Let us take the crucial points which make Austrian libertarianism anti-capitalist:
(1) Opposition to fractional reserve bankingNow let’s expand on these points.
Rothbardians and many other Austrian libertarians oppose even private capitalist fractional reserve banking, but their arguments for doing so are utterly flawed, wrong or just plain ignorant. In truth, fractional reserve banking is neither inherently immoral nor fraudulent, but is a fundamental and indispensable basis of capitalism. You cannot have modern capitalism without it.
In its ignorant opposition to fractional reserve banking, Rothbardianism and other Austrian economics following the Rothbardian view are actually profoundly anti-capitalist and (on their own principles!) would require coercive violations of private property rights and free contract to ban fractional reserve banking, if they were to implement their utopian anarcho-“capitalist” system.
(2) The Austrian business cycle theory (ABCT) when we understand Point (1)
Because of their mistaken view in (1), Austrians and Rothbardians – whether they want to admit it or not – are logically committed to the view that business cycles are a core and inevitable element of capitalism. In essence, Rothbardians assert that, in order to avoid business cycles, not only central banking but also private-sector fractional reserve banking must be abolished.
However, as we have seen, fractional reserve banking is a fundamental basis of capitalism and is not fraudulent. It cannot be abolished without rejecting capitalism. Capitalism is stuck with fractional reserve banking. It follows that Austrians and Rothbardians (if they were honest) must admit that capitalism – since fractional reserve banking is at its heart – is inherently and badly flawed and naturally tends to produce business cycles in its laissez faire state. Laissez faire capitalism is therefore obviously not the best system we could have. And Austrians must therefore hold the view that capitalism is inherently bad. They are just filthy anti-capitalists like their opponents.
What is the major argument Austrians have against fractional reserve banking? The Rothbardians argue that fractional reserve banking is fraudulent because it supposedly involves two incompatible property claims to the same money “deposited” in a bank whenever one opens a demand deposit.
However, this is simply a blatant falsehood, because when you open a demand deposit, you utterly forfeit your property rights to the money and transfer the ownership rights in the money to the bank. The money becomes the bank’s property. All you get in return is an IOU or debt instrument, promising to repay the debt owed to you on demand. Therefore there are not two property claims to the same money: there is only one.
I cannot be bothered repeating all my refutations of every ignorant and absurd Austrian argument against fractional reserve banking, but you can read them here:
“Hayek’s Original View of Fractional Reserve Banking,” February 29, 2012.Every stupid and ignorant Austrian argument is dealt with above, from Huerta de Soto’s unbelievable errors on banking and the mutuum contract in ancient Rome to Rothbard’s gross misunderstanding of the court case Carr versus Carr (1811).
“Fractional Reserve Banking, Option Clauses, and Government,” January 31, 2012.
“Are the Public Ignorant of the Nature of Fractional Reserve Banking?,” December 17, 2011.
“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.
“Callable Option Loans and Fractional Reserve Accounts,” December 16, 2011.
“Future Goods and Fractional Reserve Banking,” December 15, 2011.
“Rothbard on the Bill of Exchange,” December 11, 2011.
“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.
“Schumpeter on Fractional Reserve Banking,” June 12, 2011.
“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.
“The Mutuum Contract in Anglo-American Law,” September 30, 2011.
“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.
“More Historical Evidence on the Mutuum Contract,” October 1, 2011.
“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.
“Huerta de Soto on the Mutuum Contract: A Critique,” August 11, 2012.
“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012.
“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique,” August 31, 2012.
“Huerta de Soto on Justinian’s Digest 18.104.22.168,” September 1, 2012.
“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.
“A Critique of Rothbard on the History of English Bailment Law,” August 11, 2014.
“Fractional Reserve Banking is a Fundamental Part of Capitalism,” August 8, 2014.
“The Mutuum Contract in Henry de Bracton and English Law,” August 1, 2014.
“Coggs v. Bernard and the History of English Bailment Law,” July 31, 2014.
“A Critique of Murray Rothbard on the Origins and Legal Basis of Fractional Reserve Banking,” July 30, 2014.
“Foley versus Hill and the History of Fractional Reserve Banking,” July 29, 2014
“Mutuum versus Bailment in Banking,” July 24, 2014.
“Carr versus Carr (1811) and the History of Fractional Reserve Banking,” July 23, 2014.
“Rothbard on ‘Deposit’ Banking: A Critique,” July 22, 2014.
When we get to the essence of the matter it is this: Rothbardians and their ignorant cult leader Rothbard tried to paint fractional reserve banking as an alien, unnatural and fraudulent addition to pure capitalism in its “garden of Eden” state, which was the reason for business cycles.
We can see this in Rothbard’s attempt to do just this in his book Economic Depressions: Their Cause and Cure, in the passage as follows:
“What, then, are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free-market economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds? Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other?Rothbard, of course, blamed “fraudulent” and “immoral” fractional reserve banking as well as central banks for the business cycle. As we have seen, he thought fractional reserve banking was some alien and anti-market addition to a pristine, wonderful and pure form of capitalism.
The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: that these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.” (Rothbard 2009 : 12–14).
Rothbard was laughably wrong here. It is particularly absurd because it never seems to have occurred to Rothbard that the idea that the cause of business cycles lies within capitalism was actually a view of Hayek!
Hayek – to his credit – admitted that if one were to take his absurd business cycle theory seriously, we are stuck with the view that capitalism is inherently flawed and doomed to produce endless endogenous business cycles:
“we can … see how nonsensical it is to formulate the question of the causation of cyclical fluctuations in terms of ‘guilt,’ and to single out, e.g., the banks as those ‘guilty’ of causing fluctuations in economic development. Nobody has ever asked them to pursue a policy other than that which, as we have seen, gives rise to cyclical fluctuations; and it is not within their power to do away with such fluctuations, seeing that the latter originate not from their policy but from the very nature of the modern organization of credit. So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulting trade cycles. They are, in a sense, the price we pay for a speed of development exceeding that which people would voluntarily make possible through their savings, and which therefore has to be extorted from them.” (Hayek 2008: 102).According to the logic of the ABCT, since capitalism naturally has an endogenous/elastic money supply, not only from fractional reserve banking, but also from things as simple as bills of exchange and promissory notes, it will be hit by perpetual business cycles. Capitalism has an inherent and natural tendency to produce such destabilising cycles.
It is no surprise that, when Hayek was propounding his business cycle theory at the LSE in the 1930s, his theory was even attractive to socialists, as Skidelsky notes:
“Hayek, like Keynes, hoped to prevent a slump from developing by preventing the credit cycle from starting. But his method was very different. It was to forbid the banks to create credit, something which could be best achieved by adherence to a full gold standard. He was quite pessimistic, though, about this being practical politics, so his conclusion, like Keynes’s, was that a credit-money capitalist system is violently unstable – only with this difference, that nothing could be done about it. One can understand why Hayek’s doctrines attracted a certain kind of socialist: they seemed to reach Marx’s conclusions by a different route. Because of the Austrian school’s close attention to the institutional and political setting of a credit-money economy, Hayek’s picture of the capitalist system in action was altogether more sombre than that of conventional Anglo-Saxon economics, with its story of easy adjustments to ‘shocks.’” (Skidelsky 1992: 457).In other words, Hayek’s theory in the 1930s was seen as a pessimistic criticism of capitalism as inherently flawed that naturally attracted people sympathetic to socialism – a point which splendidly confirms everything I have been arguing here.
Austrian economics has a profoundly anti-capitalist mentality, and they should admit this instead of denying the heart and soul of their theory, like the delusional idiot Rothbard.
So, to all Austrians everywhere, it seems to me you need to come out of the closet and embrace your inner and suppressed hatred of capitalism. I’m sure you’ll feel a lot better when you admit to being the filthy anti-capitalist you really are.
Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard. Ludwig von Mises Institute, Auburn, Ala.
Rothbard, M. 2009 . Economic Depressions: Their Cause and Cure. Ludwig von Mises Institute, Auburn, Ala.
Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour, 1920–1937 (vol. 2), Macmillan, London.
“Rothbard Shoots Himself in the Foot: Why the ABCT is Anti-Capitalist,” June 25, 2012.
Just because something is freely agreed to does not mean it is legally enforceable. Rothbardians (I am not one) object to FRB as you say because it implies you enter some kind of contract that as a class is en masse not logically satisfiable. (Try having everyone withdraw 'their' money from a FRB banking system at the same time).ReplyDelete
I think their point that there could not be cycles without a FRB system is an empiric one and I see no logical reason that even in a non FRB system people may make mass errors. It does seem obvious that in a FRB system such errors get can be magnified beyond the point they would in a harder money system.
(1) "Just because something is freely agreed to does not mean it is legally enforceable. "Delete
Of course it is legally enforceable: you sue for recovery of debt. Christ, the ignorance.
(2) " (Try having everyone withdraw 'their' money from a FRB banking system at the same time)."
That is a completely different issue from the flawed "two property rights" argument: you are referring here to the possibility of a bank run.
But the fact is that insurance companies and even casinos are subject to the same problem: not being able to honour debts if some highly improbably event happens (e.g., a huge natural disaster that causes an insurance company to have too many clients asking for insurance payouts). Does this mean that casinos and insurance are fraudulent or inherently wrong? No, it does not.
(3) "I think their point that there could not be cycles without a FRB system is an empiric one and I see no logical reason that even in a non FRB system people may make mass errors."
Then clearly you don't or didn't read Rothbard properly: he clearly does blame the business cycle on fractional reserve banking.
In short, your comment does not refute anything I said.
"(Try having everyone withdraw 'their' money from a FRB banking system at the same time)"Delete
not a problem under fiat money
"you enter some kind of contract that as a class is en masse not logically satisfiable. (Try having everyone withdraw 'their' money from a FRB banking system at the same time)."Delete
Try having everyone decide to stop lending to each other at the same time.
The economy would collapse, right?
So that must mean that capitalism is is en masse not logically possible, right?
1. If we agree you sell me a square circle, enforce that. I am not sure what Christ has to do with this or the (endless) insults. Agreeing to somethng that is not logically possible for example is meaningless.ReplyDelete
2. No, it isn't. That is the problem with FRB versus 'normal' property.
3. I agree, I said I am not a Rothbardian. This is my view. Read more closely before getting so angry.
But it isn't a square circle. The bank owns the deposit, you own a debt instrument which is legally enforceable. Legally enforceable does imply you will get your money back, because a failed bank may be unable to pay. But you wrote about legally enforceable.Delete
Oops. Does not imply. Just like any contract.Delete
"is not logically possible"Delete
Technically, a solvent bank is able to pay all of its depositors, so yes everyone can withdraw their money from the bank. However in order to do this the bank would have to sell all of its assets, which might take some time, so the bank might default on the promise to pay on demand whilst not defaulting on the promise to pay.
However, a bank deposit is a loan to the bank. According to simple economics, interest rates should change in response to changes in the desire to save or borrow. If all depositors want to withdraw their money at the same time, this means they no longer want to lend to the bank. But the bank still wants to borrow... which means interest rates on deposits should rise until people are willing to lend to bank and hold deposits instead of base money (cash).
(1) "Just because something is freely agreed to does not mean it is legally enforceable."ReplyDelete
Read your original statement very carefully. If you do, you will see my comment is entirely correct. It is manifestly possible to use the law to enforce something that is freely agreed to between two parties: we call them legally enforceable contracts enforced in courts of law every bloody day all over the world, like debt contracts.
I am not addressing the absurd "logically impossible" two property rights arguments in (1) above which is already dealt with in the post.
(2) it is not even clear what you talking about.
I warn you my patience with idiot trolls -- whether Marxists or Austrian lunatics -- is getting very thin these days. You sound very much like one.
I'm guessing this post is in response to another pointless engagement with the demented idiots over at Bob Murphy's blogReplyDelete
I’m baffled by Lord Keynes’s claim that “You cannot have modern capitalism without” fractional reserve banking. If we implemented full reserve (i.e. only the state issues money) there’d be absolutely nothing to prevent the private ownership of car manufacturers, restaurants, whelk stalls, you name it. I.e. full reserve banking is perfectly compatible with capitalism.ReplyDelete
Certainly none of the main advocates of full reserve (e.g. Milton Friedman, Lawrence Kotlikoff, Irving Fisher, Positive Money, etc) have said anything about full reserve being incompatible with capitalism.
That apart, I agree with Lord Keynes that Austrians are a waste of space. While I agree with them that the existing bank system is flawed and that we’d be better off with full reserve, I’ve heard so much nonsense from Austrians that I just can’t be bothered looking at their pro full reserve arguments.
without FBR the cost of financing would be impossible for unknown borrowers. Creative capitalism need fractional reserve.Delete
It depends how you advocate it. if you advocate it by telling investors to hold more cash or gold then it's not incompatible with capitalism. If you make a law that says that running a bank (in the traditional 3000 years old sense of the word) is illegal then it's the socialization/nationalization/prohibition of banking. And this policy leads directly to barter.Delete