Nice article in Investor’s Business Daily on Mises, which quotes extensively from TLS blogger Jeff Tucker and Austrians Bettina Bien Greaves and Mark Thornton:

Let Free Markets Work, Said Ludwig Von Mises

By PETER BENESH, FOR INVESTOR’S BUSINESS DAILY Posted 12/13/2011 01:47 PM ET

Ludwig von Mises was born in Ukraine, studied in Vienna, fought in World War I, and in 1940 landed in America, where he lectured and wrote books. View Enlarged Image

If he were around today to see the economic mess in the U.S. and Europe, Ludwig von Mises would be entitled to a big, fat “I told you so.”

Mises held that whenever government tinkers with the economy, especially the money supply, it screws things up.

Natural market forces do a better job of ironing out inflation, ending a recession and boosting employment, he said and wrote.

Though he lived to age 92, from his birth in 1881 in what is now Ukraine to his death in 1973 in New York City, Mises never drew the plaudits he deserved, says Jeffrey Tucker, executive editor of Laissez Faire Books, a libertarian publisher and bookseller owned by financial forecasting firm Agora Financial.

“Mises deserves every bit as much recognition as his contemporary, Albert Einstein,” Tucker told IBD.

Read more>>

The problem FDR faced in 1938 was not all that different from that faced by President Obama and the Congress today. The bad economic times stretch on and on, and there is open talk of high unemployment as far as the eye can see. After years of claiming to see “green shoots,” officials are downplaying the chance of substantial economic recovery.

And it’s not just in the U.S.; the problem exist in Europe too, where there is a widespread belief that the European Union, as symbolized by Euro, cannot last. The OECD just predicted a double dip recession pending in the UK.

At the midpoint of Roosevelt’s second term in office, a profound fear gripped the White House that there was no real answer to the depression that seemed to continue on and on. Every respite was followed by yet another plunge in productivity, and clearly unemployment would not improve. Unemployment was 18%, which was higher than two years earlier. (Note that the broadest measure of U.S. employment today is 17+%.)

It is a documented fact that his advisers were the first to draw his attention to the possibility of stoking international problems involving the far East. Japan was the target and a series of embargoes, demands, sanctions, and diplomatic moves reinforced that the point of inspiring a massive movement in the U.S. to push for peace.

Responsible writers at the time drew attention to the plot and speculated about what was really going on. The history of the journalism of this entire period came to be buried in the ash heap of history following the Second World War. But it remains a fact that historians cannot and do not deny: FDR saw advantages in war and dearly wanted the U.S. involved – and that is true regardless of whether you believe that Pearl Harbor constituted his “back door to the war.”

It was hardly the first or last time that the U.S. government pursued war as the ultimate stimulus package. Of course, as Robert Higgs has demonstrated, the war didn’t stimulate anything. It sent the unemployed off to foreign lands to kill and be killed. It gave a pretext to demand massive material sacrifices on the home front. It distracted the public from the obvious failures of the New Deal. The recovery didn’t begin until government spending and regulation were slashed following the war.

Wars have long worked as a salve for serious political problems. Clinton used war in Bosnia, Somalia, and Yugoslavia to bolster a faltering presidency, and Bush followed suit with massive wars on Afghanistan and Iraq that provided a temporary boost. Obama inherited these ongoing conflicts and even increased U.S. involved but both are out of the news and provide no real opportunities for executive heroics.

And so one worries. The U.S. is setting up de facto military bases in Australia while offering a variety of diplomatic warnings against China’s policies with its neighbors. This prompted the head of People’s Liberation Army, Major General Luo Yuan, to proclaim that the U.S. is trying to “encircle” China. He said that “the intent is very clear — this is aimed at China, to contain China.”

This move was followed within days by a ghastly and presumably errant attack on Pakistan that killed 24 Pakistani soldiers. The U.S. apologized and swore it would investigate fully, but everyone knows what that means: what’s past is past. What’s more, this attack occurred only hours after a meeting between Pakistan’s army chief and the head of U.S. operations in Afghanistan at which both sides agreed to more cooperation.

China reacted extremely strongly to this news from Pakistan, with sharp rhetoric and unleashed moral condemnation. “The soil nurturing terrorism will become even more fertile,” said the China state newspaper, and reasonably so, “and the space for terrorism to spread even broader.”

It is a striking observations that most Americans are not willing to contemplate. How do you fight terror when you are daily engaged in bloody activities that can only inspire the creation of more terrorism? Another fundamental question is why this sudden belligerence against China at a time when the U.S. foreign policy priorities are presumed to be focused on the dangers of violent Islamic extremism?

These events together constitute, in the old phrase, “a cloud no bigger than a man’s hand.” Following the end of the Cold War, many Washington warmongers began the search for a new enemy to sustain the imperial overreach of the U.S. government. China was first on the list, but robust trading relationships and amazing growth rates made a military strategy unviable. The U.S. eventually found its enemy and tensions with China abated.

But that was ten years ago, and the terrorist excuse for continuing the American empire indefinitely is wearing thin. The tables have turned to the point that the American people are more scared of TSA agents and custom officials than Islamic radicals. How long will people put up with giving up their rights and liberties under the anti-terrorism pretext?

Most profoundly, how much longer will people stand by and watch the systematic strangling of the American dream – their children unable to find jobs, the college degree ever more expensive and worthless, the political and central banking classes looting private wealth to prop up failed enterprises – all in the name of a “stimulus” that has not and cannot work?

If you were a member of the power elite – hated, protested, and questioned at every turn – war might look increasingly attractive.

There is a gross tragedy with all these events. We could have had peace. We could have had prosperity. It was all within our reach at the end of the Cold War. Instead, our leaders chose intervention and empire building. Chalmers Johnson is right: if there is hope for America, it is with dismantling the empire, not building it, much less trying to provoke another friendly nation into a bloody conflict.

I am pretty sure that, had I taken economics in school, I would never have developed an interest in it.

One of my hobbies is collecting economics textbooks. They are not uniformly bad — I have gained insights from those by Alchian and Allen, David D. Friedman, Gwartney and Stroup, and a few others — but they are not as good as the old “Principles”-style texts from days of yore. You know, general theory books covering a lot of ground for a wide audience including amateurs, written (in the best cases) in readable English (or other common tongue) and not littered with Q&As and “work problems” and “call-out” boxes of biographies of Adam Smith, David Ricardo, Karl Marx, and the ever-present Keynes. The best of the old-fashioned treatises, such as by F.W. Taussig, and especially the “anachronistic” efforts by Ludwig von Mises (Human Action) and Murray Rothbard (Man, Economy and State), outshine all econ texts used in colleges today.

Part of the problem is that the textbook industry is a mostly corrupt adjunct to the university system, the main idea being to milk as much money as possible from students. The often-annual revisions in textbooks are usually trivial . . . but quite necessary for the planned obsolescence of the media, allowing universities to renege on buy-backs, thus keeping multi-hundred dollar purchases coming into their revenue streams. Change a few pictures, charge $300+.

This perverse industry has arisen, in part, in response to the near-unlimited demand stemming from subsidized tuitions and student loans.

Sometimes I pity the professors. College teachers often find themselves the lead grifters in a long-running scam on the public purse. I’d be ashamed of myself.

So, were I college student today, I’d probably balk, too. But I hope I wouldn’t be as witless as Greg Mankiw’s protestors:

The students’ general criticism is that Ec 10, in which some 700 students are enrolled, “espouses a specific — and limited — view of economics.” Their specific criticisms are that economics as taught in this class, formally called Economics 10, failed to prevent the financial crisis and does nothing to narrow the gap between rich and poor.

They’d like a more diverse intro course that includes exposure to more progressive economic frameworks.

“I’m someone who lives below the poverty line, my family’s extremely poor. And having a class like this that promotes gaining at the expense of millions of people disturbs me and bothers me at my core,” freshman Amanda Bradley told National Public Radio.

Read the rest of the piece. Amity Shlaes goes on, arguing that Harvard’s economics department lacks the old Schumpeterian insight into destructive creation*, much hint at all of Ludwig von Mises’ great contribution to business cycle theory (malinvestment theory), and, last but not least, Public Choice analysis. This is a great piece.

Shlaes is right. Harvard econ is narrow — though widening it up with the nonsense one often finds in ”‘history,’ ‘sociology’ or ‘government’” is not the way out. Broadening out of the neoclassical paradigm that is Harvard’s main focus would certainly get students thinking better.

Sad, in one way. Taussig was a Harvard economist, and not a bad one, all in all. His 90-year-old essay “Is Market Price Determinate?” would be great reading for Harvard neoclassicals. A great challenge. And perhaps it might lead to more Schumpeter, Mises, and Public Choice.

* I know, Schumpeter said “creative destruction.” But that’s the wrong order. Capitalism proceeds by gales of destructive creation. Schumpeter’s reversal of these words gives the wrong picture.

Arnold Kling, at EconLog, relates Scott Sumner’s simple query as to why the 2008 financial crisis has caused such low or negative growth down even unto the present day, and offers four possible answers. I will comment only on one of them:

Because the Fed made forecasting errors. Right-wingers are fond of brandishing charts showing that the unemployment rate with the stimulus is on a worse trajectory than what was forecast without the stimulus. That may or may not be evidence that the stimulus failed, but it is evidence that standard forecasts were not sufficiently pessimistic about the economy. Assuming the Fed used standard forecasts, that would explain the inadequate monetary expansion back then. It doesn’t explain their reluctance to expand now, though.

There are several places where this answer (which Kling does not favor) goes wrong. Most noticeable, to me, regards the possibility that the forecasts “were not sufficiently pessimistic about the economy.” This is not the only possibility. It is not even the most likely possibility.

The problem was that the forecasts were too negative, and the policy response too extreme and witless. Had financial collapse been allowed, and some major banks and other financial institutions — and a whole class of conceited Wall Street players — gone the way of the Brontosaur and the Dodo, the downturn would have been dramatic (housing prices would have collapsed, and a lot of real estate and credit default fortunes would have evaporated), yes, but the rest of us would have recovered pretty quickly. The nature of the boom-period pricing problems would have become apparent, since those who failed would have signaled their failure. Recovery would have started before the lawyers would have finalized the first few bankruptcies.

But that’s not what happened. Instead, we were forced to witness a self-fulfilling prophecy: The too-negative forecasts spurred on hysterical over-reaction, the bailouts. Which, in turn, covered up the semiotic function of markets, and generally disabled markets from clearing.

A more positive forecast — one untainted, say, by having friends in anguish at Goldman Sachs and Bear Stearns et al. — would have yielded saner policy, and better consequences.

This is a problem with the welfare state as it applies to government-businesss relations. You work regulatory expectations up to an unrealistic frenzy, where people think government is somehow “managing” things. This requires experts from the industries to get involved, with their own agendas. And they corrupt any reasonable attitude towards big business. They cannot help but pay favorites, because they — who live and breathe the industry the hail from — have favorites.

And folks in power becomes craven with fear, and foolish regarding policy. We lurch from an impossible-to-scale micromanaging regulatory scheme where businesses often are forced to endure expensive and crazy “oversight” by bureaucrats . . . to “welfare for the rich.” It’s absurd. Current policy could hardly be more idiotic.

Until we can let big businesses (including big financial institutions) fail, America will stagger among several competing policies, with no coherent sense. Consequently, the general signal to market participants will remain incoherent.

And, amidst such regime uncertainty, nothing like a thriving business environment, or “full employment,” will be achieved.

Reading Paul Krugman is like picking at a scab: You know you should probably just let it alone, but there’s pleasure in picking the Krugman rough redness. So you read. So you bleed. So you flick away the droplets and the clots.

I could hardly avoid his recent post, “Economics and Morality,” in part because the title mirrors an abiding interest of mine, and of many libertarians. There is a deep connection between economics and ethics. After all, one is the science of human action and transactions, the other is the art of prescribing for same. Frank Knight observed that the subject of economics was the same as that of Herbert Spencer’s Principles of Ethics: “acts adjusted to ends,” or, to put simply, Human Conduct.

Krugman offers no insights about the deep connections. Instead, he regurgitates old pabulum about the welfare state, and misunderstands the case for free markets. Again.

He begins with a concern: “[T]he right is winning economic debates because people believe, wrongly, that there’s something inherently moral about free-market outcomes.”

I don’t know if this is the case, in the real world. Perhaps I don’t follow enough “debates.” But, as I see it, market outcomes are not moral as such. It’s market processes that are. That is, non-fraudulent, non-coerced exchanges (trade) — no matter how much error there may be in them — are more moral processes than fraudulent and coerced processes. It’s the means that are important, here. Fixating on the ends leads you into traps like Krugman seems to rest his whole ideology upon.

Sure, I can imagine a coercive scheme that will reach ends I conceive of as good. (I tell you, you people out there, your tastes in music are generally pretty awful, and I could help you out a great deal. Just give me power, dammit!) Indeed, I can make sophisticated arguments for the ends I’d choose. I’d be a great philosopher king, I’m sure.

But you’d be a fool to let me become one, and I’d be a knave to accept any offer.

If you don’t see the reasons for this, then you’re not really a very trustworthy guide to policy of any kind.

That is, you may be like Krugman.

Of course, there’s so much wrong with Krugman’s thought and argumentation, it’s hard to know where to begin, or end. You could easily spend your whole career unraveling his errors and misjudgments. Here are just a few points, from his January 10th post:

Simplicity Sells

He says that “the right” is addicted to “simplicity.” His example? Boom-and-bust policy: “[G]oldbuggism is intellectually easy, Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it.”

This is a simple claim, and falls on the grounds of its own simplicity. “Goldbuggism” is not the alternative to Keynesianism. The Austrian Theory of the Business Cycle is. And since Krugman cannot even adequately relay what it is, I’d say that it’s hard, and Keynesianism is easy. Indeed, Keynesianism doesn’t have a theory of capital. It treats capital as a black box, and identifies it with a letter, k, which it manipulates with an astounding degree of simplicity. Austrian Business Cycle Theory, on the other hand, treats many factors as complex, as adjusting in non-uniform ways, and is actually a much more nuanced disequilibrium theory than is any version of Keynesianism, and certainly Krugman’s cheapjack version.

Left-Right Narrowmindedness

He talks about good liberals and bad conservatives. His map of ideology is almost always geared to a simple “left” and “right” construction. This helps him, because it allows him to not deal with libertarian ideas properly. He lumps them in with conservatism, and thus he can tar many ideas with a wide brush, and never address the salient differences.

This is a standard practice on the left, by the way. Generally, they want libertarians to be considered at one with conservatives because they know that it’s easy to dismiss many conservative notions without much effort, and thus it makes it look like they’ve won, even if they’ve usually accomplished nothing much at all but slap down a reactionary.

Shell Game Argumentation

This narrowed focus is especially obvious in his sad foray into income inequality:

These days, America is the advanced nation with the least social mobility (pdf), except possibly for Britain. Access to good schools, good health care, and job opportunities depends on lot on choosing the right parents.

So when you hear conservatives talk about how our goal should be equality of opportunity, not equality of outcomes, your first response should be that if they really believe in equality of opportunity, they must be in favor of radical changes in American society. For our society does not, in fact, produce anything like equal opportunity (in part because it produces such unequal outcomes). Tell me how you’re going to produce a huge improvement in the quality of public schools, how you’re going to provide universal health care (for parents as well as children, because parents in bad health affect childrens’ prospects), and then come back to me about the equal chances at the starting line thing.

Who is he arguing against here? What libertarian economist, for instance, doesn’t want radical changes to the current system? When we want freer markets and less bureaucracy and less regimentation, are we doing this because . . . why, Krugman, why? Could it be because we want more opportunity, not less? More social mobility, not less?

I cannot speak for conservatives, but a libertarian reading this passage begins to pull hair, not scabs. What utter bilge this is. The idea that social mobility and opportunity are increased, net, by the institutions of the welfare state may seem plausible to the unlearned, but from the get-go of welfare-state construction, the libertarian prediction was that these institutions would actually stultify social processes. And if America and Britain are experiencing lower rates of social mobility, maybe it is the result of the welfare state itself.

This is, in fact, what libertarians have argued. Indeed, American libertarians now argue that further government control of the medical industry will lower the rate of progress in medicine, will increase its cost, will lead to future problems of shortages and surpluses (that is, radical disequilbria in services) that people like Krugman will blame on markets and use as an excuse for yet further controls.

The truth, though, is that Krugman knows that libertarians argue like this. He ignores actual positions, pretending, instead, that opponents of extending the “liberal” welfare state advocate the status quo.

You may be tempted, at this point, to call Krugman an “idiot,” and let it go at that. Don’t. He’s not an idiot. He’s a very smart man.

“Liar,” on the other hand, might be about right. “Base rhetorician” is the nice way of saying it.

Perhaps the greatest contribution of socialism to economics was to cajole Austrian economists into understanding just how different their theoretical approach was from the main stream of economics. At first, Ludwig von Mises and F.A. Hayek thought they were on the leading edge of that main stream. But the two major debates that they engaged in in the first half of the 20th century — over business cycle theory and regarding calculation in the socialist society — both proved vexing. They should have won both debates. They had the better arguments. But in both cases the majority of economists sided against Mises and Hayek.

And in both cases it was, in a sense, over equilibrium theory.

Pete Boettke, interviewed on today’s EconTalk podcast by Russ Roberts about the contributions of Mises, makes this pretty clear. Three quarters into the program, both Boettke and Roberts attack the scientistic assumption that because an equilibrium can be defined, it can be established. For socialists, this might as well be a matter of hocus pocus. Mises and Hayek became interested in the processes that would allow many competing and co-operating traders to reach equilibria. Or, as Boettke and Roberts state it (this transcript does not indicate who’s speaking)

Hayek writes an essay called “The Meaning of Competition” and Mises starts developing and using the term the “market process” as opposed to equilibrium states of affairs. That analytical approach follows on the heels of what they learned in their debate over other economists over socialism, because what other economists were doing was going to the equilibrium end-states and saying: If the equilibrium end-state is defined as x, I can just say, under socialism, let’s assume x and then we’ve mimicked what it is that capitalism would deliver. And Mises and Hayek said no, we have to explain how x comes about, how it emerges from the exchange behavior of individuals. Because you can’t really take tastes and endowments as given — that’s an illusion that makes the math look nice but in real practice could never be implemented.

Earlier, Boettke had indicated that something similar was happening in the business cycle research area, where the Austrian view turns out to be far more nuanced than the simple quantity theory of money view:

In fact the quantity theory is one of the most important ideas because basically you are not going to make everyone better off by printing money. You are just going to make prices go up. So, there is a relationship between the quantity of money and prices in the economy. What Mises does is he defends the quantity theory, but he argues that we can’t have a mechanical interpretation of it. . . . Mises . . . argues that the quantity theory of money viewed mechanically underestimates the distortionary forces of inflation. It’s as if as soon as I double the money supply, prices are going to double instantly and there won’t be these consequences — the only costs of inflation are the menu costs: you have to change the numbers on restaurant menus. Mises wanted to show, and this was a great innovation on his part, was that injection effects — the way that prices adjust through the economy — they adjust through relative price changes, not a whole price level change. Eventually the math is going to work out that way: you double the money supply, eventually all prices are going to adjust. But in the short run there can appear to be a case where the effect on a nominal variable can have a real impact. You distort relative prices, distort your choices. That’s what sets up the business cycles.

In both monetary theory and regarding socialism, non-Austrian economists tend to misunderstand what equilibrium theory means. They misuse a tool of economics, and thereby misunderstand reality. Were I a Marxian, I would probably call this tool fetishism.

The whole conversation is interesting, and worth a listen. I certainly do not disagree with Boettke’s list of Mises’ major contributions, but I am slightly surprised that Boettke does not even mention Mises’ advancement of the ordinal conception of utility in The Theory of Money and Credit (and of course in Human Action). Mises insisted that utility was not measurable, and showed why elaborate cardinal conceptions of utility by economists such as Irving Fisher failed.

Not only was his work on this prior to the Slutsky/Allen/Hicks pushing of indifference curves over the regnant notion of cardinal (measurable) utility, it fits with the distinctive “Austrian distinctiveness.”

It served as Mises’ first major foray against the illusions of neoclassical economics. And it targeted, quite exactly, the neoclassical vice of over-emphasizing math and thereby misunderstanding what a mathematical theory’s actual value is, as a tool for understanding. Mainstream economists have demonstrated a preference, over and over again, to view economics as a kind of physics that gains its “scientific” character by elaborate mathematical reasoning. By leaping to mathematical conceptions, they tend for forget the things they are trying to explain, and get lost in a fantasy world of their own imagining.

Economists in the Austrian tradition, on the other hand, have emphasized the things themselves — not mere models of them — and developed principles and tools that explain what is actually going on in the real world.

Indeed, it may be helpful to think of Austrian economics as the science of economic reality and economic illusion — for in both the boom and bust cycle and in the attempts to establish a socialist society, human beings find themselves caught up in illusions. Austrian theory helps us sort out the fact from the fiction, the illusions embedded into central banking monetary systems and the very appeal of total government control of the economy. Austrians succeeded at these endeavors better than other schools in large part because they foreswear delusion as a tool for understanding.

A Chinese libertarian, Nicolas Dong, who recently did a Mandarin translation of one of my IP articles, recently told me this in an email regarding my earlier post, Don’t Bet on China:

I agree most part of your point of view about China. I believe that after the bust of the current housing bubble and high inflation, there will be much more unrest. The costs to maintain a “stable” social order have exceeded the cost of maintaining the army. Great changes may occur after the Xi Jinpin administration. But democratization will probably make China more socialist, for reasons explained in Hoppe’s Democracy: The God that Failed. There are just too many mobs here. And many social democrats are controlling the media, preaching democracy and equality instead of liberty. Fortunately, some influential media have libertarian-leaning editors or columnists. We also have libertarian and classical liberal university professors. We are trying our best to have a greater influence.

Also, regarding the libertarian perspective on intellectual property and my anti-IP article that he translated, he said:

They [the Chinese libertarians] debated for a while, and now, most libertarians in China are anti-IP.

However its influence is limited since we are just circulating it in our circle, and posting it on websites. Most people in China don’t know what libertarianism is, and they may not capable of catching the idea in the article.

… You know, something nice is that those who control the internet here don’t know what libertarianism and the Austrian School are; thus, most of those sites are not prohibited. The Austrian School does have some influence in academia here, albeit mainly Hayekian.

Douglas Carswell, M.P.

Austrians and others interested in fractional-reserve banking (FRB) will find of interest a banking reform about to be proposed in the UK. Douglas Carswell, an Austrian economsics-informed member of the UK parliament for Clacton, is planning to introduce a so-called “Ten Minute Rule Bill” after Prime Minister’s Questions tomorrow (Wednesday, Sept. 15) that could have significant implications for current centralized FRB practices. The Bill will be supported by Steve Baker, the Member of Parliament for Wycombe, who also serves on the Advisory Board of the Austrian/classical liberal Cobden Centre.

Carswell described the proposal in a post on Friday entitled “How should we reform the banks?,” and Baker promoted it earlier today in “Douglas Carswell leads the way on bank reform,” on CentreRight, the unofficial web site of the Tory Party (widely read by all members from the PM down). Baker’s article provides further elaboration and explanation, as well as a wealth of useful resources, speeches, links related to this issue. Baker is also scheduled to have a column about this in the Wall Street Journal Europe tomorrow [update: see Steve Baker, "A Bill to Fight Crony Capitalism" [2], Wall Street Journal (Opinion Europe section) (Sept. 15, 2010); and also: Toby Baxendale, “The radical reform that would end boom and bust in banking,” Telegraph.co.uk (Sept. 15, 2010)]. Daniel Hannan, the free market Member of the European Parliament, has also come out in support, in his Telegraph.co.uk column “Instead of subjecting our financial services to Brussels, we should embrace the Baker/Carswell banking reforms.” Finally, Austrian classical liberal entrepreneur Toby Baxendale, who is also Chairman of the Cobden Centre, provides a good explanation of the legal background giving rise to the Bill “What is the Legal Relationship Between the Banker and his Customer?”

The proposal involves clarification of the relationship between banks and their customers. In particular, banks would make it clear to the customer whether his funds would be owned by him, or lent out to other bank customers.

At present, as in the US, most of the money “deposited” with a bank may be lent out by the bank, even though the “deposit” is also available and guaranteed to the depositor. This centralized FRB practice of course results in inflation, the business cycle, moral hazard, and so on. Many Austrians also oppose FRB on the grounds that it has been, or tends to be, or inevitably will be, bound up in some type of fraud. Other Austrians–primarily, but not exclusively, those in favor of a private variant of FRB–maintain that FRB need not be fraudulent, and, indeed, that it can be very useful.

Steve Baker, M.P.

The economic arguments in favor of FRB and its usefulness seem flawed to me, but in my view it is not necessarily fraudulent, so long as full disclosure is made. But is full disclosure actually made? Are customers aware? Proponents of FRB often say that FRB “depositors” “are” aware of what is done with their money since interest is paid on it. In actuality what they are saying is that such customers are “deemed” to have constructive knowledge of the fact that their money is lent out, since they “ought to” know that this is implied by the earning of interest. But this is assuming too much economic sophistication on the part of the typical bank customer and substituting the legal fiction of constructive knowledge for actual disclosure. It is obvious that most banking customers are not aware of the nature of modern centralized FRB, or of the legal status of “their” “deposits.” One reason for this is modern deposit insurance, which reduces the need for “depositors” to consider the question in the first place. Another is the complexity and subterfuge of the current state-regulated and controlled banking system. As for actual evidence, a recent survey conducted in the UK concludes that most people (74%) think they own the money they deposit in a bank. Which, of course, they do not.

Given the confusion inherent in conflating the services of deposit or safekeeping of money, on the one hand, and lending of money, on the other, why not simply make it clear to the bank customer what his options are? Why not give people a choice: do you want to own your money and have it deposited and safeguarded, or do you want to give up ownership of it and permit the bank to lend it on your behalf, in order to earn interest?

Carswell and Baker’s proposed Bill does just that. As Carswell explains:

Under my Bill, when opening a new bank account, you’d still be free to tick the box that says “it’s fine to lend on my money”. … To be clear, this Bill does not stop banks from treating your deposit as a loan. You just have to make clear that you give them permission to do so. There would, in effect, be two types of bank account; one where it was made clear that you owned the money (and probably paid for banking services in fees), and one where the bank was free to lend on your money like they owned it.

In other words, banks would have to make customers aware of whether it will (a) safekeep the funds to be deposited; or (b) loan out these funds on behalf of the customer (who is choosing to be a lender). It would align the law to mirror what people actually think happens: that they deposit money and it is theirs. It also seeks to allow savers to save in a term deposit which the bankers can then with the saver knowingly and indeed willingly lend out this money to borrowers. This relationship will then be that of a depositor lending to the bank and the bank being the creditor to the lender.

The Bill was stimulated by Baxendale, as the result of his setting up the Cobden Centre and talking to Carswell and Baker about this issues, and generally making the mainstream audience more aware of the issue through postings on the Cobden Centre site and other activities. The basic ideas behind Baxendale’s efforts here and the proposed Bill are influenced by the work of the Austrian economist Huerta de Soto, primarily his book Money, Bank Credit and Economic Cycles, which sets out the relevant legal distinctions, drawing on Roman legal principles, and the proposals for reform set out in Chapter 9. Baxendale also approached me for assistance in drafting the initial Bill, based on my Austrian and libertarian background as well as my mixed civil law/common law/Roman law legal background. As Baxendale elaborated in a note to me:

Douglas Carswell came to see me in my North London fish factory in February of this year and talked to me about what he knew or more importantly what he did not know about the Austrian School of Economics. The money and banking things I focused on clearly had an impact and from henceforth we have had a good, productive and interesting dialog. I introduced him to our Cobden Centre website and the articles we put up there focused around banking reform. This culminated with me getting a phone call before the summer saying that he had secured some Parliamentary time in the Autumn to put forward my Banking Bill suggestions. At that point in time I thought he was suggesting the reform I outlined in “Emperor’s New Clothes” article. However, the project Douglas suggested was more focused on just sorting out the property rights of the depositor and the banker in the first instance to be able then to create a more stable environment for wider reform later and giving time for a coalition of support to be built up. As he sits in the public light, only he and his colleagues/supporters can judge the merits of this way forward. I then got in touch with Prof. Guido Hülsmann who I had recently introduced to the think tank community in London for sounding on how to construct the Bill Douglas wanted. He suggested that I contact the American legal scholar Stephan Kinsella. Touching base with Kinsella then led to him drafting a Bill that forms the basis of this Ten Minute Rule Bill.

Interestingly, its supporter in Parliament is one of our founding Directors, Steve Baker the MP for Wycombe. He wrote to Lew Rockwell two years ago now, expressing his interest in the Austrian School and who could he speak to in the UK on these matters. Lew forward him to me saying rather flatteringly “Toby Baxendale is the leading Austrian School advocate in England.” That is praise from a great and inspiring man for sure. Steve coming from a software engineering background took up the project of getting us a web presence with great enthusiasm and vigour. Today what you see on the site is largely down to his initial work; needless to say there are other critical people to our project. Steve has a wonderfully logical mind as you would expect to find in a quality software engineer so his grasp of the logical propositions and necessary key apriori ones is very good. This helps him grasp the core issues very quickly indeed. This is a good time for the Austrian School here in the UK and we will continue boldly forward!

Further background may be found in the links above and in the endnotes.

This proposal, if implemented, could help end the state practice of fractional-reserve central banking which causes inflation and the business cycle. It will be interesting to see what happens tomorrow. As Baxendale notes, “I hope this Bill gets a second reading so that Honest Money can become a major taking point in the banking reform debate.” Indeed.

Update: Toby Baxendale’s Cobden Centre post Support for Douglas Carswell’s forthcoming Bill to reform the banks provides links to various articles and posts in support of the Bill.

And, as noted in First reading of Carswell’s Financial Services Bill, “Douglas Carswell MP yesterday delivered a superb speech in support of his eagerly anticipated Financial Services (Regulation of Deposits and Lending) Bill, introduced as a Ten Minute Rule Motion.”

The video is below. There were no objections; the “second reading” of the Bill is slated for Nov. 19. The full text is available here, and pasted below. Note in particular Carswell’s explicit mention of the Mises Institute:

Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

***

Financial Services (Regulation of Deposits and Lending)

Bill Presented — Savings Accounts and Health in Pregnancy Grant Bill

House of Commons debates, 15 September 2010, 1:28 pm

Motion for leave to bring in a Bill (Standing Order No. 23 )

1:33 pm

Douglas Carswell (Clacton, Conservative)

I beg to move,

That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder;
and for connected purposes.

Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs-but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank-bank B-which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.

Banks enjoy a form of legal privilege extended to no other area of business that I am aware of-it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them. So why are banks allowed to sub-let people’s money many times over without their consent?

My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes. Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.

My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one’s deposit as an investment in a giant credit pyramid, banks are able to conjure up credit. In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.

As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit- interest rates-in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings. Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people’s money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles. To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else’s deferred consumption, so the credit boom creates unsustainable over-consumption.

Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme-and the people who built it-and in doing so devalue our currency to keep the pyramid afloat.

Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.

Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.

With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.

Question put and agreed to.

Ordered,

That Mr Douglas Carswell and Steve Baker present the Bill.

Mr Douglas Carswell accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).

[Cross-posted at Mises Blog]

With the U.S. displaying characteristically Third World national stats, and average households deep in financial trouble (see below),

(Click to enlarge.)

…one truly wonders if the Obama administration has any sense of proportion at all when proposing a ridiculous 100mm dollar budget cut.  Consider that more than a quarter of the total budget is financed by growing debt (people’s savings, and, by people, I mean Chinese people and other net savings countries like Chile and El Salvador that have been long buying U.S. Treasury bonds and transfering their savings). Click here to see what those 100mm represent with respect to the total budget.

China is widely viewed as a “threat” to the US because of its perceived rapid and unstoppable economic growth. This is, in my view, doubly confused. First: if the premise were true, this would be good, not bad. Second: I don’t think China is in such great shape. Unfortunately.

Some free market economists think otherwise. Peter Schiff “predicts that China will overtake the U.S. in terms of Gross Domestic Product before 2020.” Jim Rogers thinks “China will likely constitute tomorrow’s most powerful nation-state.”

I’ve been working for years now for a company with factories and extensive dealings in Taiwan and China. It’s been my opinion for some time that China is a primitive basket case. Land is leased, not owned. The communist party corruption is everywhere. The Asian mentality is far different than the western one; they are less innovative, more subservient and servile, more order-following, more collectivist and less individualistic. Poverty and peasantry are rampant. Asians are far more racist and superstitious than Americans (everyone is more racist than Americans in my experience). You have to get permission for everything. There are currency controls. Contracts are not respected–they are signed because they are viewed as red tape and then they start being renegotiated the next day. And on and on.

In my view, America is, for all our faults, still, by far, the strongest and best large economy in the world. Who can match the US? Canada is too small. Japan is not quite our size and has its own problems. Europe is like an older, more kleptocratic version of the US–and is probably second best in the world. South America is a basket case of banana republics. Africa is even worse. Russia and Central Europe?–mired in pessimism and corruption and the tendrils of the wreckage of communism. Of the rest, I think India has a better chance than China, for two reasons: they speak English, and they inherited the English property rights system–unlike in China where you still have to lease land from the state for 50 years instead of buying it. And I think India is a basket case too, unlikely to improve much for many decades. So the US is and will remain preeminent, in my view–despite all our problems. (See also Jonathan Bean’s America’s Hidden Strength: Babies, Immigration; Joel Kotkin, Why America Will Still Lead the World in 2050, Reason.tv; David Brooks Relax, We’ll Be Fine (News of America’s death is greatly exaggerated. In reality, the U.S. is on the verge of a demographic, economic and social revival); and Glimmers of Hope (The fiscal future of the developed world looks bleak, but the British coalition should give us hope.) Unfortunately, this will allow our parasitical state to maintain its warfare-welfare state (see my post Hoppe on Liberal Economies and War).

An American friend of mine living in China sent me some of his thoughts, which I provide, with editing, and anonymously, below:

China is [screwed], I tell you. This place is one big pile of poo. Jim Rogers and Peter Schiff are wrong, at least about China. Jim Chanos is right! [See also Jim Rogers: China not in a bubble, Chanos couldn't spell China; China May ‘Crash’ in Next 9 to 12 Months, Faber Says. Also note: Mark DeWeaver, who has written for the Mises Institute before, recently gave a speech about Chinese monetary policy.  There's some interesting meat in both the audio and corresponding slides.]

There is sooo much unbelievable corruption here. There is very little tolerance for criticism of government policies. They are afraid of Twitter! Yep, the PRC is afraid of 140 character messages. Twitter-Facebook-Youtube: all blocked.

The people are ignorant peasants, and their health is terrible too: every guy I know smokes–dude, there are 300+ million smokers in this country. Light it up on the bus.  Light it up in the elevator.  Light it up in the hospital.  I kid you not, I went in for cold medicine and my doctor lit up a cigarette and asked me “what is your problem?” Students regularly smoke during break time and come back in smothered in the world’s sh*ttiest cologne. But hey, I probably wouldn’t worry either if I saw the impending demographic time bomb.

And you think that is annoying?  Did you know that during the height of stimulus follies last year, the brilliant officials in Hubei province actually mandated a quota of cigarettes public workers were supposed to consume?  You might take the Chinese man off the farm but you don’t take the farm out of the Chinese man.

The health system is in disarray.  I was very sick last summer and visited 6 hospitals in a couple cities. These were all large centers (both public and quasi-private) and in several of these floor after floor had family members camping out on the ground.  Sanitation in the bathrooms is horribad… you can smell them all the way down the hall after coming out of the elevator.  And when you visit a doctor all the other customers stand next to you and listen in and look at whatever is going on. Privacy was simply not something you had in many cases.

I was actually very bullish on China a year or so ago and now I feel like an idiot after having lived outside of the big metropolises.

I read a really good interview the other day–some American bigwig was interviewed on cctv. He mentioned just how polluted the waterways here are. Sure, this is just one small thing–but I know that in the city where I live, the river is completely untouchable. It is so unbelievably polluted with heavy metals, that the only thing that its used for is transportation of low-tech barges moving coal up and down between cities.

As for corruption–well, at every college, you have a two-part administration. One half of it does the typical bureaucratic stuff, and it is simply filled with Communist Party staff members. A friend who teaches told me that when he goes to a faculty dinner, he is always sitting next to the local Communist Party heads. It is bizarre–just completely dead weight. It gives you an idea of just how interconnected it is here. Imagine–Michael Moore would blow a gasket if the GOP had offices on campuses throughout the country, where curriculum had to go through them first! Here’s the CP is just one big vetting machine. Teachers are extremely and notoriously corrupt–for example, bribery is rampant, the teachers will just sell students test answers. This is very commonplace. These poor people are in a really bad place, and the current policies are not going to lead them to what Schiff and Rogers have in mind. No land of milk and honey for sure.

One silver lining, I suppose–they can only block ideas for so long, and wireless tech really can be a disruptive force at some point. We’ll have to wait and see. And hope.

***

Some other thoughts: so I’ve had a live-in girlfriend for more than a year.  She’s not from the countryside but is from a modern-middle class family in the south (Guangdon). And she has a brother. Everyone showers him with love, attention, money and pretty much sh*ts on her in comparison. And she’s hardly an exception to this very mainstream chauvinistic thinking that permeates much of the rural peasantry.  The stories you hear of men having 3, 4, 5+ kids until they have a boy is not uncommon nor are the horrible stories of girls being thrown into public waste bins or drowned in streams by angry mother-in-laws (because they want to have grandsons as well!). So it’s not only racist, but sexist.

The racism is terrible too–I have a Ghanian friend, a teacher–the Chinese people call him “demon” and “devil.” Along with my girlfriend, I’ve traveled to several large cities with my friend from Ghana.  And during the train rides, bus rides, taxi queues and restaurant visits, many residents of these modern cities will murmur and not-so-murmur slurs like “demon” and “devil.”  They’re fine and dandy with white people (cause they all want porcelain white skin) but the slightest shade of brown is considered lower-class … because your parents worked outside on the farms!

What Hong Kong movies also fail to illustrate (much like their Hollywood counterparts) is that in addition to superstitions and racism, nepotism is a huge problem here. Unfortunately most westerners have drunk the Crouching Tiger Kool-Aid when it comes to the very primitive nature and mindset large portions of the population still has (remember more than 50% of the population still lives in the countryside at or near subsistence), believing that everyone here is some kind of egalitarian calligraphy master sitting on top of mountains.

Modern engineering requires modern management and accounting practices to operate, and during the industrialization and globalization process, countries, cultures and domestic firms have to implement meritocracy-related promotions and compensation in order to remain competitive and solvent. Yet, meritocracy is not part of the current corporate culture here.  It is all about family connections if you want to do anything because there is a ceiling you simply cannot overcome no matter how smart or hard working you are.  Throughout the semesters I hear demotivating stories from former students who have done internships at companies and the nepotism that permeates State-owned enterprises.  Contracts are easily broken if you are connected to the judicial system, a judicial system that is not independent or transparent.  I could go on and on but check out Andy Xie if you want the real beat on Chinese Finance.

And don’t even get me started about trash and road side pollution or gambling!

***

I’m not jaded. In fact I have a pretty comfortable life. But I do live here, outside the big cities, which is something people like Jim Rogers or Peter Schiff don’t do. Singapore is to China like Beverly Hills is to Compton. And the mean, gangster-filled streets of Greenwich Connecticut are pretty divorced from the drearily decrepit dusty roads in the middle of middle-of-nowhere central China.

Earth to Rogers, there is a reason why there aren’t huge lines in San Francisco to get the next flight back to Zhong Guo, because anyone with half a brain makes their way to the West and not the other way around. Chanos is right–investing in China is crazy. Of course, I like a lot of things in China and certainly would recommend touring here, but I really can’t recommend investing in anything, especially with how crazy the legal system is, the inability to own land, and so on.

Update: China’s Private Party: “The Communist Party has made strenuous efforts to keep signs of its enduring power out of sight to the Chinese public and the rest of the world. Richard McGregor on the secrets of the world’s largest political machine and its role in Beijing’s growing clout.”

Update 2: My correspondent sent me this followup comment:

Where the Singularity probably won’t happen: China

So I’m catching up on some online reading and was reading the winter 2009 edition of Human Plus.  Among other articles this one stuck out: “The Chinese Singularity”

There have been few things I’ve read in the past year that have inspired me to write, this one is one of them. For instance:

The first page (at least if you’re reading the pdf) is pretty funny because this writer (Ben Goertzel) and the professor he interviews (Hugo de Garis) literally think that China’s GDP growth numbers are not only real but genuinely reflect productive economic activity.

I think investor Jim Chanos is right: if you don’t believe central planning works for health care or any other industry in the West, then there is little reason to believe Politburo-style planning will work either.  Furthermore, as Chanos and others have noted, half of China’s official GDP comes from construction-related activity.  Once that bubble blows up it will be even harder to cook the (macro) books and suggest that GDP growth = engineering prowess.

In addition, I believe there are fundamental differences that explain the relative “successes” of state-sponsored labs like Fraunhofer/DARPA compared to Chinese ones that have contributed very little to the corpus of engineering: it is not so much funding as it cultural.  By cultural I mean meritocracy versus nepotism and risk-taking versus conservative carbon-copying.  Furthermore as detailed annually in R&D Magazine (pdf), the vast majority of R&D in developed countries still takes place through the private-sector (for instance, HP Labs and the memristor, Google Labs and Pagerank, Intel Labs and tick-tock).

In 2007, R&D Magazine notes that the sum total of R&D in the US amounted to 2.62% of total GDP.  Japan was 3.33% and China came in at 1.43%.  In terms of Gross Domestic Expenditure on R&D, the US spent $362 billion in 2007, Japan $142 billion and China $100 billion.

Ignoring ratios, the most striking illustration in the 2009 report relevant to this discussion is on page 22.  For roughly 20 years US government funding of R&D has remained relatively stagnant at around $75 billion a year.  Conversely industrial (private) funding of US R&D has risen to more than $200 billion a year.  And it was during this time frame that both the information and silicon ages ushered in all the whiz bang stuff that Futurists (such as Goertzel and de Garis) point to as part of their “accelerating future” mantra.

Both Goertzel and de Garis seem to believe that pumping massive amounts of capital into “basic” science research is needed and that the Chinese government should do it.  However, R&D Magazine also notes that “[s]ince 1981, about 75% of industrial R&D performance has been devoted to development, and about 5% and 20% directed towards basic and applied research, respectively.”  In contrast, federal R&D funding for both academia and non-profit organizations have focused primarily on basic research (70% for the former, 55% for the latter).

Yes, contrary to what these two futurists would suggest, throwing money at projects is not the most effective way to achieve goals.

Thus, if you were to draw conclusions from these statistics:

1) Over the past three decades it is private industry not the government that continues to create disruptive and innovative products to the benefit of consumers.  If one were to scan the isles of Best Buy, private industry undoubtedly is the game changer and inventor, not NASA.

2) The private industry — which has a vested interest in not going bankrupt by continuously satiating consumer wants — clearly believes that funding development (e.g. commercialization) is much more effective way to grow and expand than throwing large sums of capital at basic research worthy of the Ig Nobel (that’s not the one you want on your resume).

Comically towards the end, the author suggests that “The Chinese government should create a Chinese Artificial Brain Administration…”  Just like we needed to a have an American CPU Administration, American OS Administration, American RAM Administration.  Where would we be with… them!  In fact, I would argue that the industries that have had historically low rates of disruption and innovation (wireless and rocket-systems) have been those industries regulated with well-meaning government administrations (FCC, NASA).

And I’m hardly the only one who sees these Sino-tech problems for what they are: big problems.  TechCrunch recently updated netizens to the Geeks-on-a-Plane project (nutshell: engineers and VCs that globe trot professionally) and they recently attended two tech expos in China.  Here is what they said:

But Silicon Valley and the planet’s other technology hotbeds still have a bit of time to breathe before the dragon takes over, as even in China’s web market all’s not well. The GOAP heard local mobile and web entrepreneurs and VCs deploring the

• lack of valid industry data across a number of tech sectors
• strict legal and political frameworks (one industry veteran told me he checks if his popular micro-blogging service is still online every morning, as Twitter is blocked by the government)
• low online spend (just one telling example: the ARPU in China’s social gaming sector is said to be 5-20 times lower than in the US and other regions)
• insufficient online payment systems (still low circulation of credit cards hampers growth in e-commerce and other areas)
• overheated VC market
• trouble for young startups to find seed capital and angel investors
• lack of competent staff (especially engineers)
• propensity of highly skilled team members to quickly quit even successful startups to join others or set up their own
• lack of innovative power in the industry (Korea invented the virtual goods-based business model, Japan invented the mobile web, and China?)
• rampant copycat culture (which is not really a China-only phenomenon)
• fierce domestic competitive environment in the mobile and web fields
• and other factors (for example, copyright problems or the fact that no foreign entrepreneur- with one exception – has realized a sizable exit in China so far).

In conclusion, if various branches of the Chinese government do end up taking Goerzel’s and de Garis’s advice and centralize “singularity”-related innovation then it’s probably a safe bet that the AI-based singularity will not take place here.

Update 3: My correspondent sends me this: “So I have a friend who is a proper American professor teaching out in a large city in the Northeast of China, he recently said the following:

As I may have mentioned to you before, I believe strongly in free markets and laissez-faire capitalism. In fact, part of what brought me here was the misapprehension that China is moving towards more and more free markets, while America unfortunately is moving away from them. So I entirely agree with your remarks about the centrally-planned economy in China.

I’ve been going through a fairly significant disillusionment recently, as I realize how centrally-controlled the economy still is here. The supposed free market is really more like the “freedom” to escape controls by bribing the authorities, which isn’t really a free market at all. That’s pretty much what BP had going for it in the Gulf, and look where that led.

As for GDP numbers, they are indeed laughable. To take just one example, our university has a building that was constructed less than five years ago. It’s lovely from the street, but up close you can see rust stains where the rebar isn’t sealed properly. That’s going to have to be repaired soon, at a cost probably greater than the original cost of the building.

The gypsum wallboards inside all the hallways of the building are severely bowed and discolored from the humidity. I thought they must be 20 years old, which didn’t make sense because the building is new. A colleague of mine told me that, no, the gypsum-board was replaced just over a year ago. But it was replaced with such shoddy goods that it’s already in need of a second replacement.

The reason I bring this up, is that the GDP of our local economy will almost certainly show growth when someone is paid big money to come in and repair the building — but in fact, there is no growth at all.

That said, I can definitely see improvement in the overall conditions of life in XXXXX. The city center is rebuilding, much nicer than it was before, and the shoreline is developing some really lovely areas that didn’t exist before. There definitely is growth here, but the evidence of it is what my eyes can see, not what governmental GDP numbers tell me.

So far, the Chinese economy has been sustained by the willingness of Chinese laborers to work like mules for minimal pay, with only the smallest improvements as their incentive. They’ve got thousands of years of culture encouraging that mule-like attitude: the unwillingness to question authority, the acceptance of life as it is, the willingness to live with contradictions. But that can only take a country so far, and then something has to change.

I just signed my next-year contract, for a sizable increase in pay and an equally sizable decrease in teaching hours. My immediate future looks very bright, indeed. But as for China, I don’t expect much. I hope they can muddle through, with neither an economic collapse nor a catastrophic revolution.

Update: Deirdre McCloskey, Reply to Greg Clark on China’s Dishonesty (she makes the point that “At a daily production of $13 a head (the United States now is at $130 a head), it’s going to be a long, long time before China looks “developed.” A German businessman told me that his company finally gave up trying to make a deal because the Chinese kept reopening the negotiations — after the signing.”–I am general counsel to a company with facilities in Taiwan and China; I have seen this exact same behavior re contracts dozens of times. The lack of respect for property and contract rights is incredible.). See also some of the comments to the Mises blog post about Jim Rogers’s winning the 2010 Schlarbaum prize and his views on China.

Update: Tyler Cowen writes (and I agree with the comments in the linked post):

$$ Leaving Las Vegas, continued

The meaning of such facts is speculative, but they are fun to ponder:

A 40? container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.

The full story, which considers the cost of shipping a bottle of Fiii water, is here and I thank Henry at Crooked Timber for the pointer.

Update: See Innovation in China: Patents, yes; ideas, maybe: Chinese firms are filing lots of patents. How many represent good ideas?, The Economist (Oct. 14, 2010)

Update: See Kinsella: How Intellectual Property Hampers Capitalism (Transcript):

We have America and its lackey, the World Trade Organization, pressuring other countries, like Russia, India, China, to adopt our draconian IP laws.

China is now actually coming into shape a little bit.  They’re now thirdin place, behind Japan and America in terms of patent filings which is a radical change from five to ten  years ago, due to American pressure.  We have diplomatic pressure being exerted on Canada right now to adopt some of our copyright provisions that are in our Digital Millennium Copyright Act which make IP law much worse and more draconian.

Even worse, right now pending, is the secret anti-counterfeiting trade agreement or ACTA.  It’s a treaty that’s being negotiated right now.  I suspect it will pass, probably this year, and it’s going to be horrible.  It’s going to impose patent and copyright type protections around the world, including Digital Millennium Copyright Act, or DMCA type provisions.  As science fiction author Corey Doctorow observed, the act is a “radical rewriting of the world’s Internet laws taking place in secret without public input.”

Update: Don’t Bet on China: Redux; Why China’s Heading for a Hard Landing, Part 1: A. Gary Shilling.