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Theory And Crisis

by Sheldon Richman for the Foundation For Economic Education

What might be even more distressing than the current buildup of the corporate state in response to the supposed economic crisis is the way some self-styled advocates of the free market are willing to cast aside the economic theory they once claimed to embrace.

If you are a glutton for cable news-talk shows, you know it’s been little more than a parade of “experts” declaring the absolute imperative of government bailouts. Many of these experts preface their remarks by saying how much they hate the idea of government intervention to save business from its mistakes. “I’m a free-market, small-government advocate, but. . . .” The tenor of their remarks is that the free market is great when things are going well, but this is an emergency and we don’t have the luxury of theory. Statements like this were most common during the frantic week between the House’s rejection of and reversal on the ever-changing Troubled Asset Relief Program, or TARP.

Right off the bat we can see a problem. Any bailout plan that is believed to be potentially effective must be based on a theory. If you asked a TARP advocate why the intervention is necessary, he might say that when the government borrows $700 billion in order to buy banks’ bad mortgage-backed securities or shares of stock, it will inject liquidity into the credit markets and improve the economy. But that is a theory. (It’s a bad theory, but it is a theory.) So the apparently bold thrusting aside of all theory in the name of pragmatic action is a mere pose. The move is as theory-bound as free-market opposition to the bailout is.

The debate, then, is a contest of theories. Free-market theory can explain the cause of the crisis—government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off—way off—and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation. What is the alternative theory used by those who have jettisoned free-market theory in “this time of crisis”? Why should we believe that things will be fine only if the government has the discretionary power to transfer resources from those who haven’t screwed up to those who have?

Ludwig von Mises had a thing or two to say about theory. For Mises the laws of economics (more broadly, human action) are derived by spinning out the logical corollaries of the inescapable concept action, of which we have apodictic “a priori” knowledge. (This means the self-evident and universal nature of purposeful behavior is not discovered through empirical testing; empirical testing presupposes purposeful behavior. The corollaries include, among others: means and ends, value and preference, marginal utility, cost, time preference, and profit and loss). As he wrote in “Social Science and Natural Science”:

Economics therefore is not based on or derived (abstracted) from experience. It is a deductive system, starting from the insight into the principles of human reason and conduct. As a matter of fact all our experience in the field of human action is based on and conditioned by the circumstance that we have this insight in our mind. Without this a priori knowledge and the theorems derived from it we could not at all realize what is going on in human activity. Our experience of human action and social life is predicated on praxeological and economic theory.

This doesn’t mean that economic analysis is done without reference to the world. To be sure, we must first confirm that we are observing human action in an economic context (and not, say, a game, ritual, or reflexive motion), but once we do that, our a priori understanding of economics applies.

There is never a good time to throw aside theory and just act, for such a thing is impossible. The only question is whether our theory is good or bad.

Here in what Mencken called “the land of the theoretically free,” most states outlaw the sale of unpasteurized raw milk. If you know what’s good for you, don’t get caught with it, writes William Pike.

What do poker and the free market have in common? More than you might think, Robert Stewart wagers.

It’s been long enough for the American people to have gotten used to being forbidden to carry any more than three ounces of liquids and gels in a single baggie when boarding an airplane. Still, it’s interesting to see this arbitrary decree sliced and diced, compliments of Becky Akers.

Support for a free and spontaneous society can be found in some unexpected places. Gene Callahan introduces us to Michael Oakeshott.

Much is said pro and con about gun control, but seldom is economic analysis applied to the subject. Unsurprisingly, it sheds a worthwhile light, as Scott Kjar and Jason Robinson demonstrate.

Taxation is normally discussed in the rarefied jargon of public policy or the technical terms of economics. Lachlan Markay, harking back to Frédéric Bastiat, analyzes it as a form of vandalism.
People fear complete privatization of education because they fear loss of central control over their children’s curriculum. That absence of control is one of the strongest reasons to get government out of schooling, says Danny Shahar.

Here’s what our columnists have come up with. Lawrence Reed remembers a friend who knew what it’s like to live without liberty. Donald Boudreaux revisits the Austrian theory of the business cycle. Robert Higgs examines Richard Nixon’s New Economic Plan. John Stossel takes on the Wall Street bailout. Charles Baird goes after government-employee unions. And Charles Johnson, reading the argument that freedom conflicts with social cooperation, protests, “It Just Ain’t So!”

Our book reviewers dive into volumes on the middle class, immigration, economic fallacies, and the family.

This article was originally published by the Foundation for Economic Education (FEE) in The Freeman on January/February 2009. Volume: 59. Issue: 1.

About The Author

Sheldon Richman is the editor of The Freeman and In brief. The Foundation for Economic Education (FEE), one of the oldest free-market organizations in the United States, was founded in 1946 by Leonard E. Read to study and advance the freedom philosophy. FEE's mission is to offer the most consistent case for the "first principles" of freedom: the sanctity of private property, individual liberty, the rule of law, the free market, and the moral superiority of individual choice and responsibility over coercion.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.