Winter is approaching and Europeans are facing homes without heat, thanks to the US-led sanctions against Russia. Who will carry the blame when people freeze to death?
This Audio Mises Wire is generously sponsored by Christopher Condon.
One doubts that the so-called Inflation Reduction Act will reduce inflation. However, it will wreak havoc on the US economy with its lethal mix of taxes, regulations, subsidies, and outright crony capitalism.
This Audio Mises Wire is generously sponsored by Christopher Condon.
In a market economy, prices are determined by supply and demand: how much of a quantity is being offered and how much value people place on that good relative to other goods. However, with great government power comes potential for great government irresponsibility: artificially lowering prices for some either through outright money printing or by taxing some to subsidize others.
In the Austrian business cycle theory (hereafter ABCT), lowering prices artificially causes serious trouble in the economy, as the government is directing excessive resources into an area unsupported by accompanying supply and demand. Thus, when the monetary spigot is turned off, these areas are revealed to be insolvent; they were kept afloat only by government-created conditions, causing malinvestment.
Meanwhile, other sectors of the economy were neglected and starved of resources due to the favorable position created by the government elsewhere. A boom turns to bust. The economy experiences a downturn as businesses are liquidated and capital positions are reformed.
This phenomenon can be observed in the modern structure of student loans. In 2010, the US federal government took responsibility for student loans outright, but before then, there had still been significant government participation in this market. Before 2010, student loans were still guaranteed by the federal government, and the government even participated in direct lending alongside banks. Of course, when you subsidize something, you get more of it, and the proportion of young people going to college has grown steadily. We can call this a boom.
Under market conditions, banks would have to ensure enough loans are repaid to cover their costs and make a profit. Otherwise, they would go out of business. This would lead to students’ plans being properly scrutinized. If the banks predicted a student’s college and career plans would leave the student unable to repay the loan, they would tell the student to take a different major, or go to a more affordable college, or perhaps even to forego college altogether and pursue an alternative path. While progressives would consider this mean, ultimately it would protect young people from carrying large debts that they are unable to repay and protect the general taxpayer from having to pick up the slack.
Under conditions of government intervention, the opposite incentives manifest. An obscure game of musical chairs where it is uncertain which income bracket and which generation will foot the bill, and even whether the shortfall will be made up by printing money or by taxation, prevails. However, we do know the loans come at the general public’s expense, and that for the banks, the students, and the universities themselves, a situation of easy money prevails.
Without the profit motive, banks apply less discretion in granting loans, universities lower entrance requirements, and potential students reevaluate their options in favor of college. Discipline is eroded, as the nebulous collective future taxpayer will be forced to underwrite the whole thing.
Many of these government loans constitute malinvestment; the students cannot secure a job that enables repayment. In a market transaction, we see a coincidence of wants. Both parties agree to the trade, and nobody else is forced to participate. With government student loans, artificial intervention against real market supply and demand guarantees a negative return, for which the taxpayers are forced, ultimately at gunpoint, to pay.
However, there are also serious structural consequences, both for the individuals involved and for the economy as a whole. Capital has been forced into unproductive areas; therefore, the capital structure is distorted. Vocational jobs cannot be filled, as there aren’t enough employees who possess the necessary skills. This is a problem for the economy as a whole, as demand still exists on the part of customers for the services of those unfulfilled jobs.
It is a lengthy and complicated process to reform the capital structure—i.e., for those inappropriately subsidized students to retrain in an employable skill and for their debt to be liquidated. In the meantime, there is a lack of credit available, as the student loan debt must be liquidated and savings have to be built up again, and there is less economic activity and production than there otherwise could have been due to the skill shortage.
We observe the same process at the micro level. Students are enticed into college by government subsidy, which is a malinvestment. And they cannot secure jobs to repay their debts. Their personal capital structure is distorted, and they have to reinvest time and money in liquidating their debt and learning new marketable skills.
The effects are far worse at a human level; students’ debts leave them unable to buy a house, starting a family becomes challenging, and their standard of living often is worse than if they had pursued a trade. Even students who are intellectually strong enough to attend college under competitive conditions suffer similar effects, as government subsidies have dramatically raised the price of tuition for everyone.
On a side note, because ABCT is based in sound microeconomic theory, it can help explain personal economic cycles, as well as general macro trends, even when the former aren’t related explicitly to general recessions. Other BCTs claim micro- and macroeconomics are isolated phenomena, and they only purport to explain one type of incident; namely, a downturn in gross domestic product (GDP).
It is worth asking why Western governments have pursued this insanity, which has ruined so many lives and severely distorted their economies. Why have they pushed students with a 99 IQ through a communications degree (not to belittle the discipline of Marshall McLuhan), when it wrecks the student’s life prospects and distorts the general economy? Who exactly is winning in this situation?
We turn to Joseph Schumpeter. In his work Can Capitalism Survive?, Schumpeter advances the argument that elites push as many students through university as possible knowing that they will not be able to secure jobs proportionate to their status (or their egos), that they will become “psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” These graduates “swell the host of intellectuals … whose numbers increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into … social criticism … [and] moral disapproval of the capitalist order.”
This manifests politically in voting for left-wing parties, who will make available more bureaucratic, white-collar jobs for the disaffected intellectuals. They desire these jobs for economic reasons, and those economic conditions were created by the university system, where graduates were inculcated in the values of leftist social engineering. Thus, it is a self-perpetuating system, a wholesale replacement of bourgeois society, that was first consecrated with the managerial revolution in the early twentieth century.
It is especially dispiriting to see mainstream conservatives’ takes on the student loan crisis. Any proposal of loan forgiveness is met with fury, far more fury than has been directed at the Mideast wars, corporate welfare, or any number of spending programs cumulatively totaling far more than potential clemency for student loans. Accompanying this are exhortations for millennials to “bootstrap” and quit complaining. How were eighteen-year-olds supposed to be mature enough to foresee the structural problems of the entire government-financial system, one that the “adults” have created? It would also require them to have had no self-confidence and turn down the opportunity to go to college when presented to them by their elders.
This relates to a criticism of ABCT, that entrepreneurs should realize when interest rates have been artificially lowered and refuse a loan. But if people felt this lack of self-confidence, no project would ever be undertaken.
Although I am not generally in favor of loan forgiveness, conservatives have missed the point that it is not students particularly that are at fault, but the entire bureaucratic economic-political system.
The immigration debate has polarized societies across the Western world. Objectors assert that the influx of migrants has corroded social relations, and defenders argue that immigrants release a dose of entrepreneurial dynamism. Debates will persist because it’s unlikely that people can be discouraged from migrating to rich countries in the West. Migrants will continuously flock to places like America and Canada, since they provide better opportunities.
Besides offering immigrants more options to build wealth, rich countries in Europe and North America also attract many through their well-endowed welfare systems. Researchers contend that welfare acts as a magnet that lures migrants to prosperous countries. The allure of welfare is so potent that limiting benefits can reduce the net flow of immigrants to host countries. Also, benefitting from higher incomes in developed countries affords immigrants the opportunity to experience a superior quality of life.
Economist Michael Clemens has opined that migration to the United States is the best strategy to lift Haitians out of poverty. For many in the developing world, migrating to a stable country with effective institutions is the most plausible avenue for self-advancement. Migrating can also lead to favorable health outcomes and improved well-being because developing countries have inferior health systems. Not only is healthcare better in rich countries, but in Europe and North America people are more likely to receive subsidized healthcare.
Living standards are substantially better in Western countries, so it’s understandable why people would endanger their safety to enter America or Europe. But perhaps the current debate is misguided. Instead, policy makers should be making the case for people in Western countries to migrate to the developing world. Human capital is pivotal to economic growth, and poorer countries suffer from lower levels of human capital.
However, human capital is not the accumulation of information but rather the application of expertise. Human capital refers to know-how, and transitioning to developed status will require developing countries to acquire first world know-how. Western Europeans had a human capital advantage prior to the colonial era, yet despite the rise of East Asian countries and offshoots of England like the United States, Canada, Australia, and New Zealand, there is still a great gap in human capital formation between the West and the rest of the world.
A study by Ghanaian academic William Baah-Boateng states that economic underperformance in Africa can be remedied by strengthening its human capital base. Baah-Boateng posits that policy makers and the private sector should invest in infrastructure to revolutionize African education systems. This suggestion is fair; however, the World Bank in a controversial report noted that in Africa, teachers and students alike operate below par. The report shockingly reveals that in Africa large shares of educators fail to master the curricula of the pupils they are instructing; basic pedagogical knowledge is minimal, and good teaching practices are rare.
Inept teachers must be trained, but the low-quality of education in developing countries is a global crisis, and some are proposing that institutions in developing countries employ high-quality teachers from developed countries. Throughout history, countries have improved their human capital by courting immigrants from successful countries. From 1851 to 1920, Brazil imported over 3.5 million Europeans and immigrants from other regions.
Immigration was a major boost to Brazil’s economy. Research shows that the growth of human capital was robust in places with high concentrations of immigrants. Even today, economic performance is stronger in states that imported large shares of immigrants. Likewise, Argentina equally benefitted from the expertise of European immigrants during the age of mass migration. From 1870 to 1930, Argentina was the destination of roughly seven million immigrants, mostly from Europe.
Back then, Argentina maintained a liberal immigration policy to recruit workers and populate the country. German immigrants became a distinguished group and are recognized for their contributions to entrepreneurship, education, and health.
Crucial to the story of immigrant human capital is that Japan, the first non-Western country to industrialize, established the Iwakura Mission in 1871 to study Western institutions and apply them to a Japanese context. More recently, China has reaped the fruits of institutional copying in the venture capital sector by adopting Western business practices. Undoubtedly, appropriating relevant foreign know-how can accelerate economic performance in developing countries.
As such, poor countries in the developing world can either adopt a liberal immigration policy to attract high-quality human capital or engage in ruthless institutional copying to achieve higher living standards. The problem is not that people from poorer countries are migrating to the West, but that few Westerners relocate to poor countries with their know-how and institutions.
It has already been pointed out that a country can enjoy domestic peace only when a democratic constitution provides the guarantee that the adjustment of the government to the will of the citizens can take place without friction. Nothing else is required than the consistent application of the same principle in order to assure international peace as well.
The liberals of an earlier age thought that the peoples of the world were peaceable by nature and that only monarchs desire war in order to increase their power and wealth by the conquest of provinces. They believed, therefore, that to assure lasting peace it was sufficient to replace the rule of dynastic princes by governments dependent on the people. If a democratic republic finds that its existing boundaries, as shaped by the course of history before the transition to liberalism, no longer correspond to the political wishes of the people, they must be peacefully changed to conform to the results of a plebiscite expressing the people's will. It must always be possible to shift the boundaries of the state if the will of the inhabitants of an area to attach themselves to a state other than the one to which they presently belong has made itself clearly known, In the seventeenth and eighteenth centuries, the Russian Czars incorporated into their empire large areas whose population had never felt the desire to belong to the Russian state. Even if the Russian Empire had adopted a completely democratic constitution, the wishes of the inhabitants of these territories would not have been satisfied, because they simply did not desire to associate themselves in any bond of political union with the Russians. Their democratic demand was: freedom from the Russian Empire; the formation of an independent Poland, Finland, Latvia, Lithuania, etc. The fact that these demands and similar ones on the part of other peoples (e.g., the Italians, the Germans in Schleswig-Holstein, the Slavs in the Hapsburg Empire) could be satisfied only by recourse to arms was the most important cause of all the wars that have been fought in Europe since the Congress of Vienna.
The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars.
To call this right of self-determination the "right of self-determination of nations" is to misunderstand it. It is not the right of self-determination of a delimited national unit, but the right of the inhabitants of every territory to decide on the state to which they wish to belong. This misunderstanding is even more grievous when the expression "self-determination of nations" is taken to mean that a national state has the right to detach and incorporate into itself against the will of the inhabitants parts of the nation that belong to the territory of another state. It is in terms of the right of self-determination of nations understood in this sense that the Italian Fascists seek to justify their demand that the canton Tessin and parts of other cantons be detached from Switzerland and united to Italy, even though the inhabitants of these cantons have no such desire. A similar position is taken by some of the advocates of Pan-Germanism in regard to German Switzerland and the Netherlands.
However, the right of self-determination of which we speak is not the right of self-determination of nations, but rather the right of self-determination of the inhabitants of every territory large enough to form an independent administrative unit. If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. This is impracticable only because of compelling technical considerations, which make it necessary that a region be governed as a single administrative unit and that the right of self-determination be restricted to the will of the majority of the inhabitants of areas large enough to count as territorial units in the administration of the country.
So far as the right of self-determination was given effect at all, and wherever it would have been permitted to take effect, in the nineteenth and twentieth centuries, it led or would have led to the formation of states composed of a single nationality (i.e., people speaking the same language) and to the dissolution of states composed of several nationalities, but only as a consequence of the free choice of those entitled to participate in the plebiscite. The formation of states comprising all the members of a national group was the result of the exercise of the right of self-determination, not its purpose. If some members of a nation feel happier politically independent than as a part of a state composed of all the members of the same linguistic group, one may, of course, attempt to change their political ideas by persuasion in order to win them over to the principle of nationality, according to which all members of the same linguistic group should form a single, independent state. If, however, one seeks to determine their political fate against their will by appealing to an alleged higher right of the nation, one violates the right of self-determination no less effectively than by practicing any other form of oppression. A partition of Switzerland among Germany, France, and Italy, even if it were performed exactly according to linguistic boundaries, would be just as gross a violation of the right of self-determination as was the partition of Poland.
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