Gold standard come-back?

The way to prevent a de­pression, then, is simple: avoid starting a boom. And to avoid starting a boom all that is necessary is to pursue a truly free-mar­ket policy in money, i.e., a policy of 100-percent specie reserves for banks and governments.

... says Rothbard in Man, Economy and State (chapter 12). And is time ripe for a gold standard resurrection? Many believe so, including Steve Forbes (of Forbes magazine), but not because of a political census suddenly appearing for the gold standard, but because of an economic crises and hyperinflation. Peter Schiff - the man who predicted the bust of 2008 for the right reasons, has also pointed to signs of at least a mini-gold standard appearing here and there (calling it "the institutional gold rush"). Peter Schiff says:

We may be on the cusp of a smart-money gold rush. If so, it could drive gold to a record in real terms, even before retail investors join in.

Now you know.

The boom and the bust

[T]he boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression-adjustment process is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profit­able. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the produc­tion structure, for as the prices rise, more and more money will be needed to perform the same amount of work. Once the credit expansion stops, the market ratios are re-established, and the seem­ingly glorious new investments turn out to be malinvestments, built on a foundation of sand.

... says Rothbard in Man, Economy and State (chapter 12). Here, the key phrase is "ever increasing" doses of credit expansion. We see this in the USA today, with two doses of the so-called "quantitative easing" already out there, with perhaps the third on the way.

Bank credit expansion and capital investment

Clearly, bank credit expansion cannot increase capital investment by one iota. Investment can still come only from savings.

... says Rothbard in Man, Economy and State (chapter 12). Also, and furthermore,

The dis­tortion caused by credit expansion deceives businessmen into be­lieving that more savings are available and causes them to malinvest—to invest in projects that will turn out to be unprofitable when consumers have a chance to reassert their true preferences. This reassertion takes place fairly quickly—as soon as owners of factors receive their increased incomes and spend them.

This important truth is deliberately ignored by today's "mainstream" economists, who wish to maintain their great influence in the political sphere. But I hope time is now ripe for a new way of thinking. The endless manipulation of politicians and central bankers with our medium of exchange, money, must end. Keynes, Krugman and other preachers of modern economic "science" must be thrown into the dustbin of economic history.

Interference leads to decreased utility

In sum, the free market always benefits every participant, and it maximizes social utility ex ante; it also tends to do so ex post, for it contains an efficient mechanism for speedily converting anticipations into realizations. With intervention, one group gains directly at the expense of another, and therefore social utility is not maximized or even increased; there is no mechanism for speedy translation of anticipation into fruition, but indeed the opposite[.]

... says Rothbard in Man, Economy and State (chapter 12). This is a very important thing to understand. Interference with the free market can only decrease utility, both expected utility of actions, and realized utility.

Welfare economics

Since all State actions rest on the fundamental binary intervention of taxation, it follows that no State action can increase social utility, i.e., can increase the utility of all affected individuals.

... says Rothbard in Man, Economy and State (chapter 12), defining "binary intervention" as an intervention where

the intervener may compel an exchange between the individual subject and himself or coerce a “gift” from the subject

and which is

exempli­fied in taxation, conscription, and compulsory jury service. Slavery is another example of binary, coerced exchange between master and slave.

For a more detailed analysis, Rothbard refers to his own Toward a Reconstruction of Utility and Welfare Economics, which I call a must-read for all those interested in the philosophy of State coercion. It ends with the following lines:

Economics by itself and standing alone cannot establish an ethical system, and we must grant this regardless of what philosophy of ethics we hold. The fact that the free market maximizes social utility, or that State action cannot be considered voluntary, or that the laissez-faire economists were better welfare analysts than they are given credit for, in itself implies no plea for laissez-faire or for any other social system. What welfare economics does is to present these conclusions to the framer of ethical judgments as part of the data for his ethical system. To the person who scorns social utility or admires coercion, our analysis might furnish powerful arguments for a policy of thoroughgoing Statism.

Indeed!

The visible hand

The fact that each man, in pursuing his own self-interest, fur­thers the interest of everyone else, is a conclusion of economic analysis, not an assumption on which the analysis is grounded.

... says Rothbard in Man, Economy and State (chapter 12). Many people think that the reverse is true, that economics assume that the interest of "everyone else" should be furthered by allowing economic freedom. It is the other way around. We should allow economic freedom on its own merits - a study of economics shows that this will also lead to the greatest possible prosperity for everyone. Adam Smith's "invisible hand" is not a prerequisite for a free market, but created by it. This is worth remembering.