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Posts Tagged ‘Human Action’

The Cognitive Bias behind Anti–Price Gouging Laws

Posted by M. C. on March 15, 2022

To avoid the charge of status quo bias, they need to give a reason why $10 or anything close to it is preferable to the new market price. And just saying “Because that’s the way it used to be” is not a good reason.

We used to light our homes with kerosene lamps. That’s not a good reason to keep doing it when the world has changed.

https://mises.org/wire/cognitive-bias-behind-anti-price-gouging-laws

Patrick Carroll

People often believe that price gouging is so obviously immoral that making it illegal is the equivalent of criminalizing theft. In their minds, sellers who drastically hike their prices after a supply or demand shock are simply cruel capitalists taking advantage of poor consumers, who are practically forced to hand over their money.

The student of economics, of course, would sooner laud this practice than condemn it. After all, price changes are an important part of the market process because they help us economize scarce resources.

In theory, then, all that must be done is to explain this process to the public. A little bit of reasoning and a few graphs are all it should take to dispel this misguided objection to market prices. Yet somehow, it rarely seems to work. Economists have been trying for decades to break the irrational opposition to price gouging, but they have had little success. As it turns out, the art of shaping public opinion is somewhat different from the art of explaining economic phenomena.

Ludwig von Mises draws attention to this distinction in the final pages of Human Action. “The flowering of human society,” he writes, “depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.”

How, then, can public opinion be shaped? Perhaps the answer lies in psychology. After all, “irrational” is a psychological word, not an economic one. So maybe the key is not so much to explain economic principles, but to identify and debunk the various biases that give rise to the public’s antimarket beliefs.

Price gouging, I believe, provides an illustrative example of how this can be done.

Step 1: Identify a Potential Bias

See the rest here

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bionic mosquito: Aquinas and Human Action

Posted by M. C. on February 25, 2021

Free will is not a power preceding the intellect and will.  It is a capacity proceeding from intellect and will operating together or jointly.  Intellect and will each make their contribution, and from this comes free will.

Of course, free will proceeds from will.  Free will also proceeds from the intellect – the capacity to know the truth.  The will and the intellect must act together.  This isn’t a different truth for each of us.  It is the truth of our objective end as human beings.

http://bionicmosquito.blogspot.com/2021/02/aquinas-and-human-action.html

Aquinas on the Stages of Human Action, Fr. James Brent, O.P. (Part 1; Part 2)

Following are some notes from this two-part talk (all quoted items are paraphrases, hopefully reasonably accurate):

It is taken for granted that human agents have free will or free agency – we have the experience, day to day, of being confronted with options and being able to opt between such options.  This offers a truncated picture, a picture of lower appetites.

This is David Hume’s “reason,” when he wrote: “Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them.”  It is the reason of lower appetites – if one can even call it reason.

Human beings also have higher appetites, to perceive the order of reality: reason.  We have the ability to live according to the reality perceived by reason.  Life goes beyond fulfilling our lower appetites; it is about living in accord with the reality of reason – integrating our passions according to reason.  There is more to being human than merely fulfilling our lower appetites.

Why is this so?

Reality is a world of form and finality: entities – the things of nature – have substantial forms and final ends.  We do not live in a mechanistic universe.  All human action is for the sake of an end – a proximate end, but also an ultimate end.  The ultimate end is happiness. (Fr. Brent will define this later)

There is an objective end for human beings as human beings.  Proper reason aims toward this objective end.  Without an objective end, or purpose…well, this is the world we certainly occupy today, where every behavior – including murder – is justifiable and justified.

No, reason, in any human sense, is not merely a slave to the passions.

Humans, unlike other animals, act based on intellect and will.  To varying degrees, other animals lack these same abilities.  Intellect is the capacity to know the truth, including the truth about the good – and there is a true, objective answer to this question of what is good – what brings us happiness.  We are able to know the truth about the good; Augustine calls this “wisdom.”

It is interesting: those who do not hold that there is objective value and objective truth at the same time have difficulty stating what is good.  The best they can do is to say avoid evil – with evil usually defined as “don’t be Hitler.”  By that standard, we are all pretty much saints.

Free will is not a power preceding the intellect and will.  It is a capacity proceeding from intellect and will operating together or jointly.  Intellect and will each make their contribution, and from this comes free will.

Of course, free will proceeds from will.  Free will also proceeds from the intellect – the capacity to know the truth.  The will and the intellect must act together.  This isn’t a different truth for each of us.  It is the truth of our objective end as human beings.

The will cannot not will happiness.  Every human being desires to be happy; this is not a matter of free choice.  By nature, we want to be happy – the ultimate end, beatitudo.  We might err in what constitutes happiness, but this is an error of the intellect. 

It is everyone’s answer to the question: what do you want, what do you want in life, what do you want for your children?  I want to be happy; I want my children to be happy.  But not everyone holds the proper definition of happiness – this is due to an error of the intellect.  And it is on this point that Thomas will say (I believe I have this right) that we have free will toward our proper ends – because free will proceeds from knowing the truth.

Our free choices regard means; the end – happiness, beatitudo – is not subject to this same free choice.

A wide variety of means are available to us when pursuing any given end – even the ultimate end.  In the means, we have free choice.  In the ends – we have the objective reality that we are human, made with a purpose, or telos.

Yes, it is an ethical story – according to Thomas, we are embedded in an ethical story.  The question of “why be moral?” makes no sense to Thomas.

It doesn’t make sense because we are created with an objective end.  To act toward that end is moral; to act contrary to it is immoral.  So…why be moral?  What else can we be?  Ask a lion why he acts as a lion; ask a rock why it acts as a rock.  It isn’t a moral issue; each acts according to its nature – just as humans do when acting with a proper intellect – the knowledge of the truth.

Fr. Brent then goes on to give some detail of twelve “steps” of the human act:  the first four steps regard identifying ends; the next four regard identifying the means – and it is only in the means where free judgement (in the Thomistic understanding) is available to us. 

This is why those who dismiss the notion of objective ends are able to say, without concern: “the ends justify the means.”  It is also true for those who hold to objective truth – the ends do justify the means.  But in both cases, the ends also define the means that are acceptable – and this is where an important difference lies. 

If the ends are not based on objective truth, then nothing binds the means.  If the ends are bound by objective truth, while superficially one might describe the situation as being bound in our means, in actuality we act in free will.  The ultimate end can only be achieved by good means.

The final four steps regard execution; the end and means have been identified, it is left to execute and to judge the success or failure.

Conclusion

How do you prove that leading the just life (proper ends) is better than leading the unjust life?  He says, long story – just go read Plato’s Republic!

Plato would write of two camps: “the friends of the forms” and “the earth-bound giants.” 

The friends of the forms believe in form and finality, the earth-bound giants believe everything is composed merely of matter and things come about by chance – and they have a certain ethic that goes with it. 

It seems Plato would not be surprised that this discussion is continuing 2400 years after he lived:

Between these two camps there is perpetual and undying warfare.

Posted by bionic mosquito

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America’s Riots Are Just the Latest Version of Marxist “Syndicalism” | Mises Wire

Posted by M. C. on August 29, 2020

At the root of the chaos and upheaval on our streets is an attempt at disrupting society and taking more control of it by Marxists, socialists, and “anarchists.”

The fundamental error that syndicalism makes is to think that entrepreneurs and capitalists are “irresponsible autocrats” free to pursue their personal agenda. The reality is that business leaders must follow the interests of consumers in order to further their self-interest in making profits. They have to find correct prices, production levels, and correct means of production. These things are determined by entrepreneurs with various types of feedback from the marketplace.

The riots, looting, and violence against people and their property is mostly motivated to achieve Marxist ideals via syndicalist activity (i.e., violence).

https://mises.org/wire/americas-riots-are-just-latest-version-marxist-syndicalism?utm_source=Mises+Institute+Subscriptions&utm_campaign=bdc838c443-EMAIL_CAMPAIGN_2020_08_28_02_44&utm_medium=email&utm_term=0_8b52b2e1c0-bdc838c443-228343965

The year 2020 is one of the most disrupted times in at least the last half century, maybe longer. Global protests and riots, the covid-19 virus, lockdowns, and police killings of unarmed citizens. Add to that widespread rioting, looting, arson, homelessness, and destruction of property, including the tearing down of statues. This chaos in the streets is being facilitated by mayors, governors, and police chiefs who are unwilling to enforce the law.

The great Ludwig von Mises included a discussion of “syndicalism” in chapter 33 of his Human Action: A Treatise on Economics. Most people have never heard or read of this concept, but it is highly relevant to the situation we find ourselves in today. Mises’s analysis is even more important for understanding and fixing some of the most important problems we face today. In general, I define syndicalism as being able to do whatever you want at the expense of others.

In part, it represents the ideas of French philosopher, Georges Sorel, who thought relentless violence should be used against the institutions of capitalism. This would include the “general strike” so familiar in Europe to this day. This is in direct contrast to mutually beneficial exchange and the social cooperation of the division of labor. His ideas were influential with Marxists, fascists, Nazis, and advocates of unionism.

A Key Chapter in Mises’s Human Action

When I first tried to read Human Action, I found it extremely difficult. I ended up skipping entire chapters and reading through others without understanding the material. Chapter 33 is a good example of that. Today, reading the book is much easier, because we now have things like Jeff Deist’s Human Action Podcast, which now contains a series of interviews on the book, and Robert Murphy’s Study Guide to Human Action: A Treatise on Economics.

In the 1990s I taught a course in Austrian economics at Auburn University, an advanced undergraduate course. It was listed in the catalog next to the econometric and mathematical economics classes. I spent classes reviewing chapters, but the most difficult aspect was trying to relate Mises’s words and concepts to current events. Due to time constraints, I never covered chapter 33.

Fast-forward to more recent times. The Rothbard Graduate Seminar reviews Human Action every few years along with Rothbard’s Man, Economy, and State and other selections during other years. I have always been assigned to teach a section of chapters at the end of the book which includes chapter 33. Once again, due to time constraints and my perceived view of its relevancy, I have decided to skip the chapter. That is, until this year.

What Is Syndicalism?

So, what is syndicalism? Political syndicalism is direct violent revolutionary action against the institutions of capitalism, such as security forces, property, particularly business property, and the rule of law. This approach is often adopted by Marxists, socialists, and fascists as a means of gaining power. At the root of the chaos and upheaval on our streets is an attempt at disrupting society and taking more control of it by Marxists, socialists, and “anarchists.”

The fundamental error that syndicalism makes is to think that entrepreneurs and capitalists are “irresponsible autocrats” free to pursue their personal agenda. The reality is that business leaders must follow the interests of consumers in order to further their self-interest in making profits. They have to find correct prices, production levels, and correct means of production. These things are determined by entrepreneurs with various types of feedback from the marketplace.

The riots, looting, and violence against people and their property is mostly motivated to achieve Marxist ideals via syndicalist activity (i.e., violence). Those employing these means include Antifa, Black Lives Matter, and especially the “anarchist provocateurs” who adeptly turn peaceful protests into violent riots. Of course, there is also some violence on the right, some of which I witness on the campus of Auburn University. But in either case, with mayors, governors, and police chiefs restraining and even defunding the police, the violence often goes unchecked.

The Other Type of Syndicalism

This use of the word “syndicalism” should not be confused with the better-known syndicalism as a social system, which is an alternative to socialist central planning. This system in theory would give workers control over the industries in which they work. They would make the decisions on things entrepreneurs decide in the market, such as wage rates, benefits, hours, production, etc. The workers can do anything they want at the expense of others. But if everyone is raising their prices and reducing output, how can anyone gain from the arrangement? Both forms of syndicalism ultimately rest on the Marxist notions that entrepreneurs and capitalists exploit labor and have no real purpose worth rewarding. Obviously, each industry would want higher wages, higher prices, shorter working hours, and this would result in lower output. Raw material prices increase and get passed on to consumer goods industries, which must pass those increases on to the consumer along with their own increases. This happens across the entire economy. As a result, production plummets and prices become unhinged from market prices. The “economy” would collapse if syndicalism were attempted on an economywide basis.

Democracy Fails to Provide a Solution

With democracy and voting and the military not likely or viable options, an individualist option must be developed to solve the problem. People are arming themselves in various ways. They are using various security devices like cameras and stronger locks. Businesses are hiring security firms and protecting storefront windows. Others are simply moving from cities to the suburbs and beyond. Don’t expect government to solve the problem, although more secessionism and decentralization would surely help.

Author:

Contact Mark Thornton

Mark Thornton is a Senior Fellow at the Mises Institute and the book review editor of the Quarterly Journal of Austrian Economics. He has authored seven books and is a frequent guest on national radio shows.

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TGIF: Mises, Ryle, and Me | The Libertarian Institute

Posted by M. C. on July 11, 2020

In other words, Ryle set out to solve the old mind-body problem that had plagued philosophy at least since Descartes, and he did it without dismissing purpose, which we all understand in our everyday lives, or objective reality.

https://libertarianinstitute.org/articles/sheldon/tgif-mises-ryle-and-me/

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In 1949, the first year of Harry S. Truman’s only elective presidential term, three things happened that were of huge importance … at least to me. Ludwig von Mises (1881-1973) published Human Action. Gilbert Ryle (1900-1976) published The Concept of Mind. And, oh yeah, I was born. The connection here is that Mises’s and Ryle’s books are two of the most influential things I have ever read.

What’s also interesting is what else the books have in common. Human Action sets out the logical structure of all purposeful action as well as its socioeconomic implications. Mises called the study of human action praxeology. Thus while Human Action is one of the most important books on economics ever written, it is so much more.

Ryle’s book is also about human action, but his philosophical accomplishment was to show that our purposeful pursuits require no “ghost in the machine” — no soul, spirit, or mind conceived as a nonmaterial organ — to explain them. (The ghost explanation in fact creates philosophical problems rather than solves them.) Ryle went a step further and showed that, contrary to determinists, neuroscientists, and the like, human action also would require no exemption from the laws of physics to exist. In other words, Ryle set out to solve the old mind-body problem that had plagued philosophy at least since Descartes, and he did it without dismissing purpose, which we all understand in our everyday lives, or objective reality. I’m not aware that the two men ever encountered each other or commented on each other’s work.

Here’s a morsel of Mises:

Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.

 

Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body’s cells and nerves to stimuli. People are sometimes prepared to believe that the boundaries between conscious behavior and the involuntary reaction of the forces operating within man’s body are more or less indefinite. This is correct only as far as it is sometimes not easy to establish whether concrete behavior is to be considered voluntary or involuntary. But the distinction between consciousness and unconsciousness is nonetheless sharp and can be clearly determined….

 

The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology. The theme of psychology is the internal events that result or can result in a definite action. The theme of praxeology is action as such….

 

Action is not simply giving preference. Man also shows preference in situations in which things and events are unavoidable or are believed to be so. Thus a man may prefer sunshine to rain and may wish that the sun would dispel the clouds. He who only wishes and hopes does not interfere actively with the course of events and with the shaping of his own destiny. But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation.

 

…Wherever the conditions for human interference are present, man acts no matter whether he interferes or refrains from interfering. He who endures what he could change acts no less than he who interferes in order to attain another result. A man who abstains from influencing the operation of physiological and instinctive factors which he could influence also acts. Action is not only doing but no less omitting to do what possibly could be done.

 

We may say that action is the manifestation of a man’s will. But this would not add anything to our knowledge. For the term will means nothing else than man’s faculty to choose between different states of affairs, to prefer one, to set aside the other, and to behave according to the decision made in aiming at the chosen state and forsaking the other….

 

It is true that the changes brought about by human action are but trifling when compared with the effects of the operation of the great cosmic forces. From the point of view of eternity and the infinite universe man is an infinitesimal speck. But for man human action and its vicissitudes are the real thing. Action is the essence of his nature and existence, his means of preserving his life and raising himself above the level of animals and plants. However perishable and evanescent all human efforts may be, for man and for human science they are of primary importance.

We need not ask if human action exists. As human beings, we know it does “from the inside.” Mises called this knowledge a priori because we don’t first discover human action “out there.” In fact, one obviously would demonstrate the existence of human action just by attempting to prove or disprove its existence. To ask if human beings act is in itself to act.

And now Ryle:

The fears expressed by some moral philosophers that the advance of the natural sciences diminishes the field within which the moral virtues can be exercised rests on the assumption that there is some contradiction in saying that one and the same occurrence is governed by both mechanical laws and moral principles, an assumption as baseless as the assumption that a golfer cannot at once conform to the laws of ballistics and obey the rules of golf and play with elegance and skill. Not only is there plenty of room for purpose where everything is governed by mechanical laws, but there would be no place for purpose if things were not so governed. Predictability is a necessary condition of planning…. [Thus] there is no need for the desperate salvage-operation of withdrawing the applications of [biology, anthropology, sociology, ethics, logic, aesthetics, politics, economics, historiography, etc.] out of the ordinary world to some postulated other word, or of setting up a partition between things that exist in Nature and things that exist in non-Nature. No occult precursors of overt acts [e.g., volitions] are required to preserve for the agent his title to plaudits or strictures for performing them, not would they be effective preservatives if they did exist.

 

Men are not machines, not even ghost-ridden machines. They are men — a tautology which is sometimes worth remembering….

 

Questions of … patterns are properly asked of certain chain-processes. The question ‘What makes the bullet fly out of the barrel?’ is properly answered by ‘The expansion of gases in the cartridge’; the question ‘What makes the cartridge explode?’ is answered by reference to the percussion of the detonator; and the question ‘How does my squeezing the trigger make the pin strike the detonator?’ is answered by describing the mechanism of springs, levers and catches between the trigger and the pin. So when it is asked ‘How does my mind get my finger to squeeze the trigger?’ the form of the question presupposes that a further chain-process is involved embodying still earlier tensions, releases and discharges, though this time ‘mental’ ones. But whatever is the act or operation adduced as the first step of this postulated chain-process, the performance of it has to be described in just the same way as in ordinary life we describe the squeezing of the trigger by the marksman. Namely we say simply ‘He did it’ and not “He did or underwent something else which caused it’.

TGIF — The Goal Is Freedom — appears on occasional Fridays.

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Why Mises Opposed a Global Government for Managing Trade | Mises Wire

Posted by M. C. on August 13, 2019

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

https://mises.org/wire/why-mises-opposed-global-government-managing-trade

A recent episode of the Human Action Podcast dealt with Mises’ Omnipotent Government, written between 1939 and 1943 and first published in 1944.

Besides its treatment of German national socialism, Mises’ Omnipotent Government also contains an analysis of the various suggestions for “world government” toward the end of the second World War. This article is a short commentary on Mises’ analysis of proposed international economic frameworks, their shortcomings and their subsequent outcomes.1

A Type of World Government

After maintaining the distinction that he makes earlier in Omnipotent Government between the terms “socialism” and “interventionism,” Mises correctly foresees what later became the most important post-war technique of international economic planning. Namely, international agreements between sovereign states:

The more realistic suggestions for world planning do not imply the establishment of a world state with a world parliament. They propose international agreements and regulations concerning production, foreign trade, currency and credit, and finally foreign loans and investments.

After the second World War, these international agreements took the form of “three pillars”:

  • the Final Act of the Bretton Woods Conference, entering into force in 1945, which gave birth to the World Bank and the International Monetary Fund;
  • the General Agreement on Tariffs and Trade (later becoming the WTO Agreements) of 1947;
  • the Havana Charter for the International Trade Organization of 1948, which failed to enter into force after the United States refused to ratify it.

After the failure of the Havana Charter, the issue of international investment protection was the subject of several thousands of state-to-state bilateral and multilateral investment treaties (BITs and MITs), which specify the substantive rights of foreign investors and applicable dispute resolution mechanisms. A good example of such a treaty is Chapter 11, titled ‘Investment’ of NAFTA, which may be soon replaced by Chapter 14 of the USMCA.

Other important international agreements include the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations and other, “soft,” law such as the World Bank’s Guidelines on the Treatment of Foreign Direct Investment and the FATF Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation.

International Government Planning is Government Planning all the Same

Regardless of its form, Mises points out that the concept of planning, whether national or international, remains antithetical to the concept of free enterprise. This is well understood by our readers. Moreover, while planning cannot decrease the price of one good without increasing the prices of others, it can be used to increase prices by creating monopolies:

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

This is a foreseeable scenario in the context of international agreements dealing with environmental issues. An example of what lies in store can be found in what has been called the “Renewable Energy Explosion” in Spain. After expanding subsidies for the production of renewable energy from 2004 to 2007, Spain was forced to eliminate these incentives in the wake of the financial crisis, leading to a substantial increase in energy costs and severe losses to previously subsidized enterprises.

Mises also identifies the no true Scotsman fallacy, which is invariably used to justify further planning after the initial plan fails:

[…] some of these schemes worked only for a short time and then collapsed, while many did not work at all. But this, according to the planners, was due to faults in technical execution. It is the essence of all their projects for postwar economic planning that they will so improve the methods applied as to make them succeed in the future.

Do Free Trade Agreements Promote Free Trade?

Mises was very skeptical of the outcomes of post-war foreign trade agreements, arguing that ‘the ultimate goal of every nation’s foreign-trade policy today is to prevent all imports’, and that “an international body for foreign-trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism.”

It might be safe to say that Mises was too pessimistic on this subject. Arrangements between developed and developing nations after the second World War have substantially increased cross-border trade and and reduced protectionism. The trend was further strengthened in the 1990s after the collapse of the Soviet Union and the adoption by erstwhile Soviet Republics of more liberal approaches to foreign trade.

It is not clear, however, that this expansion can be attributed to the conclusion of international trade and investment agreements, and the question remains the subject of much debate.2 In any case, Mises correctly identifies the state’s ability to circumvent restrictions on protectionist policies by taking recourse to other forms of interventionism:

If pressure or violence is applied in order to force Atlantis to change its import regulations so that greater quantities of cloth can be imported, it will take recourse to other methods of interventionism. Under a regime of government interference with business a government has innumerable means at hand to penalize imports. They may be less easy to handle but they can be made no less efficacious than tariffs, quotas, or the total prohibition of imports.

International investor-state tribunals, constituted on the basis of international investment agreements, have successfully dealt with these forms of intervention since the 1990s, particularly by applying international law concepts of indirect expropriation and fair and equitable treatment.

These decisions, may, however, be regarded as unexpected developments, and have caused a significant backlash by states against the very concept of investor-state dispute settlement. For instance, in January 2019, 22 member states of the European Union undertook to terminate all intra-EU bilateral agreements providing for investor-state arbitration.

These decisions have also lead to the adoption by states of new treaties containing wider exceptions for economic regulation. India, for instance, announced in 2016 that it was terminating 58 of its 83 bilateral investment treaties, after publishing a new, more stringent draft treaty for future negotiations. In a striking illustration of the “planning mentality,” the draft treaty provides, inter alia, that:

Investors and their Investments shall strive, through their management policies and practices, to contribute to the development objectives of the Host State.

The Gold Standard, the Cantillon Effect, and “World Money”

It is interesting to note that just a few decades after the end of the belle époque, the “undesirability” of stable foreign exchange rates seems to have evolved into gospel truth for the governments of the 1940s. After observing that ‘the Keynesian school passionately advocates instability of foreign exchange rates’, Mises finds that “stability of foreign exchange rates was in [governments’] eyes a mischief, not a blessing.”

While the various excuses that lead to the abandonment of the gold standard are familiar to our readers, it may be noted that in the international context, protectionism provides another excuse for states:

The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports.

Mises notes that any return to the gold standard would not require elaborate international agreements or international planning. All that would be required is “the abandonment of an easy money policy and of the endeavors to combat imports by devaluation.” Evidently, it is not necessary that the state re-establish the gold parity that previously existed:3

[…] every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.

Finally, Mises dismisses the idea of an international fiat currency, issued by an international monetary authority acting as the lender of last resort. After dealing with what is commonly known today as the “Cantillon effect,” Mises explains that nations could never agree upon the basis of distribution of this new form of central bank money:

The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent […]

Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution.

Could these observations give us some clues regarding the future prospects of the IMF’s SDR scheme?

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