Wednesday, October 10, 2012

The Wisdom of Étienne Bonnot, Abbé de Condillac - Part II

I finished reading Condillac's Commerce and Government last night, and what a brilliant book it is. In the second part of his book Condillac discusses the evil effects of many different kinds of government restrictions on the free trade. He brilliantly uses the economic principles developed in the first part to prove his points. His arguments are so lucid and to the point that the whole book can produce hundreds of super brainy quotes. I am reproducing some of his arguments below.

In chapter 4 of part II, Condillac discusses the harmful effects of 'war' on commerce. The Nobel prize winning economist [sic] Paul Krugman and his other Keynesian sidekicks are in love with war. He on camera has said that to bring the US economy out of recession, government can assume that some aliens are about to attack the planet, and to stave off this attack they start building a war economy via inflationary policies of money printing and spending. According to him, this big dose of monetary stimulus [sic] will increase the "aggregate demand" in the economy, which will bring the US economy out of recession! Here is Condillac exposing such silly and dangerous gibberish in 1776:

Each time they take up arms, they destroy a stock of wealth which they could have put into circulation, and which cannot be there any more. There will be fields which warfare will not allow to be sown: there will be others, where it will not allow any harvesting. Consequently, products will diminish, and the population with them.

I want some of these nations to cover themselves with glory, with that glory which the peoples, in their stupidity, attach to conquest, and which historians, stupider still, love to celebrate to the point of boring the reader: what will be their advantage? They will rule far away in countries once populous and fertile, and now in part deserted and uncultivated...

...Now, in this disorder, will the lands be as rich in products as when they were divided between a host of peaceful cities? They will be all the less so, as, with war taking away all freedom to trade, the surplus will cease to pass reciprocally from one nation to another. So it will not be consumed any more: now once it ceases to be consumed it ceases to reproduce itself.

While agriculture is damaged, many manufactures will collapse; and those which still exist will not have the same market any more. Normally they will only be able to sell to the nation in which they are established; and they will sell less to it, because that nation will itself be less rich.

Paul Krugman is not seeing the unseen effects of war destruction. He is not even seeing the seen effects of war destruction in the form of lost lives and destroyed capital base of the economies. Harboring even a thought that wars and war spending can be good for the economies is a sign of a pathological lunatic mind.

The major problem plaguing the governments around the world, especially the western world governments, today is the so-called 'sovereign debt crisis'. These governments have piled up mountains of debt, which is now threatening their economies. The illusion of prosperity - which was built around borrowed money - is now crumbling in front of their eyes. Condillac was warning against such profligate government borrowing and spending policies during his time also. In his chapter on Every Type of Government Borrowing, he said,

These loans were an endless expense for the state; an expense that was all the greater, as a part of the interest each year went abroad to foreigners who had also lent. The government did not abandon this income but it created another in the borrowings on life annuities; and to tempt greed it thought up tontines. It congratulated itself on contracting debts that snuffed themselves out, and on having found the secret of taking money from the citizens without doing violence to anyone...

...However, the state’s debts were growing, and the companies, which the government repaid poorly, could no longer keep their undertakings. Then the government put itself in their place and declared that it would pay for them, that is to say, it reduced the rate of interest on public paper from 5 to 4 per cent, to 3, to 2, finally to nothing. Then the ruin of a great many individuals, who had previously been rich, brought down with it a crowd of traders. One saw no more than bankruptcy on bankruptcy; and people learnt that it is not the same with papers, which only have a pretended value, as it is with gold and silver, which have a real value...

It was only left now for the government to bank on its own account, and it did so. When it had borrrowed from the bank to the point where it could no longer pay, it took the place of the bankers. Then it created more shares, and it did so all the more, as it believed that in future the paper would serve it in place of silver.

These shares, multiplied to excess, fell in price from one day to the next. Soon no one bought any more, and the shareholders demanded their capital. Much skill was now required. A great display of gold and silver was made. However, payment was made slowly, with the excuse that everyone could not be paid at once; and trusted persons came to receive huge sums in public which they secretly took back to the bank. But though such deceits could be repeated, they could not always succeed. The collapse of the bank in the end produced a general upheaval. (bold mine)

Not only Condillac warned against reckless government borrowing, but he also discussed the end result of such profligacy: bankruptcies after bankruptcies and final collapse of the banks producing a general upheaval. I wish people just look into the history and read the ideas of people like Condillac, but alas, I know, that is not going to happen because, as I will show below, governments will keep on repeating their silly and dangerous mistakes. The way governments are borrowing trillions of dollars today via central bank's money printing process, we are very likely to see a final collapse of the international monetary system.

Many people today, especially professional economists and other such second hand court intellectuals are clamoring for more regulations of various sectors of the economy. They are telling us, that our economies are in mess because of lack of regulations in the past; banks are in trouble because of lack of regulatory oversight in the past etc. etc. The truth which these people are hiding from all of us is, that our economies are in mess not because of lack of regulations, but because of these myriad of regulations! As Mises's analysis of interventionism informs us, that one intervention of the government in the market economy will result into myriad of problems, and to allegedly solve those problems government will intervene more and so on and so forth intervention after intervention will ultimately result in to a full fledged socialist economy. Condillac's ideas on this issue are in close proximity to Misesian analysis. Here is Condillac:

If governments had seen that these regulations were the prime cause of these disturbances they would have spared themselves a lot of trouble: they did not see it. So, to cure the ills they had produced, they placed themselves in need to make fresh ones, by making regulations on the internal circulation of grain...

So it made nothing but mistakes. It had been wrong to place itself in the position of itself having to provide for the people’s subsistence; and it made a second, even greater mistake, a consequence of the first, that of forcing open the granaries and claiming to fix the price of grain.

It was making useless attempts to settle the disorders. Its first regulations had produced them: its last regulations were bound to perpetuate them, or even to make them grow more. (bold mine)

As Condillac discussed, first governments around the world intervened in the markets via their central banks, and when that screwed up the whole system, they are again intervening to fix the problems which their first interventions itself produced! Anyone who understands the market process and government interventions' effect on this process will quickly realize that all these interventionist policies of governments around the world in the form of QE1, 2, 3, ZIRP, Operation Twist etc., are only going to result in more disasters in future.

Is there any respite from these government follies in our world? Can we expect governments to voluntarily stop their destructive policies? Can we reform our governments? Condillac provided the answer in his final chapter. He said,

Nations are like children. In general they only do what they see to do; and what they have done, they go on doing for a long time, sometimes for ever.

It is not reason that makes them change, it is whim or authority.

Whim corrects nothing: it substitutes abuse for abuse, and disorders come always in increasing number.

Authority could correct: but usually it alleviates rather than corrects. It is still remarkable for it to alleviate. It has its passions, its prejudices, its routine, and it seems that experience teaches it nothing. How many mistakes have been made! How many times have they been repeated! And they are still repeated!

However, Europe is becoming more enlightened. There is a government which sees abuses, which thinks of ways to correct them; and it would please the monarch to demonstrate the truth. So there you have the moment when every good citizen must seek out the truth. It would be enough to find it. We are no longer in a time when courage was needed to speak the truth, and we live in a reign where its discovery would not be lost.

You see. Nation states around the world are still repeating the same mistakes again and again against which Condillac and endless other such scholars warned. As he said, experience teaches them nothing, and so we must prepare ourselves for the dire eventualities of nation state's mistakes. But, as Condillas said, we should also not feel afraid of speaking the truth even if nation states today are more abusive. Only the bitter economic truth will help us all in rebuilding our societies after the coming collapse. 

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