income on buying some of the food from Larry, as she always has done.

•Larry issues $500 in new stock shares for his landholding corporation, which Cathy buys.

•Larry pays Willy $500 to plow a parcel of his land that was previously uncultivated.

•Willy spends $400 + $500 = $900 on buying food from Larry.

•Larry eats the remaining food that he hasn't sold to Cathy or Willy.

In this final scenario, consumption spending is $1,000 while net investment spending is $500, meaning official GDP is $1,500 — it has actually risen 50 percent! At the same time, Willy paid off his debt, while Cathy swapped a $500 bond for $500 in stock shares, so that (considering just these two) there has been a net reduction in indebtedness in the community.

But what about Larry? Has he simply replaced Willy as the new debtor in our economy?

No, he hasn't. Although Larry took in $500 while raising funds for his corporation, he is not indebted to Cathy, and so we can't say that his financial decision during the period somehow offset Willy's debt repayment. Cathy doesn't have a debt claim on Larry; instead she owns equity in his corporation. There is a whole literature in finance on the important differences between debt and equity, including the fact that debt financing makes a firm leveraged, whereas equity financing does not.

It's not even the case that Larry will have to reduce his future consumption in order to make dividend payments to Cathy (to justify the initial valuation of her stock at $500). So long as Larry's $500 investment is sound, the new field will increase future harvests, possibly allowing Larry to maintain his original consumption of food even though Cathy now has an ownership stake in the net profits of the business.


Krugman's Biased Arithmetic

As our fanciful example illustrates, there is nothing in the raw GDP accounting that requires a period of deleveraging to yield smaller "total spending" and hence "total income," even if we measure those items in nominal money terms.

Of course, Krugman might object that I have loaded the deck, and chosen a completely irrelevant story. In our present real-world situation of depressed demand and excess capacity, Krugman might claim, why would Larry issue more stock and try to expand his operation?

Yet here we have left the realm of GDP accounting, and we enter the realm of economic models. That is why I said Krugman's post title — "Arithmetic Has a Well Known Keynesian Bias" — was so ironic. My fanciful example shows that the tautologous GDP accounting (or "arithmetic") is consistent with a story in which extra saving allows for more investment, which in turn provides an opportunity for underemployed workers to earn more income. (Notice that in the last scenario, Willy didn't reduce his food consumption. Instead, he paid off his debt by working more and earning a bigger paycheck for the whole period.)

Maybe the reader finds my story compelling, maybe not. But my point is, there is nothing wrong in the GDP accounting with my simplistic tale. The immediate objections to my story would rely on assumptions about how the economy works — assumptions that Keynesians typically make and that their critics typically reject.


Conclusion

The old-school, commonsense solution to an economy plagued by excessive debt is for people to work hard and save more. Keynesian economists have been saying throughout our current crisis that this folk wisdom overlooks basic accounting tautologies, but these pundits are smuggling in a Keynesian theory without realizing it.

Contrary to the assertions of these pundits, an economy does not need mountains of debt — whether government or private — in order to grow. Corporations can still raise needed financing through issuing equity. There are pros and cons to debt financing, but it isn't necessary for a strong economy.



Robert Murphy is an adjunct scholar of the Mises Institute, where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to "Man, Economy, and State with Power and Market," the "Human Action" Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist.

The Value of Labor

Tomado de mises.org
Mises Daily: Friday, October 21, 2011 by Richard Cantillon

The Labor of the Plowman Is of Less Value than that of the Artisan


Abstract: The opportunity cost of becoming a skilled worker includes both the direct expenses as well as the foregone labor during the training period or apprenticeship. As a result, skilled workers must be paid higher wages than unskilled workers.

A laborer’s son, at 7 to 12 years of age, begins to help his father either in keeping the herds, digging the ground, or in other sorts of country labor that require no art or skill.

If his father has him taught a trade, he loses his assistance during the time of his apprenticeship and is obligated to clothe him and to pay the expenses of his apprenticeship for many years.[1] The son is thus dependent on his father and his labor brings in no advantage for several years. The [working] life of man is estimated at only 10 or 12 years, and as several are lost in learning a trade, most of which in England require seven years of apprenticeship, a plowman would never be willing to have a trade taught to his son if the artisans did not earn more than the plowmen.

Therefore, those who employ artisans or professionals must pay for their labor at a higher rate than for that of a plowman or common laborer. Their labor will necessarily be expensive in proportion to the time lost in learning the trade and the cost and risk incurred in becoming proficient.

The professionals themselves do not make all their children learn their own trade: there would be too many of them for the needs of a city or a state and many would not find enough work. However, the work is naturally better paid than that of plowmen.


Some Artisans Earn More, Others Less, According to the Different Cases and Circumstances

Abstract: In addition to training and the forces of supply and demand, workers with higher quality skills, risky jobs, or jobs that require trustworthy employees will receive higher wages. This is now known as the theory of compensating differentials that is often attributed to Adam Smith.

If two tailors make all the clothes of a village, one may have more customers than the other, whether from his way of attracting business, because his products are better or more durable than the other, or because he follows the fashions better in the style of his garments.

If one dies, the other, finding himself with more work, will be able to raise the price of his labor, expediting the work of some in preference to others, until the villagers find it to their advantage to have their clothes made in another village, town, or city, losing the time spent in going and returning, or until another tailor comes to live in their village and shares the business.

The jobs that require the most time in training or most ingenuity and industry must necessarily be the best paid. A skillful cabinetmaker must receive a higher price for his work than an ordinary carpenter, and a good clock- and watchmaker more than a blacksmith.

The arts and occupations, which are accompanied by risks and dangers, like those of foundry workers,sailors, silver miners, etc., ought to be paid in proportion to the risks. When skill is needed, over and above the dangers, they ought to be paid even more, such as ship pilots, divers, engineers, etc. When capacity and trustworthiness are needed, the labor is paid still more highly, as in the case of jewelers, bookkeepers, cashiers, and others.

By these examples, and a hundred others we could draw from ordinary experience, it is easily seen that the differences in the prices paid for labor is based upon natural and obvious reasons.


The Number of Laborers, Artisans, and Others, Who Work in a State, Is Naturally Proportioned to the Demand for Them

Abstract: The supply of workers adjusts itself to the demand for labor, across all professions, via wage rates, migration, and changes in population. Prosperity cannot be created by subsidizing job training.

If all the farm laborers in a village raise several sons to the same work, there will be too many farm laborers to cultivate the lands of the village, and the surplus adults will have to leave in order to seek a livelihood elsewhere, which they generally find in cities. If some remain with their fathers — as they will not all find sufficient employment — they will live in great poverty and will not marry for lack of means to raise children. If they do marry, their children will soon die of starvation, with their parents, as we see every day in France.

Therefore, if the village continues in the same employment pattern, and derives its living from cultivating the same area of land, its population will not increase in a thousand years.

It is true that the women and girls of this village can, when they are not working in the fields, occupy themselves in spinning, knitting, or other work that can be sold in the cities. However, this rarely suffices to support the extra children, who leave the village to seek their fortune elsewhere.

The same may be said of the artisans of a village. If a tailor makes all the clothes for the villagers and then raises three sons to the same job, there will only be enough work for one successor to him and the other two must seek their livelihood elsewhere. If they do not find employment in the neighboring town, they must move farther away or change their occupations and earn a living by becoming servants, soldiers, sailors, etc.

By the same process of reasoning, it is easy to conceive that the laborers, artisans, and others, who earn their living by working, must proportion themselves in number to the employment and demand for them in market towns and cities.

If four tailors are enough to make all the clothes for a town and a fifth arrives, he may find some work at the expense of the other four. Therefore, if the labor is divided between the five tailors, neither of them will have enough work, and each one will live more poorly.

It often happens that laborers and artisans do not have enough employment when there are too many of them to share the business. It also happens that they can be deprived of work by accidents and by variations in demand, or that they are overburdened with work, according to the circumstances. Be that as it may, when they have no work, they leave the villages, towns, or cities where they live in such numbers and those who remain are always proportioned to the employment that suffices to maintain them. When there is a continuous increase of work, there are gains to be made and others will move in to share the business.

From this, it is easy to understand that the charity schools in England, and the proposals in France to increase the number of artisans, are useless. If the king of France sent 100,000 of his subjects, at his expense, into Holland to learn seafaring, they would be of no use when they returned if no more vessels were sent to sea than before. It is true that it would be a great advantage for a state to teach its subjects to produce the manufactured goods that are customarily drawn from abroad, and all the other articles bought there, but I am, at present, only considering a state in relation to itself.[2]

As the artisans earn more than the laborers, they are better able to raise their children into professions, and there will never be a lack of artisans in a state when there is enough work for their constant employment.[3]

Richard Cantillon (1680–1734) was the father of modern economics. Murray Rothbard called him "one of the most fascinating characters in the history of social or economic thought" and described him as "a Gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations." Cantillon became a millionaire by investing in John Law's "Mississippi Company" and predicting the popping of the now-infamous Mississippi bubble. He moved to England, where he died in a fire, allegedly set by his discharged cook.


This article is excerpted from "An Essay on Economic Theory", part I, chapters 7–9 (2010).


Notes
[1] This is where Cantillon explains the opportunity cost of an apprenticeship (similar to the opportunity cost of college) where the father has to pay for the apprenticeship (college tuition) and loses the child’s labor for several years (lost wages). Cantillon includes the cost of clothing (which would not apply in the case of college) because children who work on the farm help make their own clothing, but children in apprenticeships do not (See Part 1, Chapter 9, paragraph 3).

[2] It should be remembered that in Cantillon’s time, France was suffering under an economic policy of severe mercantilism where all manufacturing was highly restricted, monopolized, heavily taxed, and closely regulated. Therefore manufactured goods, primarily textiles, were sold at high prices and this encouraged imports. Cantillon found that subsidizing training was both expensive and unnecessary in a free economy because skilled labor would be supplied if there was a demand as he stated in the following paragraph.

[3] Cantillon will emphasize throughout the Essay that manufacturing should be allowed to grow to its largest natural extent because manufacturing labor earns higher wages (as he explained in Part 1 Chapter 7) and therefore has a higher standard of living.

I Don't Know

Tomado de Mises Daily (www.mises.org)
Wednesday, November 02, 2011 by Leonard Read


Any individual who has become aware of the free market and its miraculous performances must realize that its opposite — socialism — is growing by leaps and bounds. This growth, at the moment, is not so much in formal takeover (nationalization of the modes of production) as in political control and the intellectual acceptance of control; socialism, ideologically, is now American doctrine. This is to say that socialism is not yet as thoroughly embedded in practice as it is in theory — but the acceptance of the theory is the preface to inevitable practice. Performance in the world of practical affairs follows on the heels of prevailing ideas.

In any event, socialistic ideas are becoming so popular that countless "free enterprisers" are either "getting on the band wagon" or "running for cover." But, whichever way — one as pitiful as the other — they are forsaking their role as spokesmen for freedom.

One of the major reasons for this apostasy is clear enough: all too few understand and can make the case for the free market — without which freedom of speech, of the press, of religion are utterly impossible.[1] In the absence of skilled spokesmen, freedom disappears in the United States as elsewhere.

Making the case for the free market requires a great deal of dedicated homework and learning, among other things, how not to give the case away. And unless "I" can everlastingly maintain an awareness of how little "I" know, the chances of becoming an effective expositor of the free market are nil. Here are two tricky and rarely suspected booby traps that victimize many an "I":

1.Attempting to explain how socialism, once installed, can be made to work better than at present.

2.Attempting to explain what would happen to a socialized activity were it desocialized, leaving the activity to the free market.

I shall try to demonstrate not only that each of these is impossible of realization but that the attempts themselves do the libertarian rationale a distinct disservice.


A FEE-seminar team was invited to Venezuela. We gathered with the participants at a plush hotel 60 miles from Caracas — one of a chain of 11 hostelries built, owned, and operated by the national government. The chain has always been deep in the red. A successful businessman (one of our hosts) had once been asked by the government to head this socialized operation. Thinking that socialism might be made to work were he in charge, he accepted the challenge. When he discovered that these hotels required 150 percent occupancy just to break even, he resigned. Had he known that socialism, by its very nature, can never be made to work, he would have been spared that waste of his energies.


Socialism Defined

Socialism may be defined as the state ownership and control of the means of production and exchange and/or the results of production and exchange; but what, really, is it in simple essence? It is a forcible intervention into exchange processes, a power wedge between the willingness of buyers and the willingness of sellers, a coercive interference with what some persons want that other persons are willing to grant. Socialism, in the final analysis, amounts to the frustration of willing exchange by people who are unaware of how little they know.

For example, an American desires to exchange his $20 for an Englishman's sweater — nothing involved but a willing swap, no one else's status one whit different after the exchange than before it was made. The know-it-alls, however, with their police force, insist that a social interest is involved, that the exchange cannot be made without a penalty of $5. To the extent that this transaction is socialized — in this case the penalty payment of $5 — to that degree is the will of two peaceful parties frustrated.

How can frustration be made to work? How can frustration be manipulated into harmony and increased production? Can any interference with peaceful, willing exchange, regardless of who does the interfering, do other than wreak havoc?

Many antisocialists, unhappy with the outcome of socialized activities, feel that these could be improved were they, rather than other know-it-alls, in charge. So they seek election or appointment to the government boards of such activities, under the impression that this is one way to strike a blow for freedom. This much I concede: they can, when in charge, do more of what they want done with other people's money than would be the case were other know-it-alls in charge. But this is no libertarian accomplishment; it's only a substitution of one group's know-it-all-ness for another's.

"Can any interference with peaceful, willing exchange, regardless of who does the interfering, do other than wreak havoc?"

Further, when those of a libertarian bent set out to make socialism work better, whether by managing the activity or by their endorsement of legislation which would modify the socialistic details, they tacitly approve the socialistic premise and thereby abandon their own case for the free market. They forswear all fundamental argument against the socialistic premise because by their actions they acknowledge that it could be improved were they themselves framing or administering it. "Socialism, were I its manager, wouldn't be so bad." That, I submit, is an emanation from the mind of a know-it-all in words loud and clear.

What am I saying? That a libertarian cannot consistently accept the postmaster generalship? Or membership on the municipal power-and-light board, or whatever? Unless he claims to know how to make socialism work, that is precisely what I am saying.[2] What more effective opposition is there than a polite "No, thank you!" And when asked, "Conceding that TVA is with us, how can it be made to work better than it now does?" what more truthful answer than "I don't know; I never will know; no one will ever know." There is no right way to implement a wrong premise!

The student of liberty, if he is not to get off the track, must hope and work for the restoration of the free market and a government restored to its principled role of keeping the peace.[3] Then let him peacefully keep in character by leaving socialistic activities to those who aren't yet aware of how little they know. Left to their own resources, the bungling of their schemes may become apparent even to themselves and, most certainly, to libertarians who have not fallen into this trap. Why should libertarians absolve the socialists by becoming a party to their unworkable measures?

So much for the first booby trap. But what about its twin, the attempt to explain what would happen were the market freed of state interventionism, that is, were the activities desocialized?


What Might Have Been?

Skeptics of the free market are forever asking, "Well, how would the free market attend to mail delivery? Education? Or, whatever?" Satisfactorily answer these questions, they imply, or the free-market case loses by default. And just as often, aspiring libertarians will stumble into the booby trap; they'll conjure up some sort of an answer.

Now these attempts to answer, regardless of how skilled and ingenious the authors, will have no less than three faults, the least of which is know-it-all-ness. Take the case of mail delivery. A person can no more explain how the free market would attend to mail delivery than his great-grandfather could have explained how television could ever emerge from free-market forces!

A more serious fault is that the listening skeptic will conclude that the know-it-all answer is the free-market answer and, if that's the best it has to offer, the free market has no valid case. These futile attempts to answer can accomplish no more than to confirm the skeptics in their socialism.

The greatest fault, of course, is that these students of liberty themselves have not yet learned to answer honestly, "I don't know; I never will know; no one will ever know." They have not wholly cured themselves of the offending psychosis.

This I-don't-know answer has the virtue of being intelligent, truthful, properly humble, and novel enough to intrigue any skeptic with a searching mind. Conceded, the answer — by itself — sheds no light. But if the skeptic wishes to learn (it is idle to talk to him if he doesn't) and if the aspiring libertarians have observed and can report on how miraculously the free market performs when not politically aborted, skepticism concerning the free market will lessen, faith in what man will accomplish when free to try will increase. In short, light will be shed, education will begin.

How would the free market attend to mail delivery were the postal service desocialized? I don't know! Nor could anyone have known 100 years ago how the free market would develop the means to deliver the human voice from city to city. But take note of these facts: we have maintained mail delivery as a socialized operation; its service is getting worse, not better; its costs and prices are increasing, not decreasing; since 1932 it has accumulated an acknowledged deficit of $10 billion, and the deficits increase annually.[4]

Voice delivery, on the other hand, has been improving. Just a century ago the human voice could be delivered at the speed of sound, but only the distance two people could understand each other's shouting. Today, the human voice is delivered at the speed of light; and as to distance, it's any place on earth — you name it! The service has improved enormously; and the cost has decreased steadily.

In human-voice delivery, free-market forces have been more or less operative. No one could have predicted in 1865 what form these forces would take during the next hundred years. Even more remarkable, no one can describe how the miracles were performed after the fact. Once we realize that we cannot explain what has happened, it becomes obvious that we can never explain what will happen.


Nature and Man

The miracles of the market are of a higher and more complex order than the miracles of nature: what emerges from the free market embraces the miracles of nature, plus the miracles of human creativity as well. May I repeat, all the artifacts by which we live are but the application of human creativity to the creativities manifest in nature.

Reflect on the simpler of these phenomena, the order of nature. Had you lived on earth before there were any trees, for instance, and been asked, "How can nature ever make a tree?" you would have answered, "I don't know." Today, were you asked, "How has Nature made a tree?" you would be forced to reply, "I don't know." Yet, you can, with considerable certainty, predict that nature will continue to produce these lovely miracles, provided conditions favorable to their growth are not aborted. You can derive from experience, not a how-to-do-it knowledge, but a soundly based faith in the dependability of the biological order.

Such confident expectation is as close as any man can come to knowing how the free market would attend to an activity, were it desocialized. All about him, in unimaginable profusion, are miracles of the free market, so commonplace that they are taken more for granted than noted and appreciated — like the air we breathe. These, properly apprehended, comprise his experience. But such experience does not give him a how-to-do-it knowledge; it serves only as the basis for a warranted and unshakable faith, a faith in what free men can accomplish — provided conditions favorable to free exchange are not aborted.

The poet who wrote, "Only God can make a tree," was merely acknowledging a common faith. Know-it-alls are never heard trying to refute this; everyone takes it for granted. Yet, if it be asserted that "only God can make a violin" — portions of nature with human creativity as an added ingredient — the person unaware of how little he knows will have no more hesitancy in subjecting violin production to his masterminding than he has in socializing the airlines, or power and light, or the postal service, or whatever.

Why will people concede that they are unable to mastermind atoms and molecules into the living manifestations of nature, while at the same time acknowledging no shortcomings at all in themselves when it comes to masterminding something we know far less about: human creativity? I don't know!


Gaining a Faith in Freedom

The aspiring libertarian, if he has made the first important step in progress, understands that he does not know how to mastermind the life of a single human being. He concedes that there is an order of creation over and beyond his own mind, that this order works in diverse and wondrous ways through billions of minds and that he should not in any way abort these miracles. This, however, does not make him a know-nothing. Even though, from his experience, he does not know what will happen, he gains a faith that miracles will happen if creative energies be free to flow.

The accomplished student of liberty acquires a faith that men, when free to try, will perform miracles, a faith extrapolated from experience. But when it comes to predicting the shape of miracles that will show forth from creativity, he takes his place with men, not with clairvoyant demigods. As an aware human being, he must answer, "I don't know!"


Leonard E. Read was the founder of the Foundation for Economic Education — the first modern libertarian think tank in the United States — and was largely responsible for the revival of the liberal tradition in post–World War II America. Mises.org will be putting all of his books online for free.



This article is excerpted from The Free Market and Its Enemy (1965).


Notes[1] See "Freedom Follows the Free Market" by Dean Russell, the Freeman, January, 1963.

[2] Even accepting such assignments with a clear mandate to plan their undoing would, I believe, be futile. See "Unscrambling Socialism," Essays on Liberty, Volume XII (Irvington-on-Hudson, New York: Foundation for Economic Education, 1965), p. 433.

[3] Inhibiting and penalizing destructive actions such as fraud, violence, misrepresentation, predation — invoking a common justice, keeping the peace — call for a compulsive agency of society: government. The management of destructive activities cannot properly be left to the free market, the nature of which is voluntary and the scope of which is the productive and creative. See my Government: An Ideal Concept, op. cit.

[4] See "$48,000" by Paul Poirot, the Freeman, February, 1965.

"Once we realize that we cannot explain what has happened, it becomes obvious that we can never explain what will happen."

"Why should libertarians absolve the socialists by becoming a party to their unworkable measures?"