The same thing goes for every other moral precept. Don't rob or steal? Well, yes, that's a good one -- except that we've riddled the definitions of robbery and theft with so many exceptions that the concept loses its universality. It's OK to steal (we admit) to feed your baby. And what about all those horrible gray areas where somebody uses the law to acquire property that might or might not truly belong to them? How do we even know who's right in such disputes? And if we can't say for sure who's right, how can we say that somebody's stealing?
How about lying? It's always wrong to lie, isn't it? Well, we all agree that there are white lies. And sometimes a doctor will lie to a patient for his own good. It's even possible to tell a noble lie that causes harm to yourself but spares another person pain. Is that wrong?
If something has exceptions, it's not a principle: it's a guideline. So how can we argue from moral principles if we don't have any?
Actually, I think that there is a fundamental moral principle that has no exceptions: the Golden Rule. I can't think of a single act that I would call moral that violates the Golden Rule. However, we need a slightly extended version of the Golden Rule: do unto others as you would have them do IF YOU WERE IN THE SAME CIRCUMSTANCES. If I see an injured person by the roadside, I could argue that I myself have no reason to go to the hospital, so why should I take him to the hospital?
I confess that there remain lots of deep philosophical arguments that can be used to muddy the waters here. I won't really claim that the Golden Rule is in fact the one absolute principle of morality. My point is that all the normal moral precepts such as those against killing and stealing are derived from deeper moral principles. These explicit moral concepts are middlemen in the flow of reasoning from morality to policy. The fact that we admit to exceptions clearly shows that they are not, in fact, moral principles. So it's rather pointless to use them in political discussions. If you want to bring morality into it, keep to the basics where you're on solid ground. Cut out the middlemen.
Let's take the case of Hiroshima as a particularly extreme example. The USA killed something like 100,000+ people in order to win the war. There were very few military personnel in that city: most of the victims were old men, women, and children. Clearly this has to be chalked up as a hugely evil act. But war kills people; the goal in war is not to avoid killing people, but to minimize the amount of killing necessary to get the job done. The worst possible kind of war is a war of attrition, where people die in a diffuse and regular manner, day in and day out, until it becomes so routine as to escape the notice of the opposing government. If you want to use violence to win your war, then you want big, showy, dramatic violence, violence that grabs people's attention, violence that terrifies and disgusts and demoralizes. It's better to broil 100,000 people than to starve a million people to death, because the horror of the 100,000 deaths is so much greater than the horror of the million deaths. And in fact, the attacks on Hiroshima and Nagasaki did exactly what they were intended to do: they so shocked the Japanese Emperor that he told his government to surrender. Ultimately, fewer people died because of the horror of Hiroshima and Nagasaki.
I was inspired to write this item by a comment in a previous discussion during which one of our correspondents wrote about the importance of morality in policymaking. My point here can be boiled down to asking "What morality?" There is no fundamental moral principle that one man's property is his to dispose as he pleases. There's a secondary moral precept to that effect, but we all know that there are exceptions to that precept -- so what's the point of citing it as a principle when it is in fact only a precept?
My claim here is that we cannot use moral precepts as fundamental principles that brook no contradiction. Pro-life people claim that the sanctity of life is absolute -- but most of them have no objection to violating the sanctity of Islamic lives. Advocates of small government try to apply grand principles to show that government should not tax the people. I'm reminded here of the classic tale of Winston Churchill offering an English aristocratic woman 5 millions pounds to sleep with him. When she expressed a willingness to contemplate the idea, he then asked if she would be willing to sleep with him for 5 pounds. She responded rather huffily "What kind of woman do you think I am?" To which Mr. Churchill answered "We've already established that, now we're merely determining the price." Advocates of small government have already conceded the principle that government is necessary and desirable; beyond that, it's only a matter of determining the price.
We cannot dodge the complexities of policymaking by taking refuge in absolute moral principles, because there aren't any absolute moral principles beyond the Golden Rule. Whenever we consider tax policy, legislation, public spending, or anything else that government does, we must rummage through all the implications and give each of them due consideration. There's no shortcut to these answers.
30 comments:
I like the idea of the Golden Rule as the "fundamental moral principle."
But what's with the extension "if you were in the same circumstances"? Isn't that already implied in the Golden Rule ("Do unto others as you would have them do unto you")? In your example, doesn't it already mean taking that injured person to the hospital?
Re Hiroshima and Nagasaki, that debate will never go away. We don't really know for sure that dropping the bomb saved lives (though we think so); we only know for sure that it took lives.
Yes, my extension is implicit, I just wanted to make it explicit. As regards Hiroshima, I think we can be pretty confident in our projections regarding the likely casualties that would have been generated by Operation Olympic, the invasion of Japan planned for November 1945. Most of the casualty estimates were based on experience in Okinawa, where there were horrific civilian casualties, many of which were suicidal in nature. Approximately 25% of the Japanese civilian population died in that battle. Apply that figure to the main Japanese islands and you'd get many millions of dead.
Even the Golden Rule isn't perfect. Let's consider these situations:
1) Fundamentalist Christians find out their son is gay and send him to be cured. They're adhering to the Golden Rule because they believe they'd want to be cured if they were gay.
2) The Golden Rule is no help in the abortion debate. Should an embryo be considered one of the "others" in the rule? How about animals? A different value judgement must be made to determine who (what) the Golden Rule should apply to.
3) Was the guy dropping the atomic bomb acting in accordance to the Golden Rule? Only if he would willingly sacrifice himself and his loved ones for the sake of a greater number of unknown people (because that's what he's forcing on other people). Yet you, Chris, consider this act a moral one.
4) Building on the previous example: *should* you welcome an atom bomb into your city if it helped save the lives of a greater number of others? The Golden Rule doesn't say - it speaks nothing of numbers.
Hmm, reading a bit more carefully, you didn't claim it was perfect.
Eurohippie: It seems to me that the Golden Rule works as well as anything else when it comes to the abortion debate. Pro-choicers, like myself, believes it's the pregnant woman who get to make the decision. She does "unto others," other pregnant women, exactly as she's "done unto": the decision is their's, not her's. No, embryos aren't "others" (not to my mind, anyway).
EuroHippie, you have raised some excellent objections to the Golden Rule. As I wrote earlier, I do not consider the Golden Rule bulletproof, and you've shot some pretty good bullets at it. However, for the sake of argument, I'll take a stab at defending the Golden Rule.
1. Parents of a gay son. The problem here is not with the Golden Rule, it's with the minority of the son. Parents are charged with the responsibility to raise their children to be ethical. Yes, there's plenty of room for arguing about what is truly ethical, but the crucial point here is that the son is still a minor and therefore his volition is subordinated to theirs.
2. Abortion. Again, the problem isn't with the Golden Rule, it's with the definition of "others". If you define "others" to include fetuses, then the Golden Rule might -- might -- might forbid abortion. The catch arises from the fact that the fetus has no free will, and therefore cannot have a preference. In other words, if I were a fetus, I wouldn't be aware enough of my situation to form a desire to live, and therefore I fall outside of the Golden Rule. I realize that this is a rather academic argument, but I think it deserves consideration.
3 & 4: Hiroshima. I don't see a conflict here. Suppose I'm a Hiroshima victim. If I die, millions of my countrymen are saved. Conversely, if a hundred thousand of my countrymen could die to save millions, including me, then I would want them to do that for me. So the Golden Rule requires me to die. The same patriotic-altruism argument applies to the US airman.
This is really just an extension of the whole problem of killing in war. Let's reduce it to a single case of one soldier shooting another soldier in combat. Our moral code accepts this as an ethical act. In such a case, both shooter and victim can acknowledge that, were the roles reversed, the shooter would be justified shooting the victim. They both accept the basic killing principle of war and act accordingly. Again, their situation is morally symmetric even though it is grossly asymmetric in practice.
I admit that these arguments do not have the bulletproof quality that we would prefer of our arguments in matters of such import. I stand by the Golden Rule only because I can't think of anything better.
The trouble with deducing moral principles is that, to start with -- and correct me if I'm wrong -- they must originate out of a desired end which is necessarily subjective. For instance, the end sought might be the aim of survival of the human species. Then, the task is to reason out which conduct is most conducive to that end. In other words, cold logic can only come into play after a personal decision is made about the end sought.
The flight crew which dropped the atomic bomb on Nagasaki was entirely Catholic, and was blessed by a Catholic chaplain (George Zabelka, who later regretted his involvement in the bombing and became a peace activist). The bombing was ordered by a Christian president and carried out under the direction of a mostly-Christian military establishment. Interestingly, Nagasaki itself was the home of Japan's Christian community.
In Christian ethics, to my understanding, the end sought is eternal life, which can only be achieved by doing the will of God as revealed by Jesus. The Christian believes:
-God exists;
-Jesus is the Messiah, who revealed the will of God to humanity;
-Eternal life (victory over evil and death) can be achieved only by following the teaching and example of Jesus (i.e. doing God's will).
We can say, without a doubt, that the means employed, and the ends pursued, by the Christians involved in the bombing of Nagasaki were not consistent with the means and ends of Christianity. Nobody in his right mind would argue that Jesus would have bombed Nagasaki.
In fact, because the state depends for its existence upon violence, threatened and carried out, the means of the state are fundamentally incompatible with the means and ends of Christiantiy. Logically, no Christian should be a president, prime minister, bureaucrat, police officer, soldier, tax collector, etc., nor should any Christian argue in favor of state violence for any purpose.
If the Christian genuinely believes in Jesus as the Messiah, then survival, as defined by the world and the nation state, is inconsequential. Anyway, it is elusive, because even if he kills every other person in the world, a man will still die eventually.
But no one outside of himself can threaten the Christian's eternal life, according to Christian ethics. So long as he follows Jesus, his survival is guaranteed for all eternity.
Why, then, do so many self-professed Christians act as if their morality is founded upon ends which are diametrically opposed to the ends of Christianity -- ends like the transient survival of self, or of nation state? Why do they support war, prisons, capital punishment and abortion? I don't have the answer to that.
Ultimately, the means depend upon the ends. If we are each assuming different ends, then we can talk about means all day and never come to agreement.
I am in total agreement with you here, Dither. Morality is a purely subjective notion and it is impossible to concoct any strictly logical solution to the problems of ethics. I offer my arguments only to those who are already in agreement on a few basic notions. I have no defense against anybody who challenges those basic assumptions. My only point is that the "middleman" moral precepts are too confusing to be useful, that for many -- but not all -- purposes, we can probably find a solution through recourse to the Golden Rule.
However, there is another consideration here. The essence of democracy is the realization that there is no objective basis for morality, and therefore public morality can only be established by the group as a whole. Moreover, the group will not be able to achieve unanimity on anything so we have to accept some sort of majority rule, although we can argue a great deal about the conditions under which a simple majority provides adequate certainty or a supermajority is required. (Or, as Dan O'Neill pointed out, "What is absolute truth? A 5-4 decision in the Supreme Court")
What this brings us to is the realization that, in some profound sense, morality is whatever a sufficient majority of the public says it is. If the public decides to confiscate personal property and require everybody to live on a commune, well, von Mises be damned, that's the most moral course of action. Of course, we all know that no such majority could ever exist, so this fantasy remains so academic as to be almost meaningless.
This society has never enshrined the ownership of personal property as a fundamental right. Your property can be taken away by any "due process" means. And you can't have your property taken away for some discriminatory process. But our Constitution seems to acknowledge that ownership of property is subject to the will of a simple majority. In some ways, that's a chilling thought. Yet after more than 200 years of history, I don't think it has triggered any disasters.
Chris: I don't disagree with the projection of casualties *if* Operation Olympic had taken place. The historical argument is that the operation may not have been necessary, that Japan in fact was already planning to surrender. If so, a lot of (civilian) people were killed for no good reason.
Yes, that's true. That will remain one of the great "What ifs" of World War II.
What this brings us to is the realization that, in some profound sense, morality is whatever a sufficient majority of the public says it is.
I think what you're getting at is the concept of "might makes right." Even if, in the abstract, we believe in the idea of rights, in the real world, the group -- or whichever faction commands the most guns -- gets its way. That's how it's always been.
Still, I think morality exists independent of democracy or government in general. It is something deeply personal.
Consider the case of Franz Jagerstatter, an Austrian peasant who refused to fight for the German army during World War II on moral grounds (he was a Christian, one who actually took Jesus' teachings about violence seriously).
Historical records indicate that Jagerstatter was treated by the group as an outcast, and urged by many (including the mayor and local clergy from whom he had sought counsel) to change his mind and stop being so obstinate. He was assured that killing for the German state was morally righteous and compatible with Christianity.
Still, he refused, and was eventually convicted in a military trial and beheaded.
It's interesting to think that, at the time, he was an unknown, one of many poor peasants. But today, he is remembered, while all those who went along with the group are forgotten to history. Maybe there's a lesson here.
I am most definitely NOT saying that "might makes right". I am saying that with something that is fundamentally subjective, the best way to make a decision is to rely on some kind of majority. And that majority need not be a simple majority -- I would argue that, the more consequential the matter, the greater the supermajority required to make a determination.
Moreover, you have no alternative. Whom would you have such decisions made by: you? me? an aristocracy of elite intellectuals? the Church?
Chris,
Do you mean the best way to make a policy decision?
In my opinion, only the individual can decide for himself what is the moral course of action in any situation. To the extent that morality influences government policy, it does so as the result of such individual decisions on the part of those involved in formulating and executing policy (including, to some degree, voters, lobbyists and others on the "outside").
I guess what I'm saying is that "public morality" is just an abstraction, like the "public will." It's basically a trend or pattern of behavior that can be observed in a large group of people. It doesn't tell us the actual desires, motivations or personal morality of the constituent parts of the group.
Let me give an example. Obama just won the election. Individually, the people who voted for Obama might have had very different motivations for doing so. Some might have done so out of fear or hatred of the other candidate. Some might have agreed with slightly more of Obama's positions than McCain's. Some might have thought Obama just seemed like a nicer guy. Some apparently thought he was akin to a Messiah. And so on. (Of course, there might have been some overlap of these motivations for a given person).
We can't formulate, just from the fact that Obama was elected, a single chain of reasoning that applies to all the people who voted for him.
So, based on my assertion that moral principles are determined by reasoning from a subjectively-decided-upon point of reference, there can be no "public morality," strictly speaking, because the individuals that comprise the public will not all share the same point of reference or draw the same conclusions therefrom. Sure, many travelers will arrive at the same place (as in the fact of many people voting for Obama) but that still doesn't tell us where they started or what path they took — which are, I think, key to morality, and what separates it from mere custom, preference or reaction.
(I don't actually think I'm arguing with you here, just that we are talking about apples and oranges, and I'm trying to clarify where I'm coming from.)
No, I don't see much disagreement here; we're just taking the discussion in differing directions. I can add only a few observations.
First, morality is necessarily tied up with policy, be it personal or social. Each of us guides our personal decisions based on our concepts of morality; and our society makes its political decisions based on its concept of morality. Since morality is a purely subjective concept, we end up averaging together the moral judgements of many people in making political decisions for the entire society.
And yes, I'll agree with you that "public morality" is an abstraction in the same sense that the average family with 2.8 members is an abstraction.
So it looks as if I'll have to go off and scratch around looking for something else for us to disagree on.
This letter in the 2/23 NY Times testifies to the need for government in a capitalist society:
"David Brooks’s assertion that 'our moral and economic system is based on individual responsibility' is an excellent example of his ability to turn language inside out.
"There is no system that is both moral and economic. Individual responsibility in a moral system is based on ethics and good behavior. Individual responsibility in an economic system is based on financial success. The amorality of our economic system, with its indifference to the social consequences of its actions, is the problem."
That's the nub: businesses are "indifferent to the social consequences of [their] actions."
Because they are, we need government (and the safety net which only government can provide).
Gerald, I strongly urge you to read "Systems of Survival" by ?Susan Jacoby?. It's a truly brilliant work on morality, arguing that there are two orthogonal systems, one economic and one guardian, each of which works quite well in its own sphere. However, moral problems always arise when the two systems intersect. I was very reluctant to read it when it was given to me, thinking that ethics is a topic long since hashed out, but this book presents a truly brilliant insight.
Gerald,
What about the social consequences of government's actions? For example, we are today seeing the consequences of government policy which encouraged debt, consumption and living beyond one's means. And now, the government will further punish the responsible and productive by making them pay for the mistakes of the irresponsible and wasteful. Do you think this will have no consequences?
To point out the fact that men sometimes do evil is not an argument against the free market. Rather, it is an observation of human nature. What you forget is that the people who comprise the government must come out of the same pool of humanity as those who comprise the part of society which is to be governed. And, contra the civics textbook propaganda, human nature prevails even when one enters so-called "public service."
Government officials are no more selfless than are business executives. The difference is that the former have command of the tremendous violent power of the army and police by which to impose their will on others. As has been observed, power tends to have a corrupting influence on human beings. And nowhere is power more concentrated than in government.
It is stating the obvious to say that our government is thoroughly corrupt. Congressman routinely take legal bribes to pass legislation for the benefit of special interests, and are rewarded with lobbying jobs when they leave office, only to return later via the "revolving door." Unionized government employees draw outlandish salaries and pensions, often by "double dipping" and otherwise milking the system, even as the private sector (i.e. the productive sector) is forced to cut back. The Fed throws billions of dollars around and the public is disallowed from even knowing who received it after the fact.
All of this and more passes without comment in the media, perhaps because it is just the everyday business of government and no longer qualifies as news. Another reason might be that the "revolving door" is at work in the news media, too, with Karl Rove, Chris Matthews and other members of the regime "retiring" to the cable news networks.
I no longer think of government as a nightwatchman, or as some noble-minded, if imperfect, attempt at solving society's problems. Why delude myself? I just open my eyes and see what is there: Government is an agency of plunder. It is an institution by which some are enabled to live at the expense of others, meaning the former are masters and the latter are slaves. This -- not the civics class version -- is a historically accurate assessment. The state is a monster which can only be sustained by murder and robbery directed against innocent people. And its terrible ends have been perfectly consistent with its means.
If humanity is ever going to progress beyond the current barbarism, we are going to have to find another way. We must bring our means into line with the ends we want to achieve. We must forsake aggression, which means we must stop looking to the government to solve our problems. It just isn't working. It will never work the way people want it to, because it is based on the lie that means and ends can be separated. Robbery is "taxation." Counterfeiting is "monetary policy." Murder is "national defense." Change the label and you change the reality, right? Evil becomes good. Except it doesn't.
Why continue to do the same thing and expect a different result?
Dither, you write:
we are today seeing the consequences of government policy which encouraged debt, consumption and living beyond one's means.
But I don't see the government playing a primary role in the financial meltdown. It's complicated, and there are a variety of factors. One major one was the enormous amount of foreign capital coming into this country, driving down interest rates. Yes, the Fed helped keep interest rates down, too -- but it wasn't the only one. And of course the whole debt swap mechanism along with the Gaussian copula formula that provided the basis for the system -- that contributed, too. It's simple-minded to blame this on greedy bankers, and it's simple-minded to blame this on the Fed. I agree with Gerald that the best response available to us is to more tightly regulate the use of complex financial instruments. From a theoretical point of view, I'd prefer to see the financial markets broken down into lots of small players, so that we can't get the kind of concentration of financial power that led to this problem. In this sense, you and I share the view that power corrupts -- but I extend that notion to ALL repositories of power, not just government power.
What you forget is that the people who comprise the government must come out of the same pool of humanity as those who comprise the part of society which is to be governed.
But they are incentivized differently. The businessman is incentivized by profit; the government worker is incentivized by the desire to protect the public.
This brings me back to the book I mentioned earlier: Systems of Survival. I think it clearly shows the orthogonality of the two systems of morality, and shows how each one works beautifully inside its own sphere, but breaks down when it intersects with the other sphere.
It is stating the obvious to say that our government is thoroughly corrupt
We might disagree on the magnitude of the problem. But more important is the resolution of the problem. It appears that you have no solution other than, perhaps, a revolution. I would prefer to attempt to revise the system. I agree that there are some fundamental flaws in our government. And that suggests another topic for me to write up.
One thing just keeps leading into another, and another...
"But they are incentivized differently. The businessman is incentivized by profit; the government worker is incentivized by the desire to protect the public."
I think this is a major flaw in your thinking, Chris.
Firstly, yes, the businessman has to make a profit eventually or he will go out of business. This means he must find ways to improve his product and/or cut waste out of his operations, i.e. to improve efficiency.
The government worker has no incentive to cut waste out of his operations. On the contrary, he is incentivized to increase waste, hire more people and spend more than necessary, so as to justify his share of the (ever increasing) government budget. Since the money comes to him not by satisfying consumer demand, but out of compulsory taxation, he need not worry about the funds drying up.
Now, I want to home in on your assertion that government workers are incentivized to protect the public. What are the consequences of failure to protect the public? In a nutshell: The government will blame its failure on a lack of resources, then proceed to spend even more money, hire more people and add another layer of bureaucracy. It is almost impossible for government workers to get fired for incompetence.
See, for example: 9/11. The government's foreign policy made Americans the targets of terrorist attacks, from which the government failed to protect them.
Did the government suffer for this? If only! It created another federal bureaucracy, nationalized airline security (thus increasing the number of people on its payroll), increased military spending, pulled the country into two wars and countless entangling political alliances in various parts of the world, and spawned a massive "homeland security industrial complex," thereby providing another avenue for spending money and increasing its control over the people.
People, in government and business, are motivated by self interest. In the market, the pursuit of self interest is (in most cases) beneficial to society. In government, it is a disaster. That is how the incentives really work.
"It is stating the obvious to say that our government is thoroughly corrupt."
No, Dither. It is stating the obvious to say that *private enterprise is thoroughly corrupt*, and, at long last, the American people have come to realize this. The "Masters of the Universe," having led the rest of us off the cliff, will now learn how to live like ordinary Americans: without huge, undeserved bonuses, without (pity) a $35,000 office commode. What's the world coming to? It's senses, maybe.
Gerald,
It doesn't give you pause that your savior, the government, is even now robbing you for the benefit of the "Masters of the Universe"? Or that the "Masters of the Universe" have their man in the Obama regime, as they did in the Bush regime?
I guess there's nothing I can say to change your mind, if the reality unfolding right before your eyes doesn't cause you to question your assumptions.
Dither, you reject my claim that government workers are incentivized by a desire to protect the public, yet in your long analysis, at no point do you present any logical basis for your rejection. You present complaints about government behavior (complaints that have merit) but you don't ever address the motivation of the individual government worker.
Moreover, I think you are assigning to individuals what is really a sociological phenomenon. There are a great many phenomena that cannot be assigned to individuals; they spring from the combination of activities of many individuals. For example, does the janitor at Exxon make profit for the company? No, I don't think we can claim that he made $X of profit for the company. Nor can we make any such claim about any individual in any company. The cells in my kidney are not writing this email; Clarence the Farmer in Ohio in 1869 did not drive the passenger pigeon extinct.
So instead of concentrating on the individual government employee, I think you would do better to examine the system as a whole. I agree with the observation that government is obese; I agree that it surely needs some trimming. However, there is another consideration there -- one that will requite yet ANOTHER topic from me...
"It doesn't give you pause that your savior, the government, is even now robbing you for the benefit of the 'Masters of the Universe'"?
Of course it does, and I'm doing what I can to put a stop to it. Google "The Annual Bailout of 'Investors'", published in several places.
P.S.: The government isn't "my savior", and I'm lucky enough not to need one. It is, however, the savior for millions of Americans, and I'm only too glad to help make sure it's there for those who need it.
What if the government has made those people dependent in the first place?
Since the creation of the Federal Reserve system in 1913, the dollar has lost almost 95% of its value. Put another way, today's dollar is worth only 5 cents.
This was not an act of nature. It was the result of monetary inflation by the Fed. More dollars chasing the same quantity of goods causes prices to rise.
But prices do not rise all at once. As the new money filters its way through the economy, the prime beneficiaries will be the early spenders — i.e. the first people to receive and spend the money before prices react to the increased money supply. This means military contractors, investment bankers and others connected to the regime. By the time the money reaches you and I, prices have risen.
A devalued dollar benefits debtors, since the money repaid is actually worth less than what is owed. The biggest debtor in the world is the United States government. Printing money is easier than raising taxes or repudiating obligations. Inflation is thus "taxation by stealth," the most dishonest way of hiding the true cost of government from the people who must bear it.
So debtors become winners, and debt is encouraged. The flip side of this, is that savers become losers, and saving is discouraged. Obviously, people who do not save will not be able to cope with unexpected misfortunes such as the loss of a job or medical problems.
Furthermore, capital itself must come out of savings. Capital (i.e. goods like power tools and computers, which are used in the production of consumer goods) is what makes labor more productive, raises wages, and increases the abundance of goods, thus lowering prices. If the capital stock is depleted, the society becomes poorer because less is produced.
And what does all of this mean for people at the margins, such as seniors living on fixed incomes? Well, their money will buy less and less, and they are thus made poorer.
At this point, yes, they may need a handout from the government. They probably won't know why. They might blame the "greedy" private sector for raising prices. The government will play on this, and ride to the rescue.
Dither, there's a counterargument to your reasoning that I think is pretty devastating to it. Let's examine the scenario in which inflation is constant. In this scenario, lenders know perfectly well that they'll be repaid in lower-value dollars, so they simply raise interest rates to compensate. That compensates perfectly for inflation and the corrosive effects of inflation are much reduced.
At the opposite extreme would be a scenario in which all inflation takes place in one big jump. That's the scenario that would inflict lots of pain on lenders -- but the greatest damage would come from the anticipation of future jumps. It is that anticipation that dries up investment. Accordingly, if the government can keep inflation constant, or changing very slowly, then inflation becomes a much smaller problem.
Chris,
There's no need for either scenario. If the central bank is abolished, and money returned to the marketplace from which it originated, people will find and use the most suitable money as they did in the first place. This is what F.A. Hayek suggested.
In practice, "the most suitable money" has usually meant gold and silver. The physical properties of these metals that make them ideal moneys are well known — they can be melted and re-shaped into coins, and divided without losing their value (unlike diamonds), etc.
But the most important property of gold and silver, oft-ignored, is that they cannot be created by governments. Increasing the available supply of precious metals requires the very labor-and-capital-intensive process of mining. This means the supply is relatively stable compared with a fiat currency like the dollar.
If it ever became feasible to more cheaply and quickly extract gold and silver from the ground, and these metals became less useful as money, the market would switch to something else. In all likelihood, a free market in money today would give us different currencies from which to choose. Amazon.com or Wal-Mart might have their own currencies, for instance. The discipline of market competition works for improving money as for other goods.
It is a common fallacy that the money supply must increase as the economy grows. On the contrary, money is the one good of which an increase in supply confers no social benefit. As more goods are produced, prices will gradually fall, i.e. a smaller amount of money will buy more. Put another way, the value of the money-commodity will increase relative to other commodities.
There are two serious flaws with your reasoning here. The first is that the money supply is not defined solely by the currency supply. There are other forms of money that the government has no control over. Any time somebody lends money to somebody else, they are increasing the money supply.
Second, the use of precious metals as the controlling factor on the money supply would lead to deflation, because the value of the goods and services in this world is increasing much faster than the amount of gold and silver being dug out of the ground. If you're so dead set against inflation, why are you so indifferent to deflation?
"There are two serious flaws with your reasoning here. The first is that the money supply is not defined solely by the currency supply. There are other forms of money that the government has no control over. Any time somebody lends money to somebody else, they are increasing the money supply."
Let's break this down to the fundamentals. We'll assume gold is money. A bank is just a warehouse for the storage of gold. The depositor gets a receipt for his gold, which he can claim at any time. He pays a storage fee when he claims the gold, or at regular intervals.
Eventually, for convenience, these paper receipts (or claims on gold in the warehouse) are exchanged instead of the gold itself.
At some point, the banker realizes that the possibility of all depositors withdrawing their gold at once is slim to none. So he cheats. He writes out a receipt for some non-existent gold and uses it to buy his wife a fur coat.
This is the kind of increase in the money supply you are talking about, which happens when the "same" money is in two places at once: in the bank vaults, available to the depositor upon demand; and simultaneously being utilized by the banker in some way. This is technically fraud, or misrepresentation. However, the legal system long ago ruled in favor of the bankers, and began treating it as basically a business decision that might sometimes lead to bankruptcy.
**Before we proceed, an important distinction: The above is different from a scenario in which the gold is supplied to the banker for the purpose of investing it, in the hope of making a profit. In this case, the gold (if any is left) cannot be claimed "on demand," but only at the end of some pre-determined period. Hence, the money supply is not here increased because the money is only in one place at a time.**
Now, even if the legal system allows for the type of inflation described above, overall inflation in still kept in check. How? Let's say the Dither Bank begins issuing lots of fake receipts (receipts for non-existent gold). Eventually, these receipts wind up in other banks. Is the Crawford Bank going to settle for holding paper? No! The Crawford Bank wants to take possession of the actual gold, which it withdraws from the Dither Bank. At this point, the Dither Bank is on a shaky footing. If its customers find out, there could be a run on the bank, and it will go out of business. So it must cease inflating to restore its own financial stability.
The only way in which the banks can inflate without worry is if the whole banking system is made into a cartel, as it is under the Federal Reserve. The government-chartered central bank acts as the conductor, making sure all the banks inflate together and profit together. This eliminates the risk of one bank calling in the gold from another.
There is still the problem of citizens (if they are allowed) or foreign governments (if they are allowed) withdrawing their gold from the banks. This problem was ultimately solved by destroying the dollar's tie to gold (under FDR for citizens, and Nixon for governments). Now the dollar is just paper. And reserves in the vault are no longer a problem, since paper money can be printed at little cost. Hence, FDIC insurance.
So, in summary, inflation would be extremely limited in a fully privatized banking system, and could be further discouraged by the legal system treating it as fraud.
"Second, the use of precious metals as the controlling factor on the money supply would lead to deflation, because the value of the goods and services in this world is increasing much faster than the amount of gold and silver being dug out of the ground. If you're so dead set against inflation, why are you so indifferent to deflation?"
A number of reasons.
-This type of deflation is gradual and does not cause the types of economic gyrations associated with central bank credit expansion and contraction.
-It is helpful rather than harmful to the poor and those living on fixed incomes.
-It encourages saving, and capital accumulation, which ultimately benefits the whole society in the form of increased production of goods (during the 19th century, the U.S. saw sustained economic growth accompanied by deflation).
-And it happens independently of political considerations, and so is not subject to corruption; it cannot be used by the government to reward its buddies at the expense of everyone else.
Boy, your understanding of how banks work is very different from my own:
A bank is just a warehouse for the storage of gold. The depositor gets a receipt for his gold, which he can claim at any time. He pays a storage fee when he claims the gold, or at regular intervals.
My understanding is that a bank is a place that pools money from savers and loans it out to borrowers. So let's walk through the fundamentals using my model:
I deposit $1 with the bank. They loan my dollar to a developer building condos. The developer uses that dollar to pay a laborer to dig a trench. The laborer uses that same dollar to buy a loaf of bread from the grocer. The grocer uses that same dollar to pay the distributor who sold him the bread. The distributor uses it to pay the baker. The baker uses it to pay the miller, who uses it to pay the farmer, who uses it to pay the loan on his equipment, so the dollar ends up at the bank.
This one dollar has been used in ten separate transactions. It's still the same dollar. So, is it one dollar or is it ten? You can say that it *is* only one dollar, but you can't deny that it *acts like* ten dollars. So how much money has been sloshing around in this microcosm: one dollar or ten? In operational terms, the answer is: ten dollars. One dollar ended up being used as if it were ten dollars. There may have been only one dollar in the bank, but the GDP showed ten dollars of wealth. That's inflation -- and the government had nothing to do with it.
I see your point about gradual deflation being less destructive than dramatic changes in either direction. But this cuts both ways. Would you also say that gradual inflation is no more injurious than gradual deflation?
-It is helpful rather than harmful to the poor and those living on fixed incomes.
Inasmuch as the poor hold very little cash, I don't see how the rising value of cash would be of any benefit to the poor. And as to fixed incomes, I would argue that there aren't many people still living on fixed incomes -- most retirement programs have automatic COLA clauses, and many people have their own investment packages whose value rises with inflation.
-It encourages saving, and capital accumulation, which ultimately benefits the whole society in the form of increased production of goods
I agree, this is a point in favor of deflation.
-And it happens independently of political considerations, and so is not subject to corruption; it cannot be used by the government to reward its buddies at the expense of everyone else.
Hold on: how can inflation be used to favor one group over another? The only selective benefit of inflation is to debtors, not creditors. I'd imagine that there are more debtors than creditors (because of the high Gini Index), so that might be a useful vote-getting scheme. But it's not done "at the expense of everybody else" -- it's done "for the benefit of everybody else". I admit, it's still selective in its benefits, but it's not corruption as you suggest -- it's a different form of malfeasance.
"Boy, your understanding of how banks work is very different from my own:"
In the passage which you quoted, I was not describing the banking system as it exists today. Rather, I was trying to establish, in a generalized and theoretical way, the origins of banking and its development into today's system.
"This one dollar has been used in ten separate transactions. It's still the same dollar. So, is it one dollar or is it ten?"
Provided that the original dollar could not be withdrawn from the bank by you (the lender) before the loan was repaid by the borrower, then it is only one dollar.
This is absolutely not monetary inflation. An increase in GDP is not inflation. Inflation is an increase in the money supply. No new money was created in the transactions you described, nor would those transactions result in the negative effects that attend actual monetary inflation.
"Would you also say that gradual inflation is no more injurious than gradual deflation?"
No, for the other reasons I listed. But I should be clear to distinguish between monetary inflation and price inflation. There is likely to be gradual monetary inflation even under a gold standard, because new gold is being mined. But there is still price deflation, because the production of goods outpaces this slow increase in money supply.
"Hold on: how can inflation be used to favor one group over another? The only selective benefit of inflation is to debtors, not creditors."
I am referring to the use of inflation to finance government expenditures. The first people to receive the money are the beneficiaries, because they get to spend it before prices rise.
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