Rothbard on how Fractional Reserve Banking would be illegal in Anarcho-Capitalism

In the passage below:

“Indeed, a ‘free market’ necessarily implies total respect for and protection of private property. But this means that rights of private property must always be preserved. This implies not only a cracking down on assault and murder, but also on all forms of theft and fraud, including counterfeiting. Counterfeiting must be prosecuted fully by the law and, more than that, must be scorned and condemned by public opinion. As an advocate of 100 percent reserve banking, of full gold backing for all bank notes and deposits, I recognize that it would be difficult for government to police the banks, banks being notably ingenious in discovering market ways of getting around government regulations. One hundred percent banking must be enforced, not by administrative regulations, but by the legal system. While investigative snoops can hunt down counterfeit warehouse-receipts, it would be far simpler and more effective to crack down immediately and totally on any failure of a bank to pay in full on demand. First, as the Jacksonians wanted, but were never able to get through the Whig-dominated Congress in the late 1830s, at the first sign of such non-payment, the bank must be declared insolvent and its assets liquidated. But, second, these fractional-reserve bankers must be treated not as mere entrepreneurs who made unfortunate business decisions but as counterfeiters and embezzlers who should be cracked down on by the full majesty of the law. Forced repayment to all the victims plus substantial jail terms should serve as a deterrent as well as to mete out punishment for this criminal activity.

I envision the free-market world of the future, then, as one of purely metallic worldwide money. Increases of bank money will not be tolerated and will be treated as the counterfeiting and the invasion of property rights that they really are. The money supply, then, will grow only slowly, concomitant with the slow growth in the stock of the world’s gold.” (Rothbard 1992: 39–40).

I suspect that Rothbardians these days have sensed that they have lost the argument on fractional reserve banking, and that Rothbard’s idea that fractional reserve banking is inherently fraudulent and immoral has been refuted time and again.

Consequently, modern Rothbardians would like to sweep the passage above (and ones like it by Rothbard) under the rug and pretend he never said it. Well, he did.

Rothbard’s views are clear:

(1) bankers have a propensity to engage in fractional reserve practices;

(2) in an anarcho-capitalist world, the private law code would make fractional reserve banking illegal, and

(3) fractional reserve bankers would be punished with the full force of the law, including forced repayment and substantial jail terms.

But, curiously, in Rothbard’s system there is no criminal law – only private civil law.

That is to say, all crimes are offences only punishable under a system of private law, and the victim can obtain redress or justice only if they privately bring a law suit or legal action against the perpetrator of the crime.

This means the only way to punish fractional reserve banking is by private suits. But of course if you have lost all your savings in a bank run, you do not have that option, not without a loan, or a lawyer willing to work for free, or a “no win, no fee” lawyer.

In any case, Rothbard’s opinion is stated explicitly: fractional reserve banking needs to be banned and illegal in anarcho-capitalist utopia.

BIBLIOGRAPHY
Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November 1992.

Was Medieval Iceland an Example of Anarcho-Capitalism?

Some people appear to believe that it was:

“Medieval Iceland is perhaps the closest approximation of an anarchist or libertarian republic that the world is likely to see. Founded in the years between 870 and 930. when its Althing and legal system were established, Iceland was settled by people unwilling to submit to a more coercive and, as the sages describe it, tyrannical Norwegian monarchy.” (Pencak 1995: 1).

I will reserve the question of how close medieval Iceland really was to some kind of anarcho-capitalism system for another post.

But let us assume, for the sake of argument, that it was.

David Friedman (1979) studies the system of private law in medieval Iceland as an example of a real world “privatised” justice system.

However, Friedman appears to admit that “public” crimes existed in Icelandic society (a slight difficulty!). Furthermore, as far as I can see, the actual courts seem to have set up in a rather democratic manner as quasi-“public service” institutions, rather than as fee-taking private businesses.

But, again, let put these concerns aside for the moment.

Iceland had a system of wergild, a private custom and legal procedure by which a murder only results in the perpetrator paying a fine to the kin or family of the victim. I would contend that such a practice means that the rich can literally get away with murder.

And, lo and behold!, we read from Friedman himself that this is what actually happened:

“A second objection is that the rich (or powerful) could commit crimes with impunity, since nobody would be able to enforce judgment against them. Where power is sufficiently concentrated this might be true; this was one of the problems which led to the eventual breakdown of the Icelandic legal system in the thirteenth century. But so long as power was reasonably dispersed, as it seems to have been for the first two centuries after the system was established, this was a less serious problem.”
http://www.daviddfriedman.com/Academic/Iceland/Iceland.html

I am sorry, but did I read that correctly?

The private Icelandic legal system broke down by the 13th century as (presumably) inequalities of power and wealth resulted in just the type of problem critics complain would happen.

Apparently a real world privatised justice system would require a high degree of equality of power and wealth, which I submit to you is grossly unrealistic.

A final comment on the level of violence in medieval societies. I freely admit that I do not have proper estimates at hand for Iceland, but other evidence suggests that medieval societies were extremely violent by modern standards in the absence of strong state-based law enforcement and widespread private tort law.

Friedman himself actually cites a crude calculation of per capita homicide rates in medieval Iceland on the basis of some mere epic fictions, the “Sturlung sagas.” But that is an incredibly naive and unconvincing method of calculating real world historical homicide rates.

BIBLIOGRAPHY
Friedman, D. 1979. “Private Creation and Enforcement of Law – A Historical Case,” Journal of Legal Studies 8.2: 399–415.
http://www.daviddfriedman.com/Academic/Iceland/Iceland.html

Pencak, William. 1995. The Conflict of Law and Justice in the Icelandic Sagas. Rodopi, Amsterdam and Atlanta, GA.

Questions for Austrians Before You Debate Them

The Austrian school has different branches and sometimes conflicting doctrines (see “The Different Types of Austrian Economics,” December 5, 2010).

Before you debate an Austrian or an Austrian apologist, there are a number of questions you can profitably ask to properly understand that person’s brand of Austrian economics.

These are as follows:

(1) Are you (a) a small state Classical liberal Misesian or (b) an anarcho-capitalist in the tradition of Rothbard and Hoppe?

(2) If (a) what functions do you think the state should have?

(3) What is your view of ethics? Do you support natural rights/natural law theory or some form of utilitarianism/consequentialism? If neither, then what theory?

(4) Are you (a) a moderate subjectivist in the tradition of Kirzner/ O’Driscoll and Rizzo or (b) a radical subjectivist in the tradition of Lachmann?

(5) Do you think expectations are subjective, as Lachmann contends?

(6) Do you think (a) Mises’s praxeology is the proper methodology for Austrian economics or (b) follow Hayek or O’Driscoll and Rizzo in rejecting pure praxeology and apriorism and wanting a greater role for empirical evidence?

Though there is a major split in the Austrian school between radical subjectivists and moderate subjectivists, it seems to me that either group can adhere to anarcho-capitalism. I am actually interested to know how many of the neo-Austrian moderate subjectivists support a minimal state.

Here is a list of older and modern neo-Austrians. If anyone knows their positions on the questions above, I would like to hear them.

Hans F. Sennholz (1922–2007)
Israel M. Kirzner (1930– )
Andrew Schotter
Laurence S. Moss
Walter E. Block (1941– )
Roger Garrison (1944– )
Karen I. Vaughn (1944– )
Mark Skousen (1947– )
Gerald P. O’Driscoll (1947– )
Don C. Lavoie (1951–2001)
Joseph T. Salerno
Richard M. Ebeling (1950– )
Mario Rizzo
William L. Anderson
Roger Koppl
Peter J. Boettke (1960– )
David L. Prychitko (1962– )
Steven Horwitz (1964– ; Hayekian anarchist, consequentialist, subjective expectations)
Steve Kates
Robert P. Murphy (1976– )
Jonathan M. Finegold Catalan

Economic Systems are Best Conceptualized on a Continuum

Of the various ways of organizing economic systems, one can see two extremes: anarcho-capitalism and communist command economies. Anarcho-capitalism would privatise everything and abolish the state. A communist command economy would abolish most private property and plan production of commodities centrally. In the middle, we have the modern mixed economy, where there is a very large space for private production of commodities and private property, but where regulation restricts production and property rights, and where the state intervenes with monetary and fiscal policy, as well as social security and other public goods.

The modern neoliberal/neoclassical system we have had since the early 1980s would be to the left of centre. I would put the neoclassical synthesis Keynesian system many countries had from 1945–1979 in the middle. A Post Keynesian system would probably be slightly right of centre.

Some nations like Japan, South Korea and Taiwan after 1945 had a higher degree of planning than even mixed economies, through their highly successful industrial policy, and would be even more to the right of the centre on the line below.

The Different Types of Austrian Economics

Although I advocate Post Keynesian economics, I have always been rather intrigued by Austrian economics. In the 1930s, when John Maynard Keynes was establishing the beginnings of the Keynesian revolution, his great intellectual opponent was the Austrian economist Friedrich August von Hayek.

The Austrian school arise in the 1870s as part of the marginalist revolution in economic thought. The founder was Carl Menger, who wrote an influential book called the Principles of Economics in 1871.

In a previous post (see “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists”), I noted that the early Austrian school was in fact split into two factions: (1) a Classical liberal wing and (2) a wing that was not opposed to government intervention per se, and that even included members sympathetic to Fabian socialism. Hayek explains the history of the Austrian school in this interview:

LEIJONHUFVUD: In economics, let me come back to a question we have touched upon before. In the twenties in Vienna, was there such a thing as an Austrian school in economics? Did you and your contemporaries perceive an identification with a school?

HAYEK: Yes, yes. Although at the same time [we were] very much aware of the division between not only Meyer and Mises but already [Friedrich von] Wieser and Mises. You see, we were very much aware that there were two traditions—the [Eugen von] Böhm-Bawerk tradition and the Wieser tradition—and Mises was representing the Böhm-Bawerk tradition, and Meyer was representing the Wieser tradition.

LEIJONHUFVUD: And where did the line between the two go? Was there a political or politically ideological line involved?

HAYEK: Very little. Böhm-Bawerk had already been an outright liberal, and Mises even more, while Wieser was slightly tainted with Fabian socialist sympathies. In fact, it was his great pride to have given the scientific foundation for progressive taxation. But otherwise there wasn’t really—I mean, Wieser, of course, would have claimed to be liberal, but he was using it much more in a later sense, not a classical liberal (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 49–50).

The split in the Austrian school in the 1920s was between (1) the classical liberal wing of Eugen von Böhm-Bawerk/Mises (which evolved into modern American libertarianism), and (2) the wing of von Wieser, some of whom were leaning towards Fabian socialism.

However, with the migration of Austrian economics to America and the emergence of Mises as a leading figure, the Classical liberal wing won out, and modern Austrian economics developed from the Classical liberal wing under Mises’ influence.

For much of the 1940s, 1950s and 1960s, Mises, Hayek and Rothbard were the major Austrian thinkers. However, there were a number of other less well known third-generation Austrian economists in this era, including Oskar Morgenstern (1902–1976), Gottfried von Haberler (1900–1995), Fritz Machlup (1902–1983), Paul N. Rosenstein-Rodan (1902–1985), and Friedrich A. Lutz (1901–1975). Not all of them were reflexively hostile to government. Paul N. Rosenstein-Rodan, for instance, was famous for his work on how the state can initiate industrialization in poor nations through planned investment (Rosenstein-Rodan 1943).

In the US, the Austrian tradition was strongly influenced by Mises and Rothbard. Then Austrian economics experienced a resurgence in America from the 1970s onwards:

“American Austrianism revolves around an axis that passes through Auburn University, George Mason University, and New York University. It gets its spin from a 1974 conference held at South Royalton, Vermont, a week-long affair that featured lectures by Murray Rothbard, Israel Kirzner, and Ludwig Lachmann” (Garrison 2001: 259).

A proceedings of that conference was later published as The Foundations of Modern Austrian Economics (ed. E. G. Dolan; Mission, Kansas, 1976). For a fascinating discussion of the history of this Austrian resurgence, see Mario Rizzo’s post “What Is Austrian Economics?” (November 23, 2009) at the ThinkMarkets blog and the comments on it.

Modern Austrians come in a number of forms, and there are clear differences between them. In my view, a useful division of modern Austrians would be as follows:

(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety supports praxeology and utilitarianism;

(3) Hayek’s economics, with a minimal state;

(4) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(5) Radical subjectivists like Ludwig M. Lachmann (1906-1990), and Austrians influenced by him.

(see Böhm 1989: 60–61; Hutchison 1994: 222).

One should note that the differences between these types of Austrians are not trivial.

From the 1970s, a new generation of Austrians challenged the older, pure aprioristic methodology of Mises, and advocated a greater role for empirical testing, and Hayek had already moved away from Mises’ methodology with his paper “Economics and Knowledge” (1937).

Personally, I have little time for Austrians of types (1) and (2). The anarcho-capitalists (1) have a radical view that the state must be completely abolished and all of its functions privatized. In the form developed by Rothbard, the case for anarcho-capitalism is based on an untenable and deeply flawed moral argument using natural rights and Aristotelian, neo-Thomist natural law theory (Rothbard 1998). Though my purpose here is not to offer a detailed critique of anarcho-capitalism, one of the most convincing arguments against it is that private protection firms would in fact have an incentive to victimise potential customers to increase market share. Violence of the type that already happens between private mafia groups might occur. A natural monopoly would probably develop as the most powerful firm drove its competitors out of business (or a cartel might become dominant), and one would be left with a de facto state, the very thing anarcho-capitalism sought to abolish! (see Holcombe 2004: 330–331). Moreover, the power relations in an anarcho-capitalist society would appear to be rather like feudalism, with no sense of the common good (Freeman 2001: 147–149). If history is any guide, a movement towards anarcho-capitalism might well result in the kind of incessant violence and warfare between private warlords/protection agencies, as in medieval feudalism. Above all, do we really want to privatise the ownership, use and production of nuclear weapons or biological and chemical weapons? Quite frankly, an anarcho-capitalism system would be one of utter insanity.

The classical liberal Austrians (2) in the tradition of Mises support a minimal state with limited functions, like justice and defence. But Mises’ praxeology is heavily aprioristic, involves an absurd and radical rejection of empirical evidence, and falls apart once one sees the vast number of unsupported subsidiary hypotheses, both present and assumed, that underlie his deductive arguments. Moreover, by admitting the possibility of rational government intervention on utilitarian grounds, Mises’ ideology has a severe logical contradiction (see “Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention”).

Austrians of type (5) are more interesting. The Austrian radical subjectivists have a “kaleidic” view of economics influenced by the views of the peculiar Austrian–Keynesian hybrid George L. S. Shackle (Lachmann 1976) and stress the subjectivist nature of value, expectations, and knowledge. Lachmann, for example, even denied that free market systems tend to equilibrium or have coordinating processes (Kirzner 2000: 46–47). Lachmann’s radical subjectivism is rejected by Austrians of type (4), who condemned his position as “nihilism” (Kirzner 2000: 47). This rejection is not unreasonable from the perspective of those who support extreme laissez faire economics, because, if there is no neoclassical tendency to full employment equilibrium or Hayek’s plan coordination in a free market system, the alleged economic or moral superiority of such a system collapses. It is thus not surprising that the Lachmann-inspired wing of Austrians aroused some hostility from the moderates who defended the free market as an equilibrating or coordinating mechanism (Dunn 2008: 136).

I am not certain whether Gerald P. O’Driscoll and Mario J. Rizzo are moderate subjectivist Austrians of type (4). Their interesting book The Economics of Time and Ignorance (Oxford, UK, 1985) appears to use Lachmann’s views on the role of time and fundamental uncertainty, but also tries to overcome the charge of “nihilism” by postulating the idea of pattern coordination in place of equilibrium (Gloria-Palermo 1999: 138).

O’Driscoll and Rizzo have made some favourable comments about Post Keynesian economics:

“[i]t is evident that there is much more common ground between post-Keynesian subjectivism and Austrian subjectivism …. the possibilities for mutually advantageous interchange seem significant” (O’Driscoll and Rizzo 1985: 9).

There are indeed some limited similarities in economic analysis between Austrians of type (4) and (5) and the Post Keynesian economists (Böhm 1989: 61).

Paul Davidson, one of leading American Post Keynesians, criticised The Economics of Time and Ignorance in his classic articles “The Economics of Ignorance or Ignorance of Economics?,” Critical Review (1989) 3.3/4: 467–487, and “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3 (1993): 423–444. Clearly, there are also very significant differences between Austrians and Post Keynesians.

Austrians of type (4) include Israel Kirzner, who argues that plan/pattern coordination (the Austrian substitute for neoclassical equilibrium) in a free market economy can be achieved by entrepreneurial discovery and creation (Parsons 2003: 7). Type (4) Austrians also include Roger Garrison and others who even engage in “Austrian macroeconomics,” which seems peculiar, given that other Austrians reject the whole concept of macro-theory in economics.

From the perspective of Post Keynesianism, Austrians of type (4) and especially (5) are the most interesting. Ludwig Lachmann, like Keynes, stressed that expectations are subjective, and Lachmann even produced work that has a positive view of aspects of Keynes’ thought. Lachmann’s paper “John Maynard Keynes: A View from an Austrian Window” (South African Journal of Economics 51 (1983): 253–260) argues that

“In the field of methodology Keynes and the Austrians agree that economics is a social science to which methods that have proved successful in the natural sciences should not be applied without careful inspection, …. But Keynes’s mind also moves in another direction. ‘I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth’ … Keynes sees in social facts manifestations of the human mind. While to Hayek it is the complexity of these facts, their multitude and diversity, that defies the attribution of numerical values to social concepts, to Keynes it is their mental character … that does so. Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than is his Austrian opponent (Lachmann 1983: 256).

These similarities have been noted by other scholars too (Caldwell 1989; Parsons 2003: 6).

Though the practical policy recommendations and political outlook of Post Keynesians and Austrians will remain deeply in conflict, there might be something that Post Keynesians can learn from studying the theories of Austrians of type (4) and (5) above.

WALTER BLOCK’S CLASSIFICATION OF AUSTRIAN SUBJECTIVISM

In an article published in 1988, Walter Block proposes a useful division of different types of Austrian subjectivism:

1. The nonsubjectivists
2. The moderate subjectivists (i.e., Yeager)
3. The Austrian subjectivists (i.e., Rothbard, Kirzner, Buchanan)
4. The ultra- or extreme subjectivists (i.e., Jack Wiseman, G.L.S. Shackle, Ludwig Lachmann, and “hermeneuticians” associated with the market process group located at George Mason University) (Block 1988: 201).

Categories (2) and (3) here include my category of “Moderate subjectivist Austrians.”

BIBLIOGRAPHY

Böhm, S. 1989. “Subjectivism and Post-Keynesianism: Towards a Better Understanding,” in J. Pheby (ed.), New Directions in Post-Keynesian Economics, Edward Elgar, Aldershot, Hants, England. 59–93.

Block, W. 1988. “On Yeager’s ‘Why subjectivism?,’” Review of Austrian Economics 2: 199–208.

Caldwell, B. J. 1989. “Post-Keynesian Methodology: An Assessment,” Review of Political Economy 1465-3982, Volume 1, Issue 1, 1989, Pages 43 – 64

Dolan, E. G. (ed.). 1976. The Foundations of Modern Austrian Economics, Sheed & Ward, Mission, Kansas.

Dunn, S. P. 2008. The “Uncertain” Foundations of Post Keynesian Economics: Essays in Exploration, Routledge, London and New York.

Freeman, S. R. 2001. “Illiberal Libertarians: Why Libertarianism Is Not a Liberal View,” Philosophy & Public Affairs 30.2: 105–151.

Garrison, R. W. 2001. Review of Subjectivism in Economic Analysis: Essays in Memory of Ludwig M. Lachmann (Routledge, London, 1998), Review of Political Economy 13.2: 258–262.

Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.

Holcombe, R. G. 2004. “Government: Unnecessary but Inevitable,” Independent Review 8.3: 325–342.

Honderich, T., 2005. Conservatism: Burke, Nozick, Bush, Blair? (rev. edn), Pluto, London.

Hutchison, T. W. 1994. The Uses and Abuses of Economics: Contentious Essays on History and Method, Routledge, London.

Kirzner, I. M. 2000 The Driving Force of the Market: Essays in Austrian Economics, Routledge, New York.

Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54-62.

Parsons, S. D. 2003. “Austrian School of Economics,” in J. E. King (ed.), The Elgar Companion to post Keynesian Economics, E. Elgar Pub., Cheltenham, UK and Northhampton, MA. 5–10.

Rosenstein-Rodan, P. N. 1943. “Problems of Industrialization of Eastern and South-Eastern Europe,” Economic Journal 53.210/211: 202–211.

Rothbard, M. N. 1998. The Ethics of Liberty, New York University Press, New York and London.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

Yeager, L. B. 1987. “Why Subjectivism?,” Review of Austrian Economics 1: 5–31.