What the founders understood

by Russ Roberts on July 9, 2007

in History

Here is some wisdom from John Baden occasioned by the 4th of July. Here’s my favorite part:

The American Constitution fostered a productive, progressive society
unburdened by an official, governmentally sanctioned religion. While
some believe our Founders were divinely inspired, there is no test for
this claim. However, were I to attribute one secular document with a
divine source, it would be the Constitution with our Bill of Rights.
Somehow, our Founders got design right.

Their work exemplified Enlightenment thinking and displayed heavy
emphasis on reason and science. Our Founders well understood the
potential for plunder and worked to minimize it. Their task was to
create institutions strong enough to protect citizens in their person
and property, while constraining politicians and special interests from
exploiting and controlling others.

While perfection eluded our Founders due to the compromises necessary
for ratification (consider neglect of women, slaves, and Indians), it
was a marvelous beginning. They limited government’s ability to
transfer wealth and opportunities; otherwise, as is Europe, benefits
would flow to the powerful and well connected. Here, individuals had
incentives to improve their lot by being productive rather than
predatory. Americans’ surest path to self-improvement came from moving
human and natural resources to ever-higher values. As a result of our
focus on productivity not plunder, we became rich beyond belief.

Today, our challenge is not wealth creation, but rather living well,
ethically, and with sensitivity to others and our environment. This is
a great accomplishment, one really quite amazing—and under appreciated.

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{ 27 comments }

David White July 9, 2007 at 12:08 pm

"Today, our challenge is not wealth creation…"

Not when "wealth" can be created via government money printing rather than work, and the financial economy accordingly dwarfs the real one. But that of course is what has rendered the nation fiscally and ethically bankrupt, with hell to pay as a result.

And let's be clear; the Federal Result is completely unconstitutional, with predictable results:

http://www.csamerican.com/stuff.asp?k=25

Keith July 9, 2007 at 1:00 pm

"Today’s politicians actively compete for booty and brag about bringing taxpayers’ funds to their constituencies. Congressional races demonstrate such ethical bottom feeding."

And it continues to grow unchecked without a hint of any limit. A system only works as long as you follow it.

Chris July 9, 2007 at 1:20 pm

David –

Wealth can only be destroyed by printing money; it cannot be created.

You seem to imply that your link indicates that the federal reserve has been doing a bad job. (I assume you mean "Reserve," not "Result.") Even if the numbers are the direct result of the Fed, they seem to show something good: since 1933, inflation has been relatively slow and steady, not subject to wild swings. That can only be a good thing.

Also, note that "cumulative inflation" is something of a lie — if you have even a small annual inflation rate, the "cumulative inflation" will increase exponentially.

David White July 9, 2007 at 2:20 pm

Chris,

Hence the quotation marks around the word. And thus will money printing — the basis of a global financal system that is awash in "liquidity" — destroy countless millions once this massive Ponzi collapses, as it inevtably must.

As for inflation, it is always and everywhere a "stealth tax," at least until it reaches a stage where the government can hide its effects any longer. Thus, it is always and everywhere evil. Nor would there be inflation in a sound-money economy. Indeed, prices would always be falling, much as the do in the computer industry (where technological advance is the most prevalent).

Robert Scarth July 9, 2007 at 3:15 pm

David White – "[inflation] is always and everywhere evil"

Surely its unanticipated inflation that's evil – anticipated inflation would be factored into any economic decisions, and so wouldn't be a "stealth tax".

Chris July 9, 2007 at 3:17 pm

David –

Sorry, I didn't detect the sarcasm on my first read. I agree that inflation is a stealth tax in that it takes away purchasing power. So, I'd rather have low inflation that high inflation. But, I don't think "no inflation" is realistic or even a good idea, because it risks deflation.

The problem I see with falling prices is that they have a negative effect on the economy. Using the computer example, many people wait to buy a computer until they really, really need one because there's a huge benefit to waiting — the computer you buy tomorrow will be less expensive and more powerful than the one you buy today. If this were widespread in other industries, I suspect many people would put purchases off, especially on big-ticket items.

(Note: Apart from a few classes in college, I have no training in economics, so I may be dead wrong…. I'd be interested in your response, though.)

Patrick July 9, 2007 at 5:14 pm

How did you guys get inflation, wealth creation and so forth from this beautifully written piece on the Constitution? It's got emotional impact and not some inference about monetary policy. The guy's right, very under appreciated. How about celebrating a little-the whole mess works…..well.

M. Hodak July 9, 2007 at 5:31 pm

The Constitution was an accident of history, way ahead of its time. One of the document's miraculous properties is that could be read by my son in just a couple of hours, which he did the other day. How long would it take to read a modern constitution, like the EU's?

Being that far ahead of its time, though, has resulted in the subsequent, disappointing retrenchment on liberty that we've experienced since. After the Founding Fathers departed the scene, our politicians proved no less power-hungry, and our people no less gullible, than those of any other nation. Our rights have been whittled away simply because our government could get away with it. Fortunately, we are finally beginning to meet other nations in the middle in terms of economic freedom, and our government is, thus, beginning to feel the hot breath of competition. Even New York is starting to care about our comparative level of regulation and taxation versus the rest of the world.

Nations are already competing to maintain the attractiveness of their currency, with anyone able to hedge inflation in their own economy. This leads to a question for David: Why, exactly, the Fed is such a threat to our economic well-being in a day of easy convertibility among currencies and commodities. This convertability makes inflationary expectations so transparent that anyone, including David, can completely escape the effect of domestic inflation if he chooses to do so. So why is he still harping on the Fed?

I've posed this question to David several times before. I'm still waiting for an answer.

raja r July 9, 2007 at 9:04 pm

Using the computer example, many people wait to buy a computer until they really, really need one because there's a huge benefit to waiting — the computer you buy tomorrow will be less expensive and more powerful than the one you buy today. If this were widespread in other industries, I suspect many people would put purchases off, especially on big-ticket items.

Yep; and the computer industry has been struggling with this 'deflation' for 25 years.

True_liberal July 9, 2007 at 10:37 pm

"Struggling"?

Efficiencies in production have brought costs down; technology has made operation infinitely easier and accessable to the non-expert; the market has grown exponentially.

The only ones struggling are those without the foresight to keep pace or a step ahead.

There are plenty of old-time airline people who decry the deregulation of the 1980s; they long for the "good old days" when they were protected from real competition. But the result of deregulation has been much more efficient use of capital, hugely expanded clientele, and overall improved service.

Hans Luftner July 10, 2007 at 1:22 am

My only real objection to this post is that Baden seems to suggest that the US went directly from monarchy to constitutionalism, when there was an intermediary step that had its merits. He completely neglects mention of the Articals of Confederation. The Constitution was arguably the imposition of a centralized mercantalist state onto a much freer loose confederation (which also wasn't perfect) that led to many of the problems the US has today.

vidyohs July 10, 2007 at 10:05 am

David White,
In a forum where you expect to find intelligent and curious minds, you find intellectual ossification beyond belief. "None are so blind as those who will not see." Most of the posters here embrace their chains and will fight you to the death to retain them.

One makes the choice between low inflation and high inflation, and totally misses the point that no inflation is better yet. And, yes no inflation is possible as you well know.

What to do what to do?

As to the constitution, there is a fatal flaw. Whether the flaw came as a result of compromise in order to get the whole thing signed or as a naive view of the role lust for power plays in how people structure organizations to their own benefit and to the benefit of their own personal comrades.

The fatal flaw is at Section 5. para. 2, "Each house may determine the rules of its proceedings,……."

That first sentence of Section 5. para. 2. is the authority for the creation of the 'committee system' that rules both houses of Congress and that system is why there is no "equal representation" afforded each elected member of Congress. that 'system' is why representatives can through seniority and a.skissing gain power far beyond the original intent. That power is then sold to the highest bidder in order to make an individual's presence in Congress very profitable.

While we the people get shafted.

Before I am challenged, think people, if what I say is not true then actual diplomacy would be what works in the machinations of legislative process, not tradeoffs and raw power to control what is allowed to pass to the floor for a vote.

Think of poor William Weld, govenor of Mass., who resigned to accept Clinton's appointment of an Ambassadorship to Mexico. Tsk Tsk, what a shame. One man, one Congressman totally blocked that appointment, holding out even against the expressed will of the majority of his house to vote on the appointment. Because Jesse Helms was committee chair on the Senate committee that controlled foreign affairs, and Jesse despised Willima Weld, the appointment was blocked by Jesse and never sent to the Senate floor for a vote. One man, more powerful than the combined Senate.

Do you see that intent in the Constitution? Do you see that in the intent behind the Constitution? And, where in all of the writings surrounding the crafting and implementation of the Constitution have you seen it expressed that our founding fathers ever intended to put into place a government that could be controlled by one man, even the President?

I think they abhorred royalty, even temporary royalty……though the word temporary doesn't seem to apply to some of those 'ancient ancstors of man' that occupy seats in the dim recesses of Congress.

The Dirty Mac July 10, 2007 at 10:27 am

Where is Muirgeo? My guess is that he is either on holiday or has a medical condition that required him to go to Cuba for adequate treatment.

Sam Grove July 10, 2007 at 12:00 pm

Muirgeo will be in Italy for a while.
—————————————-

I guess that's one flaw, but the bigger flaw is that it puts political power into the hands of a relatively few people.

vidyohs July 10, 2007 at 1:52 pm

Sam Grove,

"is that it puts political power into the hands of a relatively few people."

Not trying to pick a fight with someone who recognizes the truth, but I believe that was exactly my point.

"that 'system' is why representatives can through seniority and a.skissing gain power far beyond the original intent. That power is then sold to the highest bidder in order to make an individual's presence in Congress very profitable."

Thank you for agreeing.

Methinks July 10, 2007 at 2:08 pm

"Muirgeo will be in Italy for a while."

hopefully, sampling some of that fine socialist health care that the WHO so proudly ranks as #2 in the world. I only hope he/she/it managed to get on the list before he/she/it left for Italy, otherwise the visa will expire before Muirgeo gets to see the doctor.

JohnDewey July 10, 2007 at 3:35 pm

True_liberal: "There are plenty of old-time airline people who decry the deregulation of the 1980s"

That's a surprise. You may be correct, but I certainly haven't heard it. I've been working at the headquarters office of a legacy passenger airline for the past decade.

I suppose that former employees of Eastern, Braniff, and Pan Am may have wished for those old regulated days.

David White July 10, 2007 at 5:31 pm

Patrick,

How I got "inflation, wealth creation and so forth from this beautifully written piece on the Constitution" is, again, the abject unconstitutionality of our money and the disaster that awaits us on account of it.

M. Hodak,

"Easy convertibility" of currencies that are in a race to the bottom (to prop up exports) assures a continued loss of purchasing power. That is, these currencies jockey on the way down (hence the huge but non-wealth-creating currency market), in response to which real money rises (look at what gold and silver today as the dollar plummeted).

As for inflation being a stealth tax, it is. Why? Because the last to get their hands on the irredeemable paper (the general public) lose out to those who got their hands on it first (the banks). Always.

As for deflation, it is, properly speaking, a decrease in the money supply. This is not the same thing as falling prices, which result, in a sound-money economy, from the very same productivity increases that prevail in the computer industry, which is SO productive (as True Liberal rightly said) that it is able to overcome inflationary influences. And just as falling prices do not impair growth in the computer industry (its growth is exponential!), so would they not impair growth in the rest of a sound-money economy.

Lastly, the Constitution is indeed a flawed document, being the result of a convention that was called solely for the purpose of amending the Articles of Confederation. Instead, a central government was created that would in relatively short order render the Constitution null and void, resulting in the welfare-warfare behemoth we suffer under today.

M. Hodak July 10, 2007 at 6:00 pm

David, you should stop hyperventilating. A race to the bottom would look very different from what we've actually seen in the last 20 years, so I can't see how your citing it is responsive to my comment about currency competition. Gold is barely getting back to its price in the early 80s. Sure the current spike is uncomfortable, and probably a warning sign, but that illustrates my point, not yours. If you're uncomfortable with the trend, and are so convinced it will continue, just BUY GOLD. The law only says you must accept debt payments in dollars, but there is nothing preventing you from hedging that in gold. Then, when you turn out to be right, you'll sound much calmer.

David White July 10, 2007 at 6:49 pm

M. Hodak,

"Hyperventilating"? Perhaps someone else is "hypersensatized."

Anyway, I'd say a 70% loss in purchasing power since Nixon "closed the gold window" — with every other major currency following suit — is fairly significant.

As for gold, despite the best efforts of the Plunge Protection Team and its affiliates to suppress its price — http://www.sprott.com/pdf/TheVisibleHand.pdf — it has managed to more than double in the past five years and can be expected to blow past its 1980 high (and I mean an inflation-adjusted high of over $2,200) in the coming years.

Which is of course why I buy all the gold I can, as often as I can.

Sam Grove July 10, 2007 at 7:36 pm

Those happy dwellers in the political realm continue to believe that survival trumps moral principle.

I think that, now more than ever, our survival depends upon adherence to moral principles.

David White July 10, 2007 at 7:56 pm

Sam Grove,

And thus do we await the triumph of moral money over the corruption thereof.

I would add, too, that as someone who was profoundly affected when I read Hayek's "The Road to Serfodom" many years ago, I'm amazed at how statist this site is when it comes to a country so increasingly under the thumb of its government.

Me, I'm with Ben Franklin: "Where freedom dwells, there is my country." And thus do I rail against a government that has so utterly betrayed its promise, no less so than with its theft of our money.

M. Hodak July 10, 2007 at 8:51 pm

David,

I know you're heart is in the right place, but you need to get a serious education about money instead of the pap and B.S. fed to you by conspiratorial gold bugs, or wherever you're getting your wacko info.

We can begin with the definition of inflation. Inflation is measured as the positive change in the amount of dollars needed to purchase a given item. So, if it took $450 dollars to buy an ounce of gold in the early 1980s, and it takes about $650 to buy that same ounce today, that equates to about 1.5 percent per year rate of inflation. There is no other "inflation-adjusted" base from which to calculate the price increase. One can point out that the value of gold has not, in fact, kept pace with other items in the basket of goods and services used to measure inflation, but that's neither here not there.

Chris July 11, 2007 at 12:11 am

Raja_r:

I think computers are a special case — the computer industry has been able to handle deflation because computers go rapidly obsolete. This is not true of most products.

Consider an example: It will cost $500 to fix my car this year; if I do so, I will get another one year out of my car. Or, I can buy a new car. Under inflation, if the price of cars increases by $1000 per year, I will buy this year, because waiting will cost me $1500. Under deflation, though, if the price of cars decreases by $1000 per year, I will wait to buy the car, since waiting pays me $500 — the money I spend in repairs is more than made up for in the lower purchase price.

David White July 13, 2007 at 1:07 pm

M. Hodak,

If you're saying that inflation is first and foremost a monetary phenomenon — i.e., it begins with the over-supply of the currency in question — then I have no argument with your definition. For as a currency's supply rises, it chases relatively fewer goods, causing them to appear more scarce than they actually are and thus to rise in price. The same applies to assets, which are rising primarily due to rampant money printing (except housing, as this particular asset bubble has finally burst).

As for gold, it's price is being blatantly manipulated by the powers that be and in no way reflects gold's true value. All you have to do is compare the trillions of FRNs worldwide with the tiny amount of above-ground gold (about 155,000 tons, most of which isn't tradeable) to know that if gold were re-monetized (as it inevitably will be), its price would skyrocket into the tens of thousands of FRNs per ounce.

As for my "wacko info," I get it from those well-known wackos Ludwig von Mises and Murray Rothbard — http://www.mises.org — who understood the absolutely vital relationship between sound money and liberty.

shawn July 14, 2007 at 12:36 am

as the grammar police, I'd like to say the following:

it's = it is
its = belonging to it…possessive pronoun.
lose = to no longer have
loose = running about

….i just can't help it. and, I've been drinking. Who drinks, comes on an ECONOMICS blog, and corrects grammar?

My wife has been out of the country for FAR too long.

Hayward July 24, 2007 at 8:16 am

I barely passed 1st year Economics at University. Mainly because it was so boring. However whenever discussion on the price of gold occurs there is one question that comes to mind. Actually it covers those two fine examples of conspicuous consumption. Diamonds and gold. I may be wrong here but as far as I am aware there is actually no physical shortage of either. Diamonds are held in great quantities by producers and traders. Large amounts of gold are held by central banks, other banks, traders and gold producers. Why then is it that it is possible to maintain inflated prices for commodities that have some commercial value, i.e. uses in engineering, science and technology but are not really priced on that value.

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