Two recent Supreme Court decisions addressed problems with higher education in America. In one decision, the Supreme Court outlawed affirmative action programs that discriminate on the basis of race. A second decision rejected the Biden Administration plan to forgive about $420 billion in student loans.Both decisions seem reasonable on legal grounds. I’d like to believe that both decisions will fix problems with our system of higher education.  But I fear that in some respects they might actually make things worse.  Reason magazine reports that the Biden administration is likely to look for alternative methods of forgiving student loans, which might be even costlier: However, under the new plan, borrowers would have a radical reduction in the amount they would be expected to pay each month. Borrowers will only pay 5 percent of their discretionary income, or redefined income above 225 percent of the federal poverty rate, with forgiveness after 10 years if the balance is less than $12,000. Further, under the plan, if a borrower’s monthly payments are insufficient to cover interest, the government will cover the rest, and his balance will not grow. . . . As Reason‘s Robby Soave wrote last August, “In the long-term, this aggressive move toward an income-driven model of repaying college loans will probably have a bigger impact—and that impact will be catastrophic. In fact, unless the government does something to constrain colleges’ ability to set their own prices, IDR could break the entire higher education financing system and lead to skyrocketing costs for taxpayers.” The biggest effect of the new IDR is likely to be a rapid increase in college tuition, with graduate programs most affected. While dependent undergraduates can only borrow $27,000 over four years in federal student loans, graduate students have no such cap. As a result, the new IDR will encourage many graduate programs to push their costs higher and higher—and schools will likely justify the increase to students by directing them to take out an IDR to cover exorbitant tuition.  It’s too early to say how this new plan would hold up in court. California voters outlawed consideration of race in college admissions back in 1996.  It was no great loss, as the affirmative action program was not very effective.  Here’s the New York Times: Before 1996, affirmative action in the University of California system was in ill health. Black and Latino enrollment at top schools had stalled. Applications were falling and graduation rates low. At U.C.L.A. from 1992 to 1994, Black students had a 13.5 percent four-year graduation rate, according to data compiled by Mr. Sander, the U.C.L.A. law professor. At first, enrollment of black and Hispanic students in the University of California system dropped sharply.  But over the next few decades, enrollment from those minority groups rose back up close to 1996 levels.  University of California administrators found alternative methods of favoring underrepresented minority groups: Then the ban was enacted, and the most elite campuses, Berkeley and U.C.L.A., experienced calamitous drops in Black and Latino enrollment. It took a decade for that to reverse for Latinos. Black enrollment recovered much more slowly. In the U.C. system as a whole, trends were less dire. Latino enrollment soon doubled. Black enrollment fell and recovered. Today, Black enrollment stands at 5 percent. (Black residents make up less than 6 percent of California’s population.) The overall six-year graduation rate of Black students stands at 77 percent. White enrollment fell to 18 percent today from 35 percent in 1996. BTW, the NYT claim that “Black residents make up less than 6 percent of California’s population” links to this study: No race or ethnic group constitutes a majority of California’s population: 39% of Californians are Latino, 35% are white, 15% are Asian American or Pacific Islander, 5% are Black, 4% are multiracial, and fewer than 1% are Native American or Alaska Natives, according to the 2020 Census. So if black enrollment is 5% of the UC system, and blacks make up roughly 5% of California’s population, and affirmative action is outlawed at the University of California, then why would anyone expect the recent Supreme Court decision to have a major impact on affirmative action programs in other states?  Where there’s a will, there’s a way. Some have argued that universities will respond to this Supreme Court decision by even further de-emphasizing the role of objective measures such as test scores.  It’s easier to justify policies that favor underrepresented minorities if you focus on factors such as geographical diversity and life experience.  There’s a perception that the Ivy League schools are currently trying to achieve affirmative action goals at the expense of Asian rather than white students, via techniques such as sports scholarships and policies that favor the children of (mostly white) big donors and former students.  It’s easier to hold down Asian enrollment if test scores are de-emphasized.   To summarize, if there’s a strong political push to forgive student loans and favor underrepresented groups, it’s not at all clear that the Supreme Court can do much about it.  More broadly, I suspect that people overestimate the impact of technical changes in the law, and underestimate the effects of cultural change.  Younger readers might have been taught that the 1964 Civil Rights Act ended racial apartheid in America.  That’s not completely false, but I suspect that about 90% of the reduction in racial discrimination in America during the 1960s was due to changing attitudes.  (In fairness, the 1964 law may have modestly contributed to those changes.)  Alternatively, many southern schools continued to segregate black students even after the 1954 Supreme Court decision that outlawed the practice.  It’s difficult to force social change on an unwilling populace, and it’s hard to stop change once society has decided that something is unacceptable. I hope I’m wrong about these two cases.  I hope these decisions put an end to racial discrimination in college admission, and an end to the executive branch usurping the congressional power of the purse.  But I expect that things won’t change very much, and indeed might even get worse.  The Supreme Court is less powerful than it seems. (0 COMMENTS)

Few movie stars have had as good a run in their first three movies as Eddie Murphy: 48 Hours, Trading Places, and Beverly Hills Cop are all classics (Best Defense doesn’t count). But, more than once, when I’ve been watching Trading Places – released 40 years ago this month – someone has asked me towards the end: “What is going on?” By that point in the movie, Billy Ray Valentine (Murphy) and Lewis Winthorpe III (Dan Aykroyd) want to get their own back on the Duke Brothers, a pair of commodities brokers. They know that the Dukes have bribed a corrupt Department of Agriculture official so that they can get an early look at orange crop forecasts. With this knowledge, the Dukes plan to “corner the entire frozen orange juice market.” To stop this, Valentine and Winthorpe switch the actual crop report for a forgery and deliver this to the Dukes.  Which brings us to the finale, set in the old World Trade Center. The forged crop report has led the Dukes to believe that a cold winter has negatively affected the orange crop and that orange juice prices will rise as a result. To profit from this, they spend heavily to buy frozen concentrated orange juice futures contracts, which drives the prices of those futures contracts up even further. Futures contracts commit the buyer to buy a commodity, like frozen concentrated orange juice, in the future at a price set at the time of the purchase of the futures contract. So, if you sign a futures contract today to buy frozen concentrated orange juice at $256lb next month and the price is above that next month, you make a profit. If the price is lower, however, you make a loss (assuming in both cases that you sell your frozen concentrated orange juice as soon as you buy it). Valentine and Winthorpe, by contrast, start short selling frozen concentrated orange juice futures. Short selling involves borrowing something, like a futures contract, and selling it. The short seller has to buy the asset back at some later time and return it to the person they borrowed it from. If the asset falls in price between the sale of the borrowed asset and the purchase the short seller will make a profit. If the asset’s price rises, however, they will make a loss. Short selling is something you only do if you think the price of the asset is going to fall.  And, of course, Valentine and Winthorpe have access to the actual crop report. When it is announced that “The cold winter has apparently not effected the orange harvest…consumers can expect orange juice prices to fall,” the price of frozen concentrated orange juice futures contracts crashes. Valentine and Winthorpe, who sold their borrowed futures contracts at the high price, are able to buy them back at the new low price, honoring their contracts and making a killing. The Dukes, by contrast, have amassed commitments to buy orange juice at prices much higher than the new, low price, and are ruined.  This is all enormously entertaining, but doesn’t it illustrate what a lot of nonsense things like futures contracts and short selling are? Shouldn’t we ban them, as is often proposed, most recently as valuations of American banks collapsed? “Sounds to me like you guys are a couple of bookies,” Valentine says when the Dukes explain commodity broking to him.  In fact, both futures contracts and short selling can be pretty useful. Imagine an orange juice producer who is going to produce 100,000lb of oranges over the year. The current price, $256lb, is the highest since at least 2009, but there is no guarantee that price will hold when they are ready to bring their oranges to market. By committing now to sell at $256lb a year from now, futures contract allow the producers of commodities, often with volatile prices, to insure against that volatility. This increases production, lowering prices overall.   Short selling can act as a source of discipline. If an asset’s price rises so that enough market participants think that profits can be made ‘shorting’ it, they will do so and puncture any potential bubble. That is why assets that lead to bubbles, like mortgage-backed securities before the 2008 financial crisis, are frequently the ones which are difficult or nearly impossible to short. If Trading Places is about anything, it is about the discipline of the market place. Within five years, the Dukes are living on the streets of New York, subsisting on charity.  The next time you watch it, hopefully you will have fun, hopefully the end will make a little more sense, and hopefully you’ll appreciate the glimpse it gives of commodity markets in action.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

In the monthly email, July edition, that Liberty Fund sent out is this statement: Our most popular Article ever is from Jeffrey Rogers Hummel in 2018, turning the Revolution into an externality story. He writes, “In fact, the American Revolution, despite all its obvious costs and excesses, brought about enormous net benefits not just for citizens of the newly independent United States but also, over the long run, for people across the globe.” Because the article is so popular and, on this date, so timely, I’m highlighting it again. Here are the opening two paragraphs: It has become de rigueur, even among libertarians and classical liberals, to denigrate the benefits of the American Revolution. Thus, libertarian Bryan Caplan writes:  “Can anyone tell me why American independence was worth fighting for?… [W]hen you ask about specific libertarian policy changes that came about because of the Revolution, it’s hard to get a decent answer. In fact, with 20/20 hindsight, independence had two massive anti-libertarian consequences: It removed the last real check on American aggression against the Indians, and allowed American slavery to avoid earlier—and peaceful—abolition.”1 One can also find such challenges reflected in recent mainstream writing, both popular and scholarly. In fact, the American Revolution, despite all its obvious costs and excesses, brought about enormous net benefits not just for citizens of the newly independent United States but also, over the long run, for people across the globe. Speculations that, without the American Revolution, the treatment of the indigenous population would have been more just or that slavery would have been abolished earlier display extreme historical naivety. Indeed, a far stronger case can be made that without the American Revolution, the condition of Native Americans would have been no better, the emancipation of slaves in the British West Indies would have been significantly delayed, and the condition of European colonists throughout the British empire, not just those in what became the United States, would have been worse than otherwise. Read, enjoy, and celebrate. (0 COMMENTS)

In recent months, we’ve seen an almost endless series of opinion pieces discussing the supposed “mystery” of why tight money has failed to slow the economy. Yet almost no one seems to question the assumption that a tight money has been adopted in the US and elsewhere. In this post, I’ll show that there is no mystery to be explained; the economy is reacting today as it has always reacted.   Today’s Financial Times provides a good example of the media’s confusion: Monetary policy always comes with a lag, taking about 18 months for the impact of a single rate increase to fully seep through into spending patterns and prices. Monetary policymakers began raising rates less than a year and a half ago in the US and UK, and less than a year ago in the eurozone. They went higher than the neutral rate — where they are actively restricting the economy — only a few months ago. But some central bankers and economists believe lags may be even longer — and the effect of the tightening less potent — this time around. “Maybe monetary policy is not as powerful as it was several decades ago,” said Nathan Sheets, chief economist at US bank Citi. There is a much simpler explanation.  Interest rates do not show the stance of monetary policy.  Policy was not tightened in 2022; indeed it remained quite loose.  When policy does get tight, the effects will be almost immediate. Here’s a point I cannot emphasize enough:Interest rates are a procyclical variable. A long-term shift away from manufacturing towards services, which require less capital, could also mean slower transmission of a tighter monetary policy. Just the opposite is true.  In an economy that requires less capital, the neutral interest rate is lower.  Any given policy rate then implies tighter money.  Indeed this may help explain why the neutral rate fell to such low levels in the 2010s. Structural changes in important parts of the economy — including housing and labour markets — between now and the 1990s may explain why rate rises had a much snappier and sharper impact then. I’m afraid the FT has misremembered the 1990s.  Interest rate increases did not have a “snappier and sharper impact” back then: Notice that there were two periods of rising rates during the 1990s.  The sharpest occurred in 1994, and not only was its impact not “snappier and sharper”, it had almost no impact on the long 1990s economic boom.  Inflation was 2.6% in 1994, 2.8% in 1995, and 2.9% in 1996.  (It slowed in 1997 due to the East Asia crisis, not anything the Fed did.) The second period of rising rates began in January 1999.  A full two years later the economy was still not in recession.  In contrast, we are less than 18 months into this tightening cycle. No, there was no Golden Age when rate adjustments explained macroeconomic trends.  The Fed enacted many rate increases between 1965 and 1981, and yet inflation rose higher and higher.  Sharp rate cuts in 1929-30 failed to arrest the severe deflation of 1929-33.   How can we learn from history if we don’t even know the facts?  There’s never been a close correlation between interest rates and the macroeconomy.  Interest rates are not monetary policy. PS.  I wrote a whole book on the subject.  It’s free.   (0 COMMENTS)

One of my favorite regular book reviewers in the Wall Street Journal is Barton Swaim. In his recent review of Matt Zwolinski’s and John Tomasi’s The Individualists, though, Swaim misses the mark. I hasten to add that I haven’t read Zwolinski’s and Tomasi’s book. But I don’t need to in order to know that Swaim gets things wrong because Swaim’s review is not just of the book but also of libertarianism. And libertarianism is something I know well. David Boaz of the Cato Institute recently laid out a number of criticisms of Swaim’s review. I recommend reading David’s critique but I won’t repeat it except where I want to expand on it. In his first paragraph, Swaim writes that libertarianism “is a wildly diverse and inveterately fractious political tradition whose adherents have taken opposite sides on nearly every important political question.” Nearly every? Really? Certainly there are large differences, especially in the area of foreign policy. But libertarians are virtually united in opposing slavery, a pretty important political question, conscription, which is the modern version of slavery, high taxes, a large welfare state, high government spending, extensive regulation of the market, price controls, and government spending on higher education. These are pretty important issues. Can you find someone who claims to be libertarian who opposes the libertarian consensus on these issues? Maybe, although I haven’t met the person. But Swaim gives the impression that there are large swaths of self-proclaimed libertarians who argue with each other about “nearly every important political question.” That’s just not so. Swaim also writes: A polity, if it’s to function and endure, must offer its members a reason to remain attached, in their loyalties and affections, to the collective. That requires some engagement with ultimate questions—questions about the good life, morality, religious meaning, human purpose and so on. Modern libertarians are allergic to all such topics. Almost the only figures who mention such things in “The Individualists”—Adam Smith, William Lloyd Garrison—lived and died in the 18th or 19th century. It’s simply false that libertarians have not contended with these issues. We are not allergic to these topics; we often discuss them. But one of the virtues of libertarianism is that we are tolerant of people who come to different views on these topics. Many libertarians are Christians, Jews, or Muslims. A minority of libertarians are atheist or agnostic. But no libertarian I know of–and I know many hundreds–advocates a state religion. That’s one of those many “important political questions” that we don’t argue about. Boaz has a nice treatment of this issue. Even with all his criticisms, Swaim never makes the case or even tries to, that libertarianism is dead. He might wish that to be true, although I don’t know him and so I can’t say. Why do I mention this? Because of the last line of his review: The book also works as an obituary. Swaim seems to have intended that as a mic drop. Mic drops work only if you’ve laid the ground work that leads to the conclusion. He hasn’t come close. (0 COMMENTS)

The Supreme Court decision forbidding open racial preferences under the guise of anti-discrimination in university admissions invites some fundamental questions. We can think about these issues by examining three ideas or propositions relating to the broad issue of discrimination. The first idea is that a government-imposed mandate of affirmative action is government-imposed discrimination. Government discrimination in the name of non-discrimination is self-contradictory. The only exception that I believe can be rationally justified is the one proposed by James Buchanan and Friedrich Hayek: it can be necessary, to maintain a free society, to prevent it from being flooded by a large number of immigrants who don’t support individual liberty. The reason is not that they will eventually vote but, more importantly, that rules of conduct such as tolerance or respect of individual dignity cannot survive after a certain threshold is reached where many members of society don’t follow these rules. This reminds us of games (in game theory) where cooperators are overcome by defectors after the latter reach a certain proportion of the players. The second idea is that forbidding all racial discrimination (as the Supreme Court is, it seems, prudently trying to do for university admissions) is more coherent than only allowing what some people feel is the good sort. Many libertarians and classical liberals will be disturbed by the fact that the non-discrimination principle affirmed by the Supreme Court applies not only to public universities (which should go without saying), but also to private ones. This leads us to a third idea: although private discrimination based on individual characteristics that are irrelevant to efficient social cooperation reveals a bigoted ethics, the consequences of private bigotry will be attenuated by market competition. If many individuals in society have a bigoted “taste for discrimination” (to use Gary Becker’s terminology), there will be discrimination, but it will be attenuated by the reality that, on the market (or in voluntary social relations in general), discriminators have to pay for bigoted behavior through lost profits or other advantages. Among the many historical examples was the case of railroad companies in the Jim Crow era: greed led them to not discriminate against black customers, until Southern populist-minded governments forced them to discriminate. (See my “Jim Crow: More Racist than the Railroads,” EconLog, December 18, 2022.) Another example was the Negro Motorist Green Book, published annually from 1936 to 1967, to inform traveling blacks where they would be welcome, in hotels, restaurants, gas stations, or even public beaches and picnic places, instead of being harassed and humiliated if not worse. (See my “Markets Against the Mob’s Purpose,” EconLog, February 15, 2020.) Zoning was invented in New York City to stop the market (free landowners and landlords) from letting blacks get into white neighborhoods. Before this interventionist innovation, a real estate agent wrote in the New York Times of August 4, 1898 (quoted in Jonathan Rothwell, A Republic of Equals: A Manifesto for a Just Society [Princeton University Press, 2019]): I assure you there is no sentiment about the property owners bringing colored people here. It is purely a matter of dollars and cents and self-interest. The negroes pay their rent regularly, and many of the white people do not. Free markets (which entail a quest for customers) mitigated the taste for discrimination and its enforcement by governments. Not ideal, but better than if no market had existed and governments had been able to enforce their discrimination policies more tightly. It is indeed because markets were naturally efficient at attenuating private discriminatory sentiments that governments intervened. What we know about human history suggests that liberalism works against bigoted discrimination, while authoritarianism fuels it. Bigotry from society’s rulers is much worse than private bigotry. If coercively imposing discrimination under the guise of anti-discrimination is illegitimate, as the Court ruled, and coercively imposing non-discrimination is very questionable from a classical liberal or libertarian viewpoint, why not laissez-faire? In laissez-faire regime, public universities, if they exist, would of course be subject to a cardinal principle of liberal law: no government discrimination (and thus no affirmative action) against citizens (and even against non-citizens in many cases). As for private universities, each should be free to determine its own admission criteria. We could expect real competition and diversity among them. It would be surprising anyway if, in the intellectual climate of a university worthy of its name, bigoted morals could thrive. As Paul Moreno notes in an interesting article at Law & Liberty, “racial proportionalism,” may well survive, in universities as elsewhere, under the label of “diversity, equity, and inclusion.” I have no illusion about the political feasibility of the laissez-faire ideal in the short run, but it is not a totally unrealistic hope for the longer term. (0 COMMENTS)

Along with the direct impacts of technology, individualism and a slower life trajectory are the key trends that define the generations of the 20th and 21st centuries. ——Jean M. Twenge, Generations,1 p. 8 Jean Twenge has assembled a wealth of information about how the attitudes, behaviors, health, and economic circumstances of Americans have changed over the last several decades. Her latest book is packed with interesting charts and tables, filling my notes from the book with facts and observations to chew on. The questions that Twenge chooses to explore are interesting. When did Americans start marrying later and having fewer children, and will this trend continue? How economically disadvantaged are Millennials (born between 1980 and 1994)? As young people age, are they becoming as conservative as their parents? She answers these and other questions with evidence that appears to be well chosen and reliable. Nonetheless, I was not always pleased by Twenge’s manner of presentation. She frequently augments a data point by adding “perspective.” For example: If fertility rates had stayed the same between 2008 and 2019 instead of declining, how many more American babies would have been born? The answer: 5.8 million babies… 5.8 million is more than the entire population of Norway. (p. 476) The Norway comparison strikes me as gratuitous. It is as if Twenge does not trust a reader to be able to process the number 5.8 million. At best this is condescending. At worst it is an attempt to enlarge the number in the mind of the reader. Her “perspective” almost always nudges in that direction. I also am skeptical that the generational framing works as well as she claims. Twenge writes: The era when you were born has a substantial influence on your behaviors, attitudes, values, and personality traits. In fact, when you were born has a larger effect on your personality and attitudes than the family who raised you does. (p. 2) But her analysis reveals that there is a lot going on aside from generational eras. She herself often spells out trends that differ by gender, level of education, and other demographic characteristics. Birth year per se is not a likely causal variable. It is true that certain events will affect some cohorts more than others. Examples include the terrorist attacks of 2001 or the financial crisis of 2008. But Twenge does not regard such events as the most important determinants of generational attitudes. Twenge puts technology front and center as a causal variable. She focuses on discrete changes in technology, notably the Internet, the smart phone, and social media. These innovations emerged when different generations were at different ages. Computers and email cleaved Gen X from Boomers, texting Millennials from Gen X, and TikTok Gen Z from Millennials. (p. 156) “With greater college attendance and fewer early marriages, young people are spending more time in what seems to older generations like adolescence. Moreover, it seems like an adolescence that is less adventurous and more sheltered.” Other causal variables operate more gradually. One trend is toward a slower life trajectory, by which she means starting later to join the work force and form a household. With greater college attendance and fewer early marriages, young people are spending more time in what seems to older generations like adolescence. Moreover, it seems like an adolescence that is less adventurous and more sheltered. Individualism is a trend that predates the twentieth century, but Twenge sees it accelerating recently. For her, individualism is: … a worldview that places more emphasis on the individual self… Individualistic cultures such as the U.S. value freedom, independence, and equality, while more collectivistic cultures such as South Korea instead value group harmony and rule-following. … By the 1960s and 1970s the highly individualistic world we know today had begun to emerge in many countries around the world: Personal choice was paramount, the U.S. military became an all-volunteer force, and “do your own thing” became a mantra. Sacrificing for the greater good was less prized. Treating people as individuals means setting aside the idea of group membership as destiny, which gave rise to movements for individual rights based on gender, race, and class, enshrining equality as a core value of the culture. … Between 1980 and 2019, individualistic phrases promoting self-expression and positivity became steadily more common in the 25 million books scanned in by Google (p. 9-10) I find these characterizations a bit vague. I wish she had put more effort into spelling out what she means by individualism. I find it easiest to think in terms of the contrast between a small village and a contemporary urban existence. In a tight-knit community, everyone knows you. The people with whom you do business are the same people with whom you engage in recreation or see on the street, in church, or at a bar. Your conduct is constrained by the community’s norms and also by its expectations for you based on your past behavior. Until well into the Industrial Revolution, a boy often took on his father’s occupation (typically farming) and a girl took on her mother’s role (farmer’s wife or urban housewife). In modern society, you have more degrees of freedom to shape yourself. Accordingly, people pay more conscious attention to choosing their occupations, their associates, their loyalties, their life partners, and their beliefs. I think of this when I see the term “individualism.” For more on these topics, see “The Boys Under the Bus,” by Arnold Kling. Library of Economics and Liberty, Dec. 5, 2022. With all of that said, let me list a few of the observations that I culled from Generations. Keep in mind that there are nuggets like these every few pages, and it is a 500+ page book, so this is only a tiny sampling. While 7 in 10 women in their early 20s were married in 1960, only 1 in 10 was in 2020. Nearly half of men in their early 20s were married in 1960, but now only 1 in 14 are. (p. 376) 85% of U.S. adults said that premarital sex was wrong in 1967, which plummeted to 37% in 1979. (p. 90) Among Americans born in the 1990s, 1 out of 7 in their early 20s had not a sexual partner as an adult. (p. 289) Social media also explains a unique feature of Millennial social movements: They are decentralized, without leaders, and focused on words and ideas rather than single concrete goals.2 (p. 256) By 2019, households headed by Millennials actually made more money than Silents, Boomers, and Gen X’ers at the same age. (p. 260) Every single penny of the rise in younger adults’ incomes is due to women’s incomes. (p. 272) In late 2020 and early 2021, Gen Z was the only generation in which a majority believed there are more than two genders. (p. 350) In many ways, 18-year-olds now look like 14-year-olds in previous generations…. only about half of 12th graders date, about the same as 8th graders in the early 1990s.3 (p. 374) 4 out of 10 Gen Z’ers believe that the founders of the United States are “better described as villains” than “as heroes.” (p. 420) There has also been a large increase in teen boys believing that women are discriminated against in getting a college education, from 18% in 2012 to 30% in 2019.4 (p. 427) Footnotes [1] Jean M. Twenge, Generations: The Real Differences Between Gen Z, Millennials, Gen X, Boomers, and Silents—and What They Mean for America’s Future. Atria Books, 2003. [2] Martin Gurri, author of The Revolt of the Public, has emphasized this characteristic of recent social movements. [3] On my Substack newsletter, I started writing that “17 is the new 15.” Apparently I understated the change. [4] In fact, in recent years, the proportion of female college students has approached 60 percent. But the teen boys may nonetheless be correct, because in an attempt to achieve better gender balance, some schools do tilt the admission scales in favor of males. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Ludwig von Mises The works of Ludwig von Mises and James M. Buchanan reflect the best of the classical liberal intellectual tradition. Given the centenary of the publication of Mises’ Socialism,1 and since 2023 marked the tenth anniversary of the passing of Buchanan, it seems an excellent time to remember their contributions. Both defend methodological and ethical individualism, private property rights, the design of a minimal state, a market economy and a liberal democracy. They agree that political and economic systems and decisions must be evaluated based on respect for the value of individual liberty and the institutions that protect it. Other authors have assessed the main aspects of Mises’ and Buchanan’s economic analyses. Our purpose here is to compare some of their political views, namely, those that deal with the notions of consent and force, the relationship between liberalism and democracy, and the criticism of autocratic socialism. Consent and force Social philosophy explores the nature of social arrangements- the ideas, values, and behaviors that bring people together or separate them. For Mises, the classical liberal society is based on the principle of individual consent, the institution of contract, and the dynamics of social cooperation that follow from them. In that model, the state has only the task of protecting the life and property of individuals against violence, fraud or aggression (200, 497). Under the liberal protection of private property, people can achieve the “leisure and the peace of mind that only the division of labour can make possible” (271). In contrast, he argues, the socialist attack on private ownership in the means of production promotes the use of force, leading to the destruction of economic resources (40, 61,222) and, more broadly, of civilizational achievements (118). Mises wrote in times of the expansion of communism, but his analysis is timeless given the ever-present conflict between consent and force: “Violence and Law, War and Peace, are the two poles of social life” (34). From this angle, evolution means to move away from violence, fighting and force, and closer to consent, law, and peace. James M. Buchanan Buchanan shares a similar philosophy. In The Limits of Liberty.2 he defends the principles of individual consent and voluntary exchange as the basis of a free social order. In such an order, due to the possibility of violence and predation, individuals need to defend themselves by defining and enforcing their rights (31, 37). Thus, they adopt moral and legal precepts to accomplish a “peaceful and orderly settlement of disputes” (113-14). The opposite of this is socialism, defined as the “state control over voluntary exchange processes” (24). Also opposite to a limited constitutional order is a regime that extends the sphere of government well beyond its protective role (204-05). To convey the contrast between classical liberalism and illiberalism, both authors make use of metaphors, which facilitate the communication of difficult or abstract notions and contribute with persuasive efforts when disseminating ideas. Successful metaphors include, for example, Adam Smith’s invisible hand, and its application to the “marketplace of life” and the “marketplace of ideas.”3 Mises uses a metaphor to address the destructive nature of socialism: he writes that it turns history into a “cemetery” of civilizations (275) since it eliminates the division of labor that allows for mutual cooperation and general progress. His association of socialism with death is not gratuitous, since the language of death and violence was always an important part of collectivist rhetoric. Thus, Marx and Engels hoped to “sway” the bourgeoisie, and they wrongly thought that it produces “its own grave-diggers,” while Antonio Gramsci saw modern political and civil associations as “the ‘trenches’ and the permanent fortifications of the front in the war of position,”4 and neo-Gramscians like Ernesto Laclau accept “reintroducing the dimension of violence into [social] reform.”5 Consequently, it is only natural that Mises warns about destruction as the ultimate result of collectivist violence and force imposed on human reality. On this point he lucidly alerts: “To make Collectivism a fact one must first kill all social life, then build up the collectivist state (…) All attempts to coerce the living will of human beings into the service of something they do not want must fail. An organization cannot flourish unless it is founded on the will of those organized and serves their purposes” (263). For his part, Buchanan uses metaphors to describe two types of scenarios different and opposite from the classical liberal model of individual consent and voluntary exchanges. He speaks of the “jungle” to convey the image of a society without order and justice, and argues that to leave such a chaotic situation behind, individuals decide to abide by agreed-upon rules, and to the extent that they succeed in doing so, they build up social capital defined as a law-abiding society. Similarly, the undermining or the elimination of those rules represents “a major step backward into the anarchistic jungle” (66), that is, “the destruction of social capital, with all of the consequences therefrom” (164). Buchanan uses another metaphor, the image of the legendary Leviathan, to criticize the State’s unduly coercion and force in the form of interference with individual property and markets, as revealed in the growth of the State in modern democracies and the associated increase in taxation, fiscal expenses, and public deficits. In a 1990 lecture, after the demise of the communist regimes in the Soviet orbit, he draws a pertinent distinction between Leviathan and the socialist system without private property: “The arguments for Leviathan’s extensions are not versions of the socialist’s dream; they are, instead, simple efforts to claim a public interest in a single sector’s private profit” (18). Buchanan sees the current unlimited State as a “monster” that haunts democracies by restricting individual liberty and property, and he seeks to predict its courses of action, its unintended negative consequences and propose ways to avoid them by means of strict constitutional and post-constitutional limits. Liberalism and Democracy “Mises and Buchanan successfully engage in such ‘speculation to offer a political philosophy defined in terms of substantive ends: the defense of individual liberty and private property, equality before the law, voluntary social cooperation, the achievement of peace, and the benefits of general prosperity.” Political philosophy studies the foundations and justification of political institutions and practices. For Adam Smith, the disquisitions about “the systems of civil government (…) if they are just, and reasonable, and practicable, are of all the works of speculation the most useful” (186-87). As mentioned before, Mises and Buchanan successfully engage in such “speculation” to offer a political philosophy defined in terms of substantive ends: the defense of individual liberty and private property, equality before the law, voluntary social cooperation, the achievement of peace, and the benefits of general prosperity. And they find in a limited government the institution that best protect the principles of a free society. In this regard, Mises writes that the role of “the strictly Liberal state is to secure life and property against attacks from both external and internal foes” (133), and that “the rule of law, or limited government, as safeguarded by constitutions and bills of rights, is the characteristic mark of [Western] civilization” (521). In turn, he sees democracy as a “constitution” that avoids political violence, which is why he thinks liberalism “desires” democracy. He adds that democracy also needs liberalism to limit the power of the State in order to impair the negative consequences that follow from it (61-62, 65). In this way, liberalism and democracy have the joint task of protecting the individual by securing liberty and peace, respectively. Buchanan advances similar ideas about the role of the State, the rule of law and a liberal democracy. He refers to a “law-abiding society of free men” (21) who adopt norms “that we associate with the precepts of individualism” (71). In the democratic system, individuals have the rights “to make their own collective choices” (20). In other words, democracy is a mechanism to express the political values or preferences held by individuals. The opposite of a liberal democracy is socialism, as he writes in a 1993 presentation: “The socialist constitutional order, whether this be defined in application to a single party, a self-appointed authoritarian regime, or asocial democratic parliamentary majority, necessarily extends the range and scope for politicization well beyond the narrowly defined limits of collective authority under the classical liberal order.”6 The challenge that arises is, therefore, to design a constitution that prevents or minimizes political excesses and deviations. In sum, both agree that a limited, constitutional democracy is the political recognition of the value of individual consent underlying collective choices and of the aspiration to a nonviolent social order. They find that the main threat to this order is the power of governmental officers, who may “become absolute despots” (Mises 519), which is why according to Buchanan we should take the “romance” out of our political vision and always distrust that politicians seek a transcendent “common good.”7 The criticism of socialism So far, we have addressed elements of political philosophy in the thought of Mises and Buchanan. The authors also write on the relationship between socialism and religion. However, their approaches in this matter differ: while Mises associates socialism with a type of religious sentiment and discourse, Buchanan offers an account of how the weakening of religious faith has been replaced by a secular faith in the extended State. Let’s briefly present their views. Mises draws close connections between religion and Marxist theorists, who speak to the aspirations “embedded in the human soul” and to a future “full of happiness and enjoyment,” and who assume “a paradisiac origin” followed by an “age of evil” to be overcome by “earthly salvation” (249, 251). The concrete political form of this ideology would be similar to theocracies: if, in the latter, the authority is “endowed with a divine grace [and] superhuman powers,” the Bolsheviks pose “as the consummators of the great scheme of things” and accuse unbelievers of being heretics (163-64, 513). In taking the communist system as a sort of political religion, Mises follows F. Gerlich (253) and joins other authors of that time. His critique of theocracy and more broadly, of socialism as an autocratic organization, is based on the fact that it sacrifices the individual for the sake of an allegedly higher cause. From this angle, Mises’ outlook follows a top-down direction, in which the Bolshevik “priests” preach a sacred text to the mass of the people, promise them a paradise, demand unconditional loyalty and grant favors or penances to their followers and detractors, respectively. From a theoretical point of view, the problem with this—Mises argues—is that it is a renunciation of scientific thought and the criticisms that “shatter false beliefs” (9). In a 2005 paper, Buchanan also connects socialism and religion, but unlike Mises, he focuses mostly on the attitudes of the people and not on the discourses or actions of the political class. His term “parentalism” refers to persons “who seek to have values imposed upon them by other persons, by the state or by transcendental forces” (23, emphasis in the original).8 In his diagnosis of present day societies, Buchanan argues that the state has replaced God in people’s search for order and predictability. In modern times, individuals cope with the threat of the unexpected not by praying or going to church but by demanding “the parental role of the welfare State” (29). In other words, if religion once served the purpose of providing a sense of security in the face of fear and uncertainty of the masses, in secular times that provision of security is expected to be covered by the state. The upshot is that individuals depart from the personal responsibilities and endeavors that support a free society. It is not the place here to discuss whether Marxism can be understood as a political religion, as Mises believes, or to assess if as Buchanan holds, the psychology of fear and irresponsibility can explain the growth of Leviathan better than the premise of rational wealth maximization. This more modest effort is to show that Mises and Buchanan include considerations about religious beliefs and psychological dispositions underlying the configuration of political institutions and that they alert against any ideology that feeds blind allegiance, submission, helplessness, or fear. A society of free and responsible individuals cannot prosper on such feeble grounds. Conclusion The works of Mises and Buchanan analyze the philosophical presuppositions, institutional designs, and policy prescriptions related to classical liberalism and socialism. Our text highlighted their treatment of the notions of consent and force and the relationship between liberalism and democracy. It also addressed their criticism of socialism understood as a theory and attitude that presents either an eschatological or a “parentalistic” politics. The classical liberal paradigm that both authors defend means to facilitate voluntary exchanges among persons and to limit the exercise of force in social interactions. They both consider the costs and benefits expected to result from the social organization and conclude that only unrestricted markets and limited democracies are the institutions compatible with the values of a free society. For more on these topics, see “Ludwig von Mises’s Socialism: A Still Timely Case Against Marx,” by Steven Horwitz. Library of Economics and Liberty, Oct. 1, 2018 “Ludwig von Mises’ Socialism: A Proper Defense of Liberalism,” by Rosolino Candela. Library of Economics and Liberty, Aug. 1, 2022. “Lessons and Challenges in ‘The Limits of Liberty,’,” by Pierre Lemieux. Library of Economics and Liberty, Nov. 5, 2018. “Adam Smith’s Invisible Hand,” by Peter Foster. AdamSmithWorks, [undated]. Last, they both criticize socialism because it feeds unrealistic illusions by promising what it can never deliver, despite all the coercion and force employed to achieve it: a world of social homogeneity and of complete satisfaction of material needs. Far from it, the socialists and the welfarists end up creating a political system where the State—”the coldest of all cold monsters” (Mises, quoting Nietzche, 53), the fearful Leviathan (Buchanan)—devours resources and liberties with insatiable voracity and consequently turns into the major obstacle to human flourishing. Footnotes [1] Ludwig von Mises, Socialism: An Economic and Sociological Analysis, translated by J. Kahane, foreword by F. A. Hayek, Indianapolis: Liberty Fund, 1981 [1922/1951]. Also available online at [2] James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan, foreword by Hartmut Kliemt, Indianapolis: Liberty Fund, 2000. Also available online at https://www.econlib.org/library/Buchanan/buchCv7.html [3] James R. Otteson, Adam Smith’s Marketplace of Life, Cambridge University Press, 2002; Alvin Goldman, Knowledge in a Social World, Oxford Clarendon Press, 1999, 164 (digital version). [4] Antonio Gramsci, Selections from the prison notebooks, ed./transl. Q. Hoare and G. Nowell Smith, London, Lawrence & Wishart, 1971, 243. [5] Ernesto Laclau, “Community and its paradoxes,” in David Howarth (ed.), Ernesto Laclau: Post-Marxism, populism and critique, Oxford, Routledge, 2015, 249. [6] James M. Buchanan, “Notes on a Liberal Constitution” [1994], in Cato Journal. Vol. 14(1). [7] James M. Buchanan, “Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications” [1979], in The Collected Works of James M. Buchanan, Vol.1, Indianapolis: Liberty Fund, 1999, 145-59 at 47. [8] James M. Buchanan, “Afraid to be Free: Dependency as Desideratum” [2005], in Public Choice, Vol. 124(1/2). *Alejandra Salinas is a Professor at UNTREF and UCA in Buenos Aires, whose focus is on contemporary political philosophy, comparative political theory, social theory, democratic institutions and literature and politics. For more articles by Alejandra Salinas, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Since at least the publication of Paul Ehrlich’s The Population Bomb in 1968,1 the narrative that has gripped both academicians and the popular audience has been one of a world that is overpopulated. In a more recent article published in Scientific American, entitled “Eight Billion People in the World Is a Crisis, Not an Achievement,”2 Professor Naomi Oreskes argues that “Cornucopians, led by economist Julian Simon and military strategist Herman Kahn, argued that anxiety over limited natural resources is misguided because human ingenuity can overcome any limits.” While there are many important points to unpack and engage in Professor Oreskes’s article, the crux of the argument turns primarily on the claim I’ve quoted above, and therefore will be the primary focus of my argument. The main inspiration for the title of this essay—and the basis of my argument—comes from a Romanian proverb, “copilul vine cu pâinea lui.” My purpose is not to correct Professor Oreskes’s claim, per se. Rather, it is to address Oreskes’s assertion that she attributes to Julian Simon as representative of a popular misunderstanding in Simon’s argument, and therefore to render explicit what is incomplete in Oreskes’s claim. While the selection of this title—and the proverb to which it is related—may seem not only unusual but consistent with Oreske’s claim, it is indirectly motivated by a caption in the original edition of Ehrlich’s book, which states the following: “While you are reading these words four people will have died from starvation. Most of them children.” While this dire prediction has proven to be wrong, as even Professor Oreskes admits, does this automatically vindicate Julian Simon? The answer is admittedly “no,” but not because Simon was wrong. Rather, as I argue in a recent article (Candela, 2022), the reason is because neither Simon’s proponents nor his critics have captured the full essence of what Simon had argued in The Ultimate Resource (1981). By unpacking the proverb invoked here, we can also unpack what Julian Simon had argued. All proverbs, like the one being used here, contain folk wisdom that is not to be taken literally. Rather, it is meant to illustrate a subtle yet important lesson. Children of course do not spring from their mother’s womb with a loaf of bread. Rather, as all parents know well, the birth of children introduces a scarcity of resources, since they are born into the world entirely as demanders of resources. On a global scale, this indeed magnifies the problem. However, the point that the proverb is meant to impart, as all Romanians well know—and indicative of Julian Simon’s entire point—is that there is both a supply side as well as demand side to bearing children. The birth of children prompts parents to work harder, conserve resources, and learn how to consume more with their children, given the scarcity of the most precious commodity: time itself. “The world is not endowed with an infinite supply of natural resources any more than a child is literally born with his or her own bread.” Though not writing in the context of population and resource economics, Gary Becker (1965) had been prescient to the fact that, given the scarcity of time, greater income and wealth would prompt families—particularly as women have entered the workforce—to increase their expenditures not by having more children, but spending more per child. However, nothing about this process is automatic. It is only because of an increasing scarcity of resources in the short run that human beings learn and discover how to supply additional resources to meet a growing population in the long run. The world is not endowed with an infinite supply of natural resources any more than a child is literally born with his or her own bread. Without human beings applying their creativity, there are no natural resources to speak of, just as in the proverb there is no bread to speak of without the birth of a child. Rather, human beings are prompted to discover natural resources by applying their energy and ingenuity precisely because increasing scarcity arises, just as when children are born completely dependent on their parents. Consider this neglected passage in The Ultimate Resource (1981), which captures Simon’s main argument: More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity and prompt investors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred (emphasis original; Simon, 1981 [1996], p. 59). Consider also, for example, the commercial application of kerosene for illumination and heating that had been driven by the discovery of petroleum, from which kerosene is produced. While indeed petroleum may have existed physically speaking, the concept of a natural resource is an economic one, precisely because the scarcity that accompanies its discovery comes from its physical form having competing human uses. Therefore, without human discovery, there is no natural resource to speak of. Pushing this point to its logical conclusion, a declining population would imply a reduction of natural resources, not the opposite as critics of Simon would suggest. Why? Returning to the example, what prompted the introduction of kerosene in the first place was the fact that an increasing scarcity of whales for various commercial uses had driven the price of whale oil up. The rise in the relative price of whale oil incentivized entrepreneurs, such as John D. Rockefeller, to discover substitutes for whaling oil. This raises a secondary, yet related, point raised by Oreske: “Let populations grow alongside markets operating under minimal government constraints, and people will invent solutions to whatever problems they face.” Julian Simon no doubt was a proponent of economic freedom. This being said, Oreske’s claim requires unpacking since it would be unfair to attribute such a claim directly to Simon. Why? Because Simon himself, at least explicitly, made no direct claims about the causal relationship between economic freedom, population growth, and economic development. As Simon states, a “key characteristic of a wealthy society is a well-developed set of rules. Wealth both creates such rules and depends upon them to produce the conditions of freedom and security that progress requires. This subject is not developed in this volume” (emphasis added; 1981 [1996], p. 13). As I have argued elsewhere (Candela, 2022), Simon implicitly provides a basis for understanding increases in both human population and economic growth as by-products of economic freedom. The causal basis rests upon what Simon refers to as “economies of scope.” This concept is analogous to Adam Smith’s notion that the division of labor is limited by the extent of the market, the expansion of which—according to Simon—is predicated on entrepreneurial discovery. The extent of the market refers to the security of private property and hence ability to exchange, which allows individuals to reap the returns of discovery and ingenuity: “Discoveries, like resources, may well be infinite: the more we discover, the more we are able to discover” (Simon, 1981 [1996], p. 82), creating markets for resources and the potential for productive specialization and exchange that otherwise would not exist. “Economies of scope,” according to Simon, “stem from (1) the ability to use large and more efficient machinery, (2) the greater division of labor in situations where the market is larger, (3) knowledge creation and technological change, and (4) improved transportation and communication” (1981 [1996], p. 391). The critical link between each of these aspects of economies of scope is an implicit notion of entrepreneurial discovery, which, according to Simon, takes “a view of resources as physical quantities waiting for the plucking, rather than as the services that humankind derives from some combination of knowledge with physical conditions… Hence, resources are, in the most meaningful sense, created” (Simon, 1981 [1996], p. 75). How is this all related to Oreskes’s argument? “It’s both counterfactual and illogical,” according to Oreskes, “to imagine that more people will solve the problem of too many people. Most population growth is occurring in poor countries, where most people lack educational opportunities that might enable them to develop the kinds of ideas and skills they would need to apply their ‘fresh energy.'” Such a claim would seem to refute my underlying thesis, namely that children come with their own bread. But, the problem that Oreskes is identifying is not one of physical overpopulation but economic underpopulation. How can this be the case?! Indeed most of the growth in the physical numbers of human beings will occur in poorer countries. However, if such countries remain relatively poor, it is because, from an economic standpoint, newly born children are being precluded from realizing their creative potential, and stifling the returns to educational opportunities that emerge as a consequence of opportunities to productively specialize and exchange in the marketplace. Hence, these children may be born without their own bread! For more on these topics, see Economic Freedom, by Robert A. Lawson. CEE. “Resourceship: Expanding ‘Depletable’ Resources,” by Robert L. Bradley. Library of Economics and Liberty, May 7, 2012. Paul Sabin on Ehrlich, Simon and the Bet. EconTalk. Herein lies the fundamental point with which I wish to conclude here. If children are born into this world with their own bread in a figurative sense, then this requires that the parents of such children—and later the children as adults—have the political and economic freedom to bear the fruits of their own efforts. This includes not only the ability to make a better life for the children in the future, but also a better life for themselves in the present. If, as Julian Simon argued, that the “ultimate resource” is the human mind, then increasing numbers of individuals come with their own bread by creating it from their efforts to economize and discover new resources. References Becker, Gary S. (1965). “A Theory of the Allocation of Time.” The Economic Journal 75 (299): 493–517. Candela, Rosolino A. (2022). “The Division of Labor and Knowledge is Limited by the Division of Ownership Over the Ultimate Resource: The Role of Economies of Scope in Julian Simon.” The Review of Austrian Economics 35(3): 323–341. Simon, Julian L. (1981 [1996]). The Ultimate Resource 2, Revised Edition. Princeton: Princeton University Press. Footnotes [1] An earlier forerunner who had purported that overpopulation was a national security concern in the U.S., as well as the inspiration for Ehrlich’s book title, was business executive Hugh Moore. In addition to a public propaganda campaign that began with his 1954 publication of the proactively titled pamphlet, “The Population Bomb,” Moore had also influenced the Eisenhower administration in the formation of the Draper Committee (named after Moore’s friend Major General William Henry Draper) for promoting research and financial assistance in programs to stem population growth (see “Meet the Advertising Expert who Inspired Today’s Anti-Population Propaganda,” by Peter Jacobsen, FEE, March 31, 2022). [2] Oreskes, Naomi. “Eight Billion People in the World Is a Crisis, Not an Achievement,” Scientific American, March 1, 2023. * Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. For more articles by Rosolino Candela, see the Archive. Special thanks are due to Peter Boettke, Andreea Candela, Peter Jacobsen and Amy Willis for comments and feedback. Any remaining errors are entirely my own. (0 COMMENTS)

The members of the Philadelphia Convention1 had a few fundamental purposes they hoped to achieve with the Constitution they created. Some of their ideas were new at the time and some were time-tested. Others were not even stated and just adopted as commonsensical, since the theoretical developments explaining their soundness came much later as they developed from the observation of arrangements put in practice in the United States and elsewhere. The overarching purpose the framers had in mind was the establishment of limited and representative government for the recently united former colonies. All the elements of the new Constitution should be understood as instruments performing, in their totality, that function. Popular sovereignty, the rule of law, political representation, federalism, checks and balances, the division of power between the legislative, executive and judiciary branches were all considered by the framers of the constitution to constitute the ideal form to function as the guarantor of those self-evident truths stated a few years earlier in the Declaration of Independence. Two of the elements of the American constitutional order that I wish to discuss here, fiscal and monetary policies, are today among the least understood elements of that order. If it is true that at the time of the Founding, the boundaries between these two prerogatives of the state were well-defined, over the course of history the demarcation between them has been increasingly blurred. So much so that, nowadays, it is excusable that many policymakers, and even some academics no longer can distinguish where lies the border between those fields of state action. Early in the Republic, the “power of the purse” held by Congress meant that no money could leave the coffers of the federal government without the explicit and periodic consent of the legislature. That soon became formalized in authorization and appropriation bills by which Congress would define the scope and size of actions that the executive branch was authorized to engage. This is an application of the principle of legality, that part of the rule of law that establishes that any private individual is only prevented from doing something if forbidden by law, while any public agent is only authorized to do something if determined by law. The determination of any action by the federal government was intended to be given in the annual appropriations process. From this perspective, all “mandatory” and “back-door” spending are all infringements on popular sovereignty and violations of the rule of law. If a dollar leaves the coffers of the Treasury, whatever the justification, under the Constitutional order in which we supposedly live, it should be first authorized and then annually appropriated. The retirement of the federal debt, the payment of pensions to military veterans, the concession of loans, or subsidies to whatever sector of society all should be weighed by the sitting Congress. Such expenditures should further be considered in comparison with possible alternative uses of public funds before Congress authorizes the executive to spend a single penny of those funds. Consider the way the Federal Reserve and the CFPB (Consumer Financial Protection Bureau) are funded. Their expenses are paid from the proceeds of the Fed’s operations; Congress does not appropriate them. If they were, many would argue, they would lose their independence to conduct monetary policy and to exercise oversight of relations between financial companies and their customers, respectively. Yet the judiciary branch is funded by annual appropriations. Is anyone prepared to argue that because of that, the judiciary is not independent in the United States? Think about the operation of the FFB (Federal Financing Bank). They facilitate the ability of many federal agencies to borrow money in the market, and the Treasury, supported by the Fed, is compelled by law to fund its operations. From these funds, subsidized loans to agriculture, real estate development, exports, infrastructure, and a myriad of other programs are funded off-budget. The list of ways in which Congress’ constitutional power of the purse is disregarded in both spirit and intent goes on and on. To be clear, Congress is left out of the loop concerning which programs are funded by the executive branch and its agencies directly. These policies are also executed without being subject to previous authorization and annual appropriations by Congressional representatives. Voters complain that they disagree with most of the actions of the Federal government. No wonder, if more than 85% of the money disbursed by our national government is not appropriated by our representatives. Monetary policy today is also far removed from what was originally envisaged by Alexander Hamilton. The edifice of American finances was established on solid and eminently practical foundations. However, before we discuss what was originally established and what we have today, let us start by going back to an idealized model. Although ahistorical, this idealization is modeled on the same British arrangements that inspired Hamilton and the other Founding Fathers. Under this model, money, as the ultimate form of payment, was created by the state through the coinage of precious metals. At the same time, commercial banks would expand and contract the supply of banknotes redeemable in money proper according to the existence of profitable opportunities for short-term lending against good collateral, what was known as Real Bills. Under this model, the fluctuations in the demand and supply for liquidity in the economy would be produced, in part, from “outside” the market, by the state coinage, and, in part, from “inside” the market, by bank lending. Thanks to Hamilton, ever the practical man, taking into consideration the immense burden of the Revolutionary War debt, and following the example of the Bank of England, the new Constitution counted among the exclusive powers of the legislative branch, “To coin Money, regulate the Value thereof, and of foreign Coin.” Later, with the establishment of the United States Mint and the authorization for the creation of the First Bank of the United States (the first of three attempts to create a central bank in the country), the foundations of our financial system were established. The national debt would be purchased by banks to invest their capital, and they would be authorized to issue banknotes redeemable on demand in coins issued by the Mint to supply credit to private enterprise. Note that at the very beginning, there was already a close relation between the public debt, eminently an instrument of fiscal policy, and the arrangements by which money and other liquid instruments were supplied in the country, ostensibly the object only of monetary policy. However, the boundaries between them were still clearly defined. Banks would purchase Treasury bonds as long-term investments, funded by capital raised from their shareholders, while their credit operations were to be funded from their deposits on demand, with banknotes being issued against the discount of short-term commercial paper, that is, Real Bills. This ahistorical, schematic presentation is a good proxy for what was the history of our fiscal and monetary policies all the way up to the Civil War. There were still periods in which the “central bank” was abolished. For example, there was a short period during the Andrew Jackson administration in which all public debt was retired, but, by and large, this was the picture. Then came the Civil War. To fund the war effort, banks were required to buy Treasuries not only to constitute their capital, but also to have the ability to issue banknotes. In addition, the Treasury started to issue its own paper money, “greenbacks,” and last but not least, convertibility of bank deposits and notes in gold was suspended. Eventually convertibility was resumed and some of the war debt was paid. However, this created problems of its own under the banking arrangements put in place in 1862 which remained in place until the creation of the third “central bank” of the United States, the Federal Reserve (Fed), in 1913. After the creation of the Federal Reserve, the fiscal requirements brought about by the Great War, the Great Depression, and World War II forced an immense coordination between fiscal and monetary policy—so much so, that the Fed only regained operational independence inside the government in 1951. Another contradictory period occurred when, due to the Vietnam War and the Great Society programs of the Johnson administration, the Fed continued to accommodate the fiscal needs of the Treasury while still somewhat constrained by the gold redemption clause of the Bretton Woods treaty. The contradiction eventually became unsustainable, and the Nixon administration defaulted in the U.S. obligations under that treaty in 1971. With that, an inflationary period began. It lasted until some prudence was restored, if not to the fiscal policy, at least to the execution of monetary policy. Once sober monetary policy was implemented, the period known as the Great Moderation ensued. Fiscal profligacy, which had been practically uninterrupted since the 1960s and was only accelerated by the Financial Crisis of 2008 and the Covid-19 Pandemic, brought us to the situation that we face nowadays. There are some instruments, such as the public debt and the prerogatives to create money and regulate finances, which are tools of both monetary and fiscal policy. The goals of those policies are different, though. Monetary policy is concerned with price stability and a balance between the supply and demand for loanable funds, whereas fiscal policy is concerned with funding the government. For these different goals to be achieved at the same time using essentially the same tools, clear boundaries about what is permissible in each field are necessary. Those boundaries continue to be blurred in recent decades. In this article, I have tried to describe the institutional setting in which this has been taking place, what the consequences are, and what might be done to preserve, restore, and strengthen the foundations of a society of free and responsible individuals as envisioned by the Founding Fathers. We began with a discussion of the constitutional disposition about the power of the purse that Congress has, which requires annual authorizations and appropriations for any money to be disbursed by the Federal government. From that point, we discussed some ways in which “back-door” expenditures happen. We may well associate the gradual erosion of the Congressional power of the purse with a “democratic deficit”, that is, with a decrease in the accountability of political agents. That is, changes in the institutional setting have led to a change in the structure of incentives, and the checks and balances that used to maintain the boundaries between monetary and fiscal policy have been eroded. At the same time, that “old time fiscal religion” (the idea that deficits may rise in times of emergencies but are to be repaid after the emergency ceases) has been almost totally abandoned. This suggests the idea of fiscal “dominance.” That is, as long as fiscal prudence is not restored, it is pointless to try to tweak the institutional constraints on the abuses of monetary instruments for fiscal purposes. On the contrary, the current trend is not to reverse an unsustainable path that will end in disaster, but to accelerate further the trend, with ESG (Environmental, Social, and Governance) mandates for the Fed on top of the existing ones of price stability and full employment. “To realize how far we are from the original constitutional arrangements of the United States, you just need to realize that, theoretically, the Fed is ‘a creature of Congress.'” To realize how far we are from the original constitutional arrangements of the United States, you just need to realize that, theoretically, the Fed is “a creature of Congress.” That is not to say that, like the FCC or the FDA, it is an agency created via a law passed by Congress. No, that is to say that the Fed is technically part of the legislative branch of power, the one with the exclusive coinage power as defined by Art I, Section 8, Clause 5, mentioned above. Mind you, the Fed does not acknowledge this. They present themselves as independent from both the Executive and the Legislative branches.2 The last time I checked, there are just three branches of power in the constitutional structure of the United States. If an agency claims to be independent from both the executive and legislative branches, while also being clear that it is not part of the judiciary, then it is claiming to be a fourth branch of power. This is something that is clearly unconstitutional, not to mention that pesky thing about the “exclusive power of coinage” given to Congress by the Constitution. Of course, the way the Fed funds its operational expenses or the compatibility of its institutional design with the putative constitutional order of this country say nothing, at first glance, about the blurring of the lines between fiscal and monetary policy. Let us think about that. Some say that Congress is not to be trusted with responsible monetary policy, so, it is a good thing that the Fed is insulated from Congress’ direct oversight. That is a logical mistake. In the same way that Chief Justice Roberts once said, “the way to stop discrimination on the basis of race is to stop discriminating on the basis of race,” the way to have a responsible Congress is to give responsibility to Congress for their decisions. The meaning of Congress’ power of the purse is not only that it is a prerogative; it is also a duty, as brilliantly explained by Professor Katie Stith.3 For more on these topics, see “The Declaration of Independence: A Study on the History of Political Ideas,”, by Carl Becker. Harcourt, Brace, and Co., 1922. Alexander Hamilton. Online Library of Liberty. Fiscal Policy, by David N. Weil. Concise Encyclopedia of Economics. Monetary Policy, by James Tobin. Concise Encyclopedia of Economics. Money Supply, by Anna J. Schwartz. Concise Encyclopedia of Economics. New Keynesian Economics, by Gregory N. Mankiw. Concise Encyclopedia of Economics. Benn Steil on the Battle of Bretton Woods. EconTalk. The fact that we have drifted so far away from the constitutional constraints established by the Founding Fathers in the all-important questions related to taxation, public expenditure, finances, and money, says volumes about the powerful political forces against such checks on the government and does not bode well for the future. However, contrary to what may be inferred from what I have just said, there is a solution to avoid the tragedy of the US government losing its “full credit.” It is after all one of the most important weapons in the “arsenal of the Republic.” To not to alienate Congress further from the decision process, but to return the power to Congress, and with that, the responsibility of the purse. Footnotes [1] To learn more about the Philadelphia Convention, see Max Farrand’s edited volume, The Records of the Federal Convention of 1787. Available online at https://oll.libertyfund.org/title/farrand-the-records-of-the-federal-convention-of-1787-3vols. [2] See “About the Federal Reserve System” online at https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm [3] Katie Stith, “Congress’ Power of the Purse,” The Yale Law Journal. Volume 97 (1988). *Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. For more articles by Leonidas Zelmanovitz, see the Archive. (0 COMMENTS)