John McVey

Stemmet. JJM

That would never pass muster in Australia, just from the labour-law aspect alone. There are rules for the determination of what is a genuine contractor relationship and what is in economic substance an employment relationship pretending not to be. Look for similar rules in the US - I'd be very surprised if they didn't exist. JJM

The point of Dr Reisman's model was to use it as a base from which to develop an understanding of elements, allowing one to expand it from there, one element at a time. Even as it is, without expanding it, one of the things it shows is that capitalism has (in Dr R's words) 'natural springs to profitability,' because when people are free the mathematics of the situation necessarily generates accounting profits in the aggregate, which when tied with the material world upon which accounting figures are based this has to mean physical profits as well. There are only two ways aggregate accounting profits could be zero for a given period - destruction of money and an increase in demand for money - but both of these events only have effects once for each instance, where prices then adjust and the aggregate accounting profits appear again in the next period - unless there is further destruction or demand. (The demand for money is not the desire to have a spendable income but the desire to hold cash unspent, resulting a net build-up of cash stores to higher equilibrium levels). As to Boris's posts, it is an old variant on an even older claim. The very old claim is that economic liberty necessily leads to crises and depressions - it is a view that goes back many centuries, predating Marx by a long shot (Adam Smith's WoN was intended to refute the mercantlists' claims on this score, and they were not the first either). The variant raised by Boris's article is the claim that accounting profits cannot be generated except by the creation of new money, and in particular through the use of debt as money via the financial sector. Thus this variant is that accounting profits can only be had by continual credit creation, of debt multiplied upon debt. (This should ring bells - with sledge-hammers for knockers, no less - for many with readers with sufficiently long memories.) Eventually there is debt overload, which causes the economy to crash. The crash wipes out the debt and hence allows the process to begin anew. Allegedly, this is the explanation for what is happening now, made inevitable by capitalism, and that we are approaching the crash phase. Naturally, the argument about the causes of what is happening today is bollocks. There is no need for an expansion of the money supply to create accounting profits, as Dr Reisman points out. Now, it is true that we are nearing a crash set up by a massive set of debts but capitalism is not to blame for this. Just in the private sector alone (ie leaving aside the sovereign debt crises caused by welfare-state profligacy and other things) the present-day multiplication of debt upon debt is the result of central banking, fiat currency, rafts of financial regulations, and various policies (eg various government guarantee mechanisms, such as FDIC & equivalents and the too-big-to-fail idea, plus artificially cheapened debt making yield income harder to get, and so on) that encouraged a degree of risk-taking that would never have been countenanced under laissez-faire capitalism. Governments caused this, not capitalism. JJM

Found it. I think this link should work. If not, it is (at time of writing) the fourth entry to be found on the link I gave previously. JJM

Boris: what you really need to do is get ahold of George Reisman's "Capitalism" and read chapters 12 to 18, because this covers in extensive detail precisely what you are struggling to understand (for a snapshot, see figure 16-2 on page 732). The clincher is chapter 16 (from whence that snapshot is taken), which discusses his Net Consumption Net Investment theory. The short answer is that you missed also the consumer spending that comes from dividends distributed to equity investors. They are NOT an expense, but the profits from prior years' efforts that sNerd is trying to tell you to consider. The initial source of these is the built-up savings that equity investors already have, out of which some personal expenditure is made (this, btw, is mistaken by Richard Salsman as making Dr Reisman's argument a type of consumptionism, which it is not). If those savings and expenditures are treated as though they did not exist then, as sNerd points out, you are working on a false premise and so can only "prove" an error. If you want it, I have an Excel spreadsheet I created (and have Dr Reisman's permission to distribute along with due recognition of his efforts) that shows his NCNI system in action. Money in matches money out, and there are consistent profits year after year. You can fiddle with it as much as you like, expanding it as you see fit to investigate. I'll have to go find it (it is buried deep in my archives somewhere) and then I will upload it to my Google Sites cabinet. Everyone else: you are missing Boris's point about monetary zero-sum - probably because that poorly-chosen term raises our hackles due to it being emotionally and ideologically loaded. He is not talking about non-monetary values, but the flow of units of media of exchange and trying to figure out where on earth the physical money for profits comes from in the absence of monetary expansion. The change in the real-world value of a unit of that money is a related but still distinct phenomenon. His point on this score is correct, even if he expressed it badly: in the absence of new money, money in must match money out, less that which is added to and plus that which is withdrawn from stores of cash. His problem is in failing to identify where a particular stream of monetary units comes from, and hence why he cannot properly identify the source for an outflow. The consideration of what happens when the money supply grows or shrinks is a later development. JJM

Welcome to the October 6, 2011 edition of Objectivist Round-Up, number 221. Kate Yoak presents Preschool due dilligence: naps posted at Parenting is..., saying, "After first despairing when I learned about the forced naps while visiting LePort school, I learned that this issue is not cut and dry. Today my daughter attends a school where that is not an issue." Carl Svanberg presents Elizabeth Warren's Assault on Justice posted at The Cold Voice of Reason, saying, "Enjoy!" John Drake presents GTD Habits posted at Try Reason!, saying, "Its the habits, not the technology that make GTD effective. Here are the habits I'm working to improve." Rational Jenn presents The One About The Standardized Test posted at Rational Jenn, saying, "The decision about whether or not to comply with our state's standardized testing requirements for homeschoolers became a very interesting lesson in Civics, Government, and Ethics." Ari Armstrong presents Pajamas Reply to Elizabeth Warren posted at Free Colorado, saying, "Elizabeth Warren invokes a 'social contract' to justify higher taxes on 'the rich.' Does her case hold water? I argue no in a piece for Pajamas Media." John McVey presents OTI post #7 - Primacy of Existence posted at John J McVey, saying, "This finishes metaphysics, at least for the time being." Paul Hsieh presents Don't Blame Capitalism for High Health Insurance Costs posted at We Stand FIRM, saying, "I'm honored that The Undercurrent published my latest OpEd as part of their Capitalism Awareness Week project!" Santiago and Kelly Valenzuela presents Once Again, Immigrants Improperly Blamed posted at Mother of Exiles, saying, "Immigrants are being blamed for border crimes, but who is really to blame and are US border cities really as unsafe as conservatives claim?" David C Lewis, RFA presents Can Your Financial Adviser Pick The Best Investment For You? | Twin Tier Financial posted at A Revolution In Financial Planning, saying, "I discuss the feasibility of selling investment recommendations." Rational Jenn presents Parenting Thought of the Moment posted at Rational Jenn, saying, "A well-behaved kid isn't necessarily an obedient kid. (But there's more--go read the post!)" David Baucom presents Gary Johnson on Republican Capitulation and His Presidential Bid posted at The Objective Standard Blog, saying, "Gary Johnson on Republican Capitulation and His Presidential Bid - (Not from my blog but my contribution to the TOS blog) A single Q&A I had with Johnson prior to, and not included in, my TOS interview with him" Diana Hsieh presents NoodleCast #99: Live Rationally Selfish Webcast posted at NoodleFood, saying, "In Sunday's Rationally Selfish Webcast, I answered questions on fear of death, using the Do Not Call Registry, genetic influences on thinking, the morality of selling your body, and more. Listen to the podcast now, and join us for another episode on Sunday morning!" Jason Stotts presents It’s About Time posted at Erosophia, saying, "Some states are now moving for legislation that removes the felony charge against teen sexting." Gideon Reich presents Why I support Gary Johnson for President posted at Armchair Intellectual, saying, "My reasoning for supporting Gary Johnson for President." That concludes this edition. Thank you all for submitting articles. To have articles showcased next week, submit your blog article to the next edition of Objectivist Round-Up using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page. Our host next week is Rational Jenn. Share Technorati tags: objectivist round up, blog carnival. JJM Automatic cross-post

Continuing to look at metaphysics, he are my observations and inductive reconstruction of the Law of Causality. Context The context for this is recognition of the three axioms for their content - <a href="http://jjmcvey.blogspot.com/2011/03/oti-post-2-existence-exists.html">existence exists, consciousness is conscious, and all existents are of definite natures - and the fact that they are axioms. This is implicit in the cognitive activity of a baby within moments of his first conscious state, and needs to be explicitly stated for students of philosophy. Basic meaning The Law of Causality is that all entities act according to their natures. Since that includes their reactions to influences of other things, we can also note that a given set of events plays out according to the natures of all the entities that were involved in or otherwise gave rise to those events. Further, looking at affairs from the perspective of events as the primary object of investigation and asking why they happened, another way of stating the law is that all effects have causes. That is, as was discussed in Dr Peikoff’s first OTI lecture, the world is orderly and lawful. Reduction of ‘entity’ I shouldn’t need to state anything other than that entities are particular things that exist. This includes rattles, hanging-toys, cot bars, pillows, blankets, mums, dads, cats, dogs, suns, snails, flowers, and so on. Further exploration was done during examination of the axioms above. Reduction of ‘act’ and ‘action’ The dictionaries I looked at only provide various synonyms of the word act, such as do, perform, and so on. Of my own formulation, a beginning for an objective definition is: to act (including react) is to change in identity. In the same vein: action is the progression of changes in identity. This also implies a reference to time, but I wont be getting into the controversial debate on that concept here. The identity in question is that of the entire observed state of affairs rather than just individual entities in isolation, which thereby includes the generation and destruction of entities. At one point in time the state of affairs within a particular context was X and at later point in time the state of affairs relating to the same context was Y, where Y is different to X and action is that process of X giving way to Y. Thus ‘to act’ and ‘action’ may take the form of a change in composition of an entity, or in the layout of an entity, or of the disposition of that entity in relation to another entity, or whatever. An apple was red, now it is brown. The flower was closed, now it is open. The sun was in that part of the sky, now it is in this part of the sky. In all three cases, action has taken place. Why it has, we don’t know yet - but that it has, we do. The concept of action is not first-level, just as the three axiomatic concepts were not. Rather, it is drawn from the lower-level concepts for types of actions. Thus we reduce action to swinging, rattling, falling, scratching, stinking, screaming, barking, yelling, and so on for all the kinds of actions whose concepts can be understood by children of single-digit ages. In turn, it is all the concrete instances of each of these that are directly observed and first-level abstractions made for. Perceptual roots Take note that it is always entities that are acting, ie it is always entities that are changing in some form either of themselves or in relation to other entities. There is much more to be said than that, but observe that, first, it is entities and their identities that we observe, and second, that it is changes in their identity that we also observe. One will never ever observe action that is not action of entities, and will never observe action other than by means of their changes. I could go back even further, showing how that definition covers observation even prior to the ability to perceive individual entities, but that’s belabouring things. And with that we have reached the directly observational roots of action. In school once we actually let an apple go rotten so we could examine it, I’ve seen for myself how flowers open and close (I’ve even teased some Venus Fly-Traps!); and finally, everyone - other than those who are strangers to the Big Blue Room, such as geeks and emos - has seen for themselves the sun rising and setting over the course of a day. Reduction of ‘cause’ and ‘effect’ So far, all we have is reference to observations of mere juxtapositions of actions with entities. We have observed the fact that there are temporal sequences, and indeed have begun to associate particular sequences and types of sequences with entities and types of entities under various conditions, and so on. BUT, we don’t know why those juxtapositions hold, and we can observe that sometimes they in fact do not hold: some seeds we planted did not sprout, the puppy did not come running when we clanked his dinner bowl, the glue we used to fix a toy didn’t hold properly, and so on. We need more than this. When we mean by cause and effect is that there are definite patterns and orders of the progression of total sets of identities. Cause-and-effect means that one particular set of identities will come to hold after an equally particular previous set every time that this previous set comes to pass; and, conversely, a particular set of identities did hold prior to another particular set every time that the later set held. It is in this overall system that we can distinguish the two words: cause is the set of identities at a prior point in time conditioning the sets to follow, while effect is the set of identities at a later point in time, conditioned by the sets that preceded. Hence when we invoke the law of cause and effect what we are doing is looking at the sets of identities at one point in time and then either inferring from those observations conclusions about what sets of identities will exist later or what sets of identities did exist previously. (Note that this also includes the generation and destruction of entities.) As with action, the concepts of cause and effect are not first-level abstractions. We do not associate causes with effects without observing particular causes and particular effects, given the particular natures of particular entities, and at and over particular points and ranges in time. In bouncing, for example, we can associate the flexibility of a rubber ball and its apparent determination to reassert a round shape in defiance of being pressed with its rebounding when dropped or thrown against a hard surface. This nature of rubber balls in general, coupled with the particular speeds that individual balls have and the solidity that surfaces have, causes the balls to rebound; and similarly, the rebounding is the effect of rubber balls striking sufficiently hard surfaces with at least some speed. We get used to this so readily with rubber etc that we have no difficulty in surmising the same cause and effect relationships on the part of the metal balls in Newton’s Cradles even though the departures from round are too tiny to see with the naked eye. We can do that because we can tie that with how we can bend metal bars, seeing how most of them want to return almost to their original shape but some them completely to their original shape so long as they aren’t bent beyond a certain point (a fact - called the yield point - that engineers et al have to work with). We contrast rubber and metal balls is say to a ball of dough or mud, which has no such determination to stay round, its flexibility is ‘one way only’, and which on impact with something just spreads out laterally or even breaks apart. We can extend those observations for all actions we can poke a stick at - including, I might add, the action of poking things with sticks and observing certain ranges of these things occasionally being none too pleased about it. Amongst other possible reactions to being poked with a stick (and each associable with different types of things), some things exhibit very little response if any, some go crunch and make us say “uh oh”, some go REEAAAAAOWWW and tear the hell out of the sofas they’ve been sleeping on, and others make noises that in turn makes mummy’s face go red and make her rush to clap her hands over our ears. After discovering and associating these causes with effects, sometimes we enact those causes again because we want to repeat the effects. Then we get new effects to ponder, such as smacks to our backsides. To a great degree we have come back to most of the perceptually observable roots of cause and effect. However, those examples of external cause-and-effect associations are by themselves just more juxtapositions of actions with entities. We’ve still not yet properly perceived evidence of causation. We infer causes for effects because we already have a nub of a notion of it. Where does that come from? To understand that A causes B, to be justified in inferring that something external to us causes effects likewise external to us, this has to be experienced physically. We must first observe ourselves making things happen and hence generating that nub of a notion through a rudimentary observation of our capabilities. It is we who cause provocations by poking things with sticks, we who cause our arms to move, we who cause our legs to walk us to where we want to go, we who cause our hands to flex, and prior to any of that, we who cause our heads and eyes to turn and look at what we are curious about, we who cause our eyelids to move at all. With that we now are finally at the core perceptual level of causation. Discovery of actions and cause-and-effect relationships What we start with is that we can observe action. We see, feel, taste, hear, and smell what is all just an incomprehensible blur at first, but from which we begin to identify patterns and start to become familiar with our surroundings. First, we begin to identify the fact that there are entities, and then that entities have attributes. These lines of investigation lead us eventually to existence and identity. Self-control and personal limitation Integral to that is discovery and development of some degree of control over the blur. We can shut out light by closing our eyelids, and we can stop the hurt on our hands and feet (which we as adults know comes about from them hitting the sides of our cots etc) by taking control of our arms and legs. We then become increasingly adept at motor control, becoming ever more able to move our eyes and our heads, to sit upright, to reach for things, and begin crawling, in manners as we choose to enact (including, to continue the previous development, learning to muffle the noises we hear by putting our hands over or fingers in our ears). Thus we start becoming active investigators of the strange world we find ourselves in rather than passive observers of it. What gets the ball rolling for our discovery of the principle of cause and effect, rather than just associations of juxtapositions, is not just that we can exercise control but also that there are limits on what we can do. We may want X to happen, but that may be beyond our capabilities. When we experiment with ourselves to see what we can do we find that we have only ranges of capabilities. We may want to reach for something but our arms are only so long, and we cannot squeeze through the bars of our cots or playpens. We may want to move some piece of heavy furniture to get a ball that rolled behind it, but we find that though we can move some kinds we can’t move others, even though we’ve seen the grown-ups do that all the time. From countless examples like these we get the first implicit notions of how we can make things happen how our powers are limited by our natures. Later, we find that our powers not only grow, but we can make them grow through practice. From recognition of ourselves causing we can project the same on the part of other entities. We see that our parents make things happen just as we do, and can do even more than we can. They can reach things we cannot, they can move furniture we cannot, and so on. We see other creatures also making things happen. From our own ability to dig holes or tear up paper or pick up balls, and seeing that a puppy can dig holes or tear paper or pick up balls too, we easily recognise that a puppy can make these things happen. And so on for cats and birds and ants and fish and etc. We recognise how those entities also cause things to happen, and can also see that they are limited. We find it amusing, for instance, to see cats try to jump for things and fail miserably, implicitly recognising the principle that there are limits to powers and mocking those who haven’t figured that out yet. Problem of anthropomorphism Before too long, however, we are inferring consciousnesses going about making things happen all over the place - and that’s a problem. Whenever mum brings out her cyclonic vacuum cleaner she may threaten to sic the Purple People Eater on us if we’ve been naughty - today we’re big enough boys and girls to be fairly sure she’s joking, but, given that “Roomba” thing that our friend’s parents have and also those robot movies our parents were watching that we’ve sneaked a peek at when we were supposed to be in bed, you never know... At the dawn of man, this anthropomorphism lead to animism, then more formal religion. Then there were the Greeks. The discovery that there was a distinction between intentional and non-intentional causation was momentous. This began initially by the same man who, in the same act, separated philosophy from religion: Thales of Miletus. By Aristotle’s time, a bit over two centuries later, what was being commonly spoken of amongst the leading thinkers in Greece in his day lead him to state as a seemingly uncontroversial conclusion that the source of the movement of natural objects was their own essential natures (Book V, Chapter 4). I’m not here to examine that progression, just to note that a problem existed for tens of thousand of years and that someone finally solved it and paved the way for our much more secular world. What the fact that this progression took place does, then, is allow us - as children now able to communicate with our parents - to investigate cause-and-effect relations without being tightly saddled with thousands of years’ worth of anthropomorphic nonsense at every turn. Cause-and-effect relations Over the same time frame as developing awareness of both self and other entities, we also observe that included in the attributes of things is that they act in certain ways. Initially all is and even http://www.youtube.com/watch?v=N9oxmRT2YWw. We do not know why these patterns hold, we know only that they do. Still, the headline is that we are actively using differentiation and integration to form pre-conceptual notions of types of entities and types of their actions. After recognising our own and other’s causative powers, along with linking the ranges of those powers to the respective capabilities of ourselves and others as entities, we now have a first and extremely crude notion of what ‘to cause’ means: to make something happen in a way that is limited by capabilities. Similarly, we understand what ‘to be affected’ means: to act in a way consistent with what sort of thing something is and in what particular way it was prompted to move. This parallels development in learning what action and reaction mean, where for these purposes ‘action’ means pro-active behaviour - we are a way away from learning about the more general concept action that subsumes both. We see directly an intentional causation on our own part, and we also easily infer the same again on the part of a wide range of other entities - that is, at least, of all the entities we later conceptualise together as animals. Now, without being saddled by others’ anthropomorphism, and with our parents saying things such as “It’s just a rock / some water / a cloud” etc, we have no significant occasion to develop our own proto-animism and run with it. Instead, after a while it becomes clear that there is also a non-intentional causation, too. We see that many objects are not themselves investigating the world like we do, that they are of themselves generally inactive though are reactive to external prodding. For instance, it is clear that http://www.youtube.com/watch?v=Dobcfo-eBRY. That paper only moves when we and other intentional beings supply it with power to move, but when we do we can identify it as reacting in certain ways by making sounds as we tear it or scrunch it or by being bouncy or roly-poly when it hits the floor, and so on. The ease with which these two sets of causations can become quickly taken for granted then allows us to have fun playing with the said cat and ball of paper. This treatment of objects that we do not suspect of being intentional causers soon becomes taken for granted for a wide variety of objects, such as http://www.youtube.com/watch?v=f5n7JroG5P4, http://www.youtube.com/watch?v=kJY5BRCNAs4, and light-switches, all despite the absence of any knowledge of what makes these things tick. From here, working on this implicit notion of their being two broad classes of causative behaviour, growth is a process of building up a stock of more implicit notions of particular cause and effect relations. We learn to associate what we can and cannot do with things, and learn to look out for tell-tale indicators of what might happen if we treat something a given way. For example, we have to learn that touching hot things hurts us, and after being warned by our parents plus learning things the hard way (hopefully not traumatically) become careful when we see things we have reason to suspect are hot, such as oven doors or pots or steamy water. As for me, one memory I have is about how light globes are very hot and will melt one’s plastic blocks if placed on top of said globes. I also discovered that parents don’t like that, for some reason. Speaking of blocks - we also implicitly learn that things fall. I recall some experiment a few decades ago where they got one of the early models of a manufacturing robot with an AI that was sophisticated for its day and asked it to stack children’s blocks. This robot tried to proceed by grabbing blocks at random and placing them in mid-air in the location they were supposed to go. The blocks then of course fell to the ground, but the robot AI still could not learn to change its approach. Contrast this to a child doing the same. Long before he is even given any blocks to stack he learns through observation and experimentation that things fall when not supported, so when he finally comes to stack blocks he knows very well that he has to start from the bottom and build up from there. We also learn that various objects have characteristics that are not obvious to the hand or eye and instead are discovered by an active interaction. These require a little more active investigation, with the accumulation of the results adding to the implicit idea of action and reaction being correlated with that which acts and reacts. A personal example, as my parents tell me but of which I have no memory at all (honestly!), is that apparently I discovered that crystal goblets make a pleasing tinkling sound when smashed. One incident that I do remember is that I experimented with a self-inking rubber stamp... while hidden behind the lounge-room curtains and decorating the wall: *kaCLICK!*kaCLICK!*kaCLICK!*. And puddles! Kids love puddles! Parents don’t like muddy shoes, but, yeah, PUDDLES! When both our motor and intellectual skills grow better, we also become able to investigate more complex relations, involving multiple steps. For instance, we learn that there are different steps in baking that have to be done in particular orders, and also that changing the ingredients will give different results - sometimes this is deliberate, so as to make different kinds of breads or biscuits, for instance, or accidental, as in forgetting to put the yeast in and finding that the bread wont rise like it should. And, before we kick the puddle habit for good, we learn to take our shoes off prior to re-entering the house - unless we want to upset mum, which we now know an easy way to do. Reconstruction of ‘action’ and ‘cause and effect’ First-level concepts The use of words in all this follows along. Indeed, one of the earliest cause-and-effect relationships we learn of is that crying makes one or both of those big huggy food-bringing nappy-changing thingamajigs come to us and give us some attention. Then they try to get us to make strange noises with our mouths by rewarding us with that attention in a good way, whereas, once they start wanting us to make these noises, just crying instead makes them upset when they finally turn up. Soon enough we get the picture and use the special noises to get their attention. Then they teach us more of these sounds, and also what they mean. Then we start uttering these words non-stop and begin annoying the crap out of these “mum” and “dad” thingamajigs. After learning some words of pronouns and ordinary nouns, we learn the verbs for particular actions we see and are involved in. For instance, we learn what washing and cleaning etc mean, starting with being washed and cleaned while our parents speak the words. Then we learn about particular ways of doing things, such as driving to grandma’s house rather than walking, where we learn that cars are things used to drive in. Then as we become adept at doing things ourselves we get told to go wash and clean both ourselves and also other things such as dogs, dishes (a favourite of parents everywhere!), cars, and floors, as well as get ordered to do a whole bunch of other things like “pick up your toys!” “put your dirty clothes in the hamper!” “take the bowl back to the kitchen when you’re done!” and so on. Then we start learning adjectives. The first are those that describe attributes we can see right away, such as colours, but now we are also beginning to learn adjectives for attributes that can only be discovered by interacting with objects. and seeing how they react. Some of the earliest are partly active: heavy versus lightweight, for instance. We can tie in with how hard they hit the ground when they fall either on the floor or on parts of our bodies: a hammer dropped from waist-height onto our feet hurts more than a plastic blocked dropped from the same. This is related to how that the heavier things are the more effort it takes both to speed them up and slow them down, which later we come to know by the inertia of objects. Other attributes of entities require more direct action to discover. During more baking, for instance, we learn that eggs are fragile or breakable; we learn how toys made of plastic are also fragile whereas toys made of metal are tough, because some can survive a boy in his sandpit whereas others cannot. When we get older this includes further nuances, such as delicate (eg thin versus thick glassware). Similarly, with adverbs we learn that the actions themselves have definite natures, such as how movement can be quick or slow, how someone may act clumsily or skilfully, and so on. Note that the ascription of adverbs to actions can only take place to the actions of entities. For that reason the adverbs applicable to actions can lead to related adjectives applicable to entities undertaking those actions. Thus that an egg easily breaks on impacts is what leads us to ascribe fragility them, and so on. Sentences After a while we begin being able to describe whole cause-and-effect relations using full sentences. As part of that we learn what the word “why” means. Working from our implicit knowledge of cause and effect, we learn that the word is asking us to describe those relations in words and whole sentences rather than just pointing. Thus, as one mother told me of, a 4yo can understand just by having the words spoken to him how his failure to secure the latch on the rabbit hutch properly allowed the rabbit to get outside and then die of cold overnight (it point of fact, as she told me, the dog did the deed, but she said she wasn’t about to tell him that.) Likewise we find ourselves having to explain to disbelieving parents why the glass cup in the bathroom got smashed, and how it was because we had slippery hands when brushing our teeth just like they told us to. Then we face a barrage of further questions that we are expected to answer. We also learn about related words such as ‘because,’ and ‘happened’ and so on. The word ‘because’ is critical: we can begin to use it when we can to use words to link one clause with another to describe a chain of events. We can use it properly when we figure out that is used to explain in words how one set of affairs A caused another set of affairs B - that is, we can say “B happened because A happened first”. For instance, “the airconditioner is hissing out gas because I put a dart through a pipe” and “I put the dartboard on the nail under the airconditioner because there was nowhere else to hang it up” and “Dad grounded me for a month because I broke the airconditioner”. (I was 8.) This word is but a step away from the formal concept of ‘cause’ itself. Reconstructing ‘act’ and related concepts Concurrently with the above progress towards describing things in sentences, as a result of a history of both us and others being naughty and being told off for ‘acting up’, asked ‘why did you act like that’ and told ‘stop acting like a baby” etc, we get our earliest introductions to the express concept of ‘to act.’ Thus similar to how our first understanding of causing is of us making things happen, our first understanding of the actual concept of acting is in how we act. An actor and an intentional causer initially mean more or less the thing. The matching word to act, and which coincides with the non-intentional causer is ‘react.’ Our first introduction to the word ‘act’ is in descriptions of this kind pro-active behaviour by ourselves and by others we observe and see being talked about, such as how dad remarks to us in a mock-conspiratorial tone “Mummy’s acting silly, isn’t she!” It is later that we start to get more formal about the words action and reaction. We separate action from intentional causation, and instead begin to recognise it as being activity by an entity that happens prior to activity of that or another entity at a later point in time. We learn that the action of the gas flame on the water in the pot is what makes it heat up, and it is the action of the hot water that makes the eggs cook. Then, finally, when we’re older, we can start using the word action in the general sense to encompass reaction too, of treating how something ‘acts’ as similar to how something works, whether overtly acted upon or is the overt actor in any instance. Thus we know that paper boats don’t act like stones when dropped onto water, salt doesn’t act like sugar when it is heated up, and so on. From there, we can go back and forth between the general and the overt meanings with ease, as the context in each case requires. And similarly, in conjunction with learning about words such as inertia, note also that by this time we are in school, and have likely been introduced to the express idea of action and reaction as an integrated unit. Most likely all this will happen with reference to the same thing: Newton and his laws. A more scientific examination of action I leave for another time. Reconstructing ‘cause’, ‘effect’, and ‘cause-and-effect’ By this time a child already has explicit understanding of making things happen. It is a fairly easy task to abstract from “making a ball of paper fall off the table”, “making a cake”, “making your bed”, “making a mess”, etc, to understand what the word make means: to cause something or a state of affairs to be brought into being. One of the earliest examples of the latter that I recall is my brother, about age 3, stepping in front of a car which then came to a screeching halt with barely any room to spare. He turned around and, with a beaming smile on his face, said to our father “I made a car stop!” That wasn’t the only thing he made happen, of course, but that’s another story. It is later, as a part of the process of separating action from intention, the child understands that non-intentional objects can ‘make things happen,’ where ‘make’ starts to take on a more abstract meaning of “to cause a given state of affairs to come to hold”. Grammatically, this is the ability to understand verbs in their infinitive form. Thus hot water makes eggs cook, and so on. This is the stage, I think, when a child is about ready to understand the actual word ‘cause’ itself. I don’t think it really matters in what context a child first hears the word. For instance, he could hear talk about causes from parents or teachers or the radio or the TV etc, or he could be asked about why he “caused” someone or something to happen, or even perhaps (given the type of parents or school he goes to) the first he hears it is when the actual concept is trying to be taught to him. In any event, with a little abstracting on his part, he figures out what causing means, drawing easily upon his knowledge of what ‘making’ means in the broader sense, along with his knowledge of what ‘because’ means. For example he can now state that the cat caused the paper ball to fall off, gravity caused the ball to fall down; and also: heat causes things to cook, soap causes things to clean better than ordinary water, oil or water on the ground cause people or cars to slide around and have accidents, and so on. Soon he can come to understand the noun form, too. That is, he is now capable of looking at “a cause” as an abstract mental entity referring to either a single entity or a whole state of affairs relating to entities, which cause is an explanation of either particular events or as an explanation of why things act certain ways in general. It is even possible that a reference like this could be where he first hears of the word, such as similar situations of overhearing others or from TV or radio, this time with reference being to “the cause” in relation to accidents or motives for action. Similarly, as for ‘effect’, sometimes the first exposure to the word itself will be direct reference, such as asking what the effect of something or hearing about how effective or ineffective something is, and sometimes this will be the result of learning that it is synonymous with “result” and hearing that word first from situations such as worrying about test results, exam results, and so on. Another source of hearing the word is in reference to “special effects” of TV programs and movies, but that is a derivative application. In any event I don’t think it worthwhile to go into more detail because it is the counterpart to causing. Thus eggs being hard-boiled (or other food being cooked) is the result of being heated in some way, falling is the result of being dropped from a height or not flying properly any more, a slip is the result of there stepping on something wet or oily on the floor or trying to hold some objet in wet or soapy hands, and so on. The last step at this still-child-level progression would be to integrate this with recognition that every form of doing something is causing something to happen. Every doing-verb can be recognised as essentially describing a means of causing some state of affairs to change into another, to which there correspond shifts in the tenses of those verbs. Thus cooking is identifiable as the process of causing things to be cooked, walking and driving are processes of causing people to have walked or be driven from A to B, washing is causing things to get cleaned, and so on. The only verbs that don’t are those that ascribe attributes or otherwise timelessly describe states of being. Eventually, after this child builds up several years’ experience, a child has a large accumulated base of knowledge of particular cause-and-effect relationships, he takes the implicit notion of cause-and-effect for granted now (both acting accordingly and understanding what others do or say while equally taking that notion for granted), and he know what the words “cause” and “effect” mean. He has also likely to have even heard the phrase “cause and effect” itself, but if he hasn’t he soon will - most likely in school or some other more formal setting given the more formal nature of that phrase. And when he does hear it, by this time he is able to take to it like a duck to water. He knows this, either implicitly or explicitly, and with the words can have the latter easily: the principle of cause-and-effect is that everything that happens comes about because it is the effect of particular causes, and that these causes are the actions and natures of the entities involved. Reconstruction of the Law of Causality A child - or any non-scientist adult, for that matter - can live the rest of life with a perfectly good working knowledge of cause and effect, and can even talk about it with quite a degree of sophistication as his needs require, but he does not yet have a Law of Causality. All he has is, implicitly, a notion of cause-and-effect that is totally taken for granted in all action, and, explicitly (especially in response to the spaced-out or Jim-Jonesish natures of many modern “philosophers” young and old), an a-philosophically dismissive attitude towards doubt and which attitude is usually expressed in the form of attacks on the common sense of anyone who even thinks about asking deeper questions. That’s fine for day work, but for science that will not do. The reconstruction The full reconstruction of the Law, qua Law, follows easily on from the preceding reconstructions and to which is added intellectual integration of cause-and-effect and action with the axioms themselves: it is the first explicit discovery and then the intellectual acceptance of the axioms that are the hard parts, particularly among the mystics. Anyway, with the above in place, which will arise mostly just from growing up in the modern world, all the honest thinker need to is reflect on that process and expressly join the dots. That is, one simply formally recognises this progression: to get to the Law of Causality, observe that: - there is existence, - there is identity, - identities can change, ie that there are actions, - all actions are actions of actors, - all actions are of specific natures, - the specific natures of actions are entirely correlated with the natures of the actors causing them, - there are actions and reactions, leading to identifying that there are causes and effects, - all effects are caused by entities, and all effects are effects upon entities, - an entity’s full identity includes the cause-and-effect relations it can exhibit, under various circumstances as set by the influence of other entities to which this likewise applies, - the correlation of effects with causes is the same correlation of actions with actors, and - all effects are caused only by the full identities of the entities involved in the action. That final observation is the Law of Causality. In order to get to it, one has to integrate the fact of actions being actions of entities and being the consequence of the natures of those entities with the fact that existence exists and all existents are of certain natures. In short, as Miss Rand put it, now we can say plainly that Causality is Identity as applied to actions. This turns the working-knowledge of the ordinary man into a proper and defensible philosophical position. Then the young man can go on a ‘causality walk’ to just look around and think about what he sees, and be able to come back later that day to exclaim “there’s causality everywhere!” But getting there was by far a lot more work than simply saying that “causality is identity as applied to actions” suggests. There is no escaping the need for actual perception and all the forms of differentiation and integration required in the processes of concept-formation and induction, with or without the intent to get to the final philosophical exposition. Back-questioning With the knowledge of the Law of Causality and the understanding of it as a proper philosophical position firmly in hand we can now deal with the kinds of questions asked by the spaced-out types et al. In regards to causality, their questions come down to: why do certain effects follow? Our simple answer to that, is that this is because that’s the way the entities involved are. As A is A, so A does what A does. The question then becomes: why?? To that there is only one answer: existence exists, it had to exist somehow, this is the way it is, and that’s that - like it or lump it. JJM Automatic cross-post

Financial barriers to entry will be a non-issue under laissez-faire, and to an extent already ARE a non-issue today. If you can prove that you have an idea for a bette product or a more efficient way of making an existing product then you can get all the funding you need from the financial sector. Billions of dollars worth of finance can be and ARE arranged in just months. This is precisely what happened in the early-mid 80's, and for which the Old Guard in the corporate world and the unions hated Michael Milken with a passion. Laws were passed to try to prevent this happening again (takeovers by formerly bit players), such as requiring at least 50% of funding for a take-over be funded by equity rather than debt. It is immoral laws like that which hinder competition by creating financial barriers, not "natural monopolies." JJM

Of course *palm-forehead-smack*! I just realised - leftists look at the world of business and think it is a larger version of their tiresomely cliche` view of the schoolyard as seen in movies: brainless jocks at the top of the pecking order hoarding all the resources for their own interests, always bashing down the weaker but smarter kids, teachers/politicians dealing with insufficient funding unless they work in relation to the jocks' interests, etc etc etc. Heck, there's even at least one whiny song I know of explicitly about it - Simple Plan's "High School never ends". Update: second *palm-forehead-smack*... the Comprachicos. Simple Plan don't know the half of it. These movies and song etc are of course of the creations of other leftists, working from previous incarnations of the same mentality that set their premisses, and they so experience an echo-chamber that acts as psychological and psychepistemological reinforcement. That's the same lunatic mentality seen when they prattled on about how that the fake military letter about Bush at the heart of Rathergate was something that "bespeaks a truth" or whatever that commentary was even after the fakeness was demonstrated. Question: is there any connection of the above to the hateful reaction to the Atlas Shrugged movie (which I haven't seen) that is more than just about the sociopolitical content? Specifically, I am wondering if they instinctively realise that the Altas Shrugged movie - however poor it may or may not be as a stand-alone piece of art - could hinder that echo-chamber mechanism at the unspoken psychoepistemological level. I am not in any position to find out, at present. This question must therefore one more thing for others, more immersed in concretes than I, to follow up on if they judge fit. JJM Automatic cross-post

I think it important to distinguish between individual instances of causal sequences and a causal connection as an abstraction, just as one distinguishes between individual entities and concepts for entities as abstractions. Induction for causality (IIRC) is not simply the identification of individual causal sequences, but recognising that the individual sequences one observes are instances of universals: all S does P under conditions X. It is not that individual event B happened to follow individual stimulus A, but that A causes B is a timeless principle of cause-and-effect that can recur again and again. That is, in induction you are looking at one or more individual causal sequences and recognising that each is a unit member of an open-ended class of such sequences, that each is identifiable a unit instance of the same cause under the same conditions having the same effect. One is dropping the measurements of each particular individual sequence observed and identifying a causal principle that unites them. So yes, induction, in forming universals from observations of concretes, is an instance of identifying individually observed cause-effect sequences as unit members of an abstraction. This is the same method applied to casual sequences as is applied to entities. The point about the unit perspective is not that only entities or classes of entities can be units, but that one is looking at something - be that an entity or an action of an entity - and recognising that it is an instance of an abstraction one can form. It matters not whether this abstraction is of classes of entities (eg men) or classes of actions of entities (eg running) or classes of connections between causes and effects (eg when men run they soon begin to sweat). As to reducing whole sentences to individual concepts, how is that necessary for all induction? It can be done as and when there is need - eg from "One element can be converted into another under the influence of high-speed impact or ionising radiation of the right kind" to "transmutation" - but I don't see this being a required element of induction for it to qualify as an example of the unit perspective. What need is there for a single concept to denote the act of typing into an edit box to recognise the fact that there are such things as edit boxes and there is a universal causal connection between typing into one and seeing what one types becoming published? Each individual act of you doing so and seeing the results is identifiable a unit instance of this causal sequence, a whole sequence that after a series of observing instances of it in action, becomes for us a universal expectation taken for granted every time we see one and have occasion to use it - ie those individual uses are identifiable as units of a rudimentary principle of end-user computer usage. Again, you could do so if you wanted to - eg I could say "John is about to postpublish" where 'postpublish' is a concept I just invented that refers to the action of typing something into an edit box and submitting it for publication on a forum, a concept whose meaning is dependent on knowledge of a now-common causal sequence using computers - but what is the point in that? JJM

I take it that the two share the same fundamental root in measurement omission and the unit perspective. Concept formation applies this to entities to form classes of entities, whereas induction applies this to actions of entities to form classes of causal connections applicable to the classes of entities so observed acting. This indicates two things to me: first, that while measurement-omission is crucial to both, concept-formation has the primacy (just as Identity is hierarchically superior to Causality), and second, that after a short while the two must proceed together, often in lock-step fashion, where learning about cauasal connections increases one's knowledge about the entities these connections relate to and also make possible the identification of more abstract entities (eg learning the concept of society properly, as opposed to a collection of unconnected men who happen to be congregated together for some accidental reason, is only possible after learning about causality in the interactions among certain men as well as commonalities in social institutions etc). Thus I think that the need of discovering the method of concept formation before discovering the full answer to the question of induction comes from identifying their common root as part of the discovery of that method. Does this help? JJM

This is fascinating - and telling... The cynical idea that religion and socialism are the only two alternatives. The fact is that one cannot establish a philosophic positive by demolishing a negative. Commentary like this shows that atheism alone is nowhere near enough to establish liberty - without reason and egoism being proudly promoted as essential parts of the secularisation of society the sense-of-life of religion - not to mention the false alternative of dogmatism versus skepticism - will continue to poison the ethical and political codes even even alleged athiests, and the consequences of the spectacle itself gives fuel back to the religious cause. The real enemy of man has always been religion, not socialism, for the latter feeds on the former and cannot survive long without its lasting influence. Religion must be despatched from this world - but the method of despatching it can only be by putting the greatness of "Reality, Reason, and Rights" in its place. JJM Automatic cross-post

A question for various segments of alleged atheists (they know who they are): If you consider yourself truly to be atheist, why do speak and act as though emotions were some magical connection to an infallible source of truth and goodness that reason is impudent if it dares question? Don't say I am not looking at you: all those who posit subjectivism - of either the individual or social variety - are as guilty as sin in this regard. Emotions are essential for human life, without which life is neither worth living nor even capable of being lived. But emotions are not tools of cognition - they are not means by which one can determine "this is true" and "this is good". So, certainly, they have pride of place in human life - but cognition is not that place. Here's the dare: Find out how emotions arise. Then go find a standard of value without committing that sin in any shape or manner. And, once you've done that, question every value judgement you've ever made. JJM Automatic cross-post

Anything the connects any one existent with another, be that between subatomic particles or galactic superclusters or anything else in between. This includes causal relationships (gamma-ray converts to a positron-electron pair under certain conditions) or numerical relationships (ten miles is 52,800 lots of a simple measure designated as the foot) or spatial relationships (the cat is on the mat) or tempral relationships (the cat was previously on my lap), or whatever relationship exists in reality. JJM

A long time ago (circa 1996) I thought up an analogy in reasoning to the mathematical methodology of simultaneous equations. I eventually dropped it, however, because I thought it was too rationalistic (plus because I was being ridiculed for it - though somewhat deservedly at the time, too, I must add). I now realise that I was definitely on to something important back then and that I was wrong to drop it entirely. What I had in mind back then was quite simple: if one knew the relationship between A and B, and one knew the relationship between A and C, where for instance A was oneself (ie one's consciousness), then one could identify the relationship between B and C as it stood independently of A (ie, contra Kant, conceptually able to identify things in themselves). Working on that principle, one can then tackle more and more complex relationships, succesively busting down complex equations into lesser ones and from there to the identification of individual variables. I had neat diagrams to go with it, too, such as: The reason why I think that there is something valid in this for all thought in general (I've never rejected the fact that it was a definitely valid method of approaching the quantitative aspects of reality) is because of its connection to Mill's methods (particularly difference and agreement) and their connection in turn to the general cognitive processes of differentiation and integation. It is quite valid to view systematic methodologies for solving them, such as Gaussian Elimination, as being advanced implementations of Mill's methods to the mathematical realm. That is, what is GE but a complex method for the progressive discovery of residues? Taking it back to reality itself, what is the method of concomitant variations but the means of identifying the equations themselves? There's even analytical software available for that purpose - that is what all those statistical packages amount to, with the R-squared variables and the like indicating how much confidence one can place in the equations so generated from a mass of raw input data. The other reason why I am reversing my past dropping is that Miss Rand noted that to invalidate concept formation one first had to invalidate algebra. The solving of simultaneous equations is an element of the subject of algebra! It is one of the methods that is directly applicable to reality itself. The fact that there really is a strong mathematical element to consciousness, along with that express identification, clearly suggests to me that the method of solving simultaneous equations ought be investigated by the epistemologist. But I am neither a professional mathematician nor a professional philosopher, so I will leave this for those professional epistemologists to develop. That being said, I know what I know, I do know that I am on to something valid and that it is not to be dismissed as inherently rationalistic. "Everything in reality is simultaneous" notes Dr Peikoff in many places, and that hierarchy in epistemology existed because we had to approach reality in that fashion: knowledge is built on previous knowledge. I strongly suspect that this is also a tie-in with the spiral theory of knowledge, in particular applications, in that the more one knows the more one can go back and refine more detail out of equations that one had already partly solved in the past. Thus I will use it when and how I think appropriate, being careful of course not to get over-enthusiastic and rationalist about it. Dr Peikoff also notes that science was nothing more than the conceptual unravelling of perceptual data. Miss Rand noted that cognition was a mathematical process. I would suggest, then, in combining the two along with recognition of Mill's methods and their derivatives (particularly in mathematics), is that science in large part consists of identifying the figurative or literal equations in reality or fragments thereof and also of contrasting various equations against each other to isolate ever smaller valid sub-equations and ultimately to identify the root irreducible variables. JJM Automatic cross-post

This continues and concludes my response to Doug, as per Max’s request. The full demand-notes variant of FRB by legal means So far we have large quantities of short-dated credit-notes being issued by professional financial houses with solid credit ratings. They trade at a small discount when in bulk, mostly just for interest with only a tiny part for credit-risk. For example, at a 4%pa rate a $100 note repayable in three months would trade at $99.02 and go up as the days passed. For smaller denominations, a lot of the time most people wouldn’t even bother with a discount. Trade both at discount and at par is precisely what happened in history. Going to a full demand-note variant rather than credit-note would only take one more tweak, also something that should be legal, and already is in general credit law independently of its application specifically to money substitutes. Each working day yay many notes would mature. However, the issuers of credit notes will find that some of the notes continue to trade even though they are mature, and so some of the cash they had made available is sitting idle. They will further find that this is not just a one-off but happens consistently and predictably, where, ceteris paribus, the better the issuer’s credit rating the larger the amount kept outstanding. Obvious implications then arise. Should the issuers be legally obliged to have the whole of that money sitting idle in vaults and tills, waiting for redemption of mature notes that they know full well aren’t going to be redeemed, even though such a requirement may not be a term of contract? Should law not inherently bar them from reinvesting a portion? Indeed, should law declare void a term of contract that expressly allows the issuers to reinvest what amounts they honestly forecast aren’t going to be redeemed? No. The situation is now that the economic difference between the credit-notes and the banknotes is only the law they come under, where both are now redeemable on demand. It is the content of the law that makes the difference: the credit notes are under credit contracts while the banknotes are under bailment contracts. The nature of bailment contracts is that the holders of the notes have direct property in the specie they are redeemable for (specifically, tantundem in genere), so it should be flat-out illegal (and would be under laissez-faire) for the note issuers to use that specie for anything. The nature of credit contracts is something else: the ownership of the specie remains in the hands of the issuers of the now-mature credit notes, and the creditors who hold the notes only have property in uncrystallised claims to being paid on demand. This makes all the difference in the world, because it is no longer illegal for the issuers to keep on using the specie - it is legally theirs to do with as they judge fit. There is a legal gulf between, on the one hand, something that ought be outright illegal and which is also imprudent, and, on the other hand, something that is imprudent but which must remain legal despite being imprudent. The law should and does recognise the existence of this gulf. This is the key to the affair. Unless there is a specific clause setting out an express covenant regarding what happens on and after maturity, the credit contracts only require that the issuer pay on demand. Without such clauses it is not a breach of contract to fail to have the money on hand. The issuer may only be found at fault if there is an actual failure to pay on demand. The issuer may not, and indeed is not, found at fault for a mere potential that would arise under particular circumstances. The law can, does, and should recognise the crucial distinction between the actual and the potential - this is the same distinction crucial in the abortion debate, for instance. So, yes, it is physically impossible to satisfy every holder of credit notes if not all the money is actually on hand to pay on demand, and yes, in economics it would be catastrophic were there enough demands made at once. The fact remains, however, that the financial houses would, under laissez-faire, be legally at liberty to keep available only a fraction of the amount of coin required to pay out on credit notes that have become mature and yet which are still trading. The final tweak is to issue credit-notes with no maturity at all to begin with. The benefit for issuers and holders alike is that now there are far fewer tranches to deal with and discounts are now just appraisals of risk. Each issuer only has one or a few contract types, with notes differing only in the unitised amounts of their principals. So, now we have large numbers of pieces of paper evidencing rights under credit law to immediate payment of unitised quantities of coin on demand, which credit was granted solely on the back of the confidence in the issuer to pay coin on demand (ie ‘created out of thin air’), which notes evidencing the credit circulate alongside actual coin, and which notes do not have a matching quantity of coin actually available to pay on demand were every single demand made at once. This is identical in every meaningful way to fractional reserve banking for notes, both in its mechanics (eg redeemable upon presentment, trading at a discount that varies predominantly with appraisals of risk) and in its economic effects (eg credit expansion in their creation, ephemeralisation of part of the money supply, potential for boom-bust cycles). The only difference is that the word 'deposit' is nowhere to be found, there is no hint whatsoever of the notes being warehouse receipts or equivalent thereof, and that the applicable commercial law is that of credit. In light of all those similarities, and despite that difference (and which difference was rendered meaningless by Foley v Hill), what purpose is served in not identifying this as fractional reserve banking? Integration with other bank practices Not only is there no benefit in that refusal, recognising this credit-variant as FRB allows much easier integration of it with other issues in prudential bank management. For instance, I hold that FRB is itself an instance of an even broader questionable practice, which a previous commenter rightly asked me about. The practice of FRB - in the wider sense I use - is a concrete instance of maturity transformation (also of duration mismatch, but that’s too arcane to discuss). This is where the maturities of the assets one invests in is different than the maturities of the liabilities and equities used to fund those investments. Mismatch is pursued because of the tendency of longer maturities to have higher rates of return than shorter maturities. In the majority of cases, the practice is of having assets of greater maturity than liabilities and equities, giving rise to net interest margins and hence increased profits for the equity-holders. This, however, is dangerous because the obligation to pay can arise much faster than the right to take payment. The result is failures to pay and hence legal proceedings for default. (The opposite, having longer liabilities than assets, is inefficient because it cuts into net margins for no good reason). So, given the zero-maturity of the notes and accounts that are payable on demand, for the most part there’d be some sort of skewed distribution curve heavily concentrated in the low-maturity range but allowing for small amount of investment in higher-maturity assets. This curve would be calculated and constantly monitored by specialists advising the bank’s overall credit policies for regions of varying sizes and economic conditions etc. With that in mind, it should also be clear both that FRB even in the wider sense I mean is not sui-generis but is part of a whole system of financial practices and that, despite courting danger for the banks, shouldn’t automatically be illegal. Where FRB differs from other instances of maturity transformation, though, lies in its more direct connection to the money supply, which leads to the danger being an issue for more than just the bank practicing it. A side observation, one perhaps too technical to bother discussing besides mentioning the fact of integration, is further connection of the practice of using bills and other “money market” instruments as media of exchange and how they are part of M3. Their use in this fashion is also an instance of maturity transformation, with the same dangers being attendant for the same reasons. But I will leave exploration of this issue to others who may be interested in this sort of arcanery. An accounts-variant of FRB The above was the notes-method credit-variant of FRB. With the requisite legal principle even for mature credit now in place, it is not hard to come up with an accounts-method credit-variant. Indeed, this can be discussed very quickly. Instead of the issuer issuing unitised notes to holders, the issuers make book-entries in their accounts that list specific amounts. The holders can then either demand payment (eg at ATM’s or inside actual branches) or demand reassignment (eg cheques, EFTPOS, internet banking). In the past, customers could get information on their accounts either by asking in person or by consulting passbooks or chequebooks etc, while today these options have been added to by ATM queries, telephone queries, internet monitoring, and probably other methods too. To facilitate trade and promote custom, the issuers can also be members of clearinghouses to deal with transactions among holders who are customers of different issuers. (One of the things that central banks have done is monopolise that clearinghouse role for their respective political jurisdictions.) After that, complexities relate only to the range of services that financial institutions might provide. The only things limiting the financial engineer are imagination and marketability. Epistemology regarding ‘deposit’ Without a doubt there has definitely been epistemological corruption regarding the word deposit. If one considers the wider, non-economic meaning of the word, it means something that is just sitting there, such as a deposit of ore in the ground. The word was brought into banking on the application of this to having specie or bullion 'just sitting there' in the vault. Thanks to various injustices now long-since normalised, 'deposit' in banking has come legally to mean having amounts outstanding owed and payable on demand, irrespective of where the physical owings happen to be or what is being done with them. This was recognised piecemeal in case law, then formalised by <a href="http://www.uniset.ca/other/css/9ER1002.html">Foley v Hill, 1 Ph. 399; 2 H. L. C. 28; 9 ER 1002, at least for Commonwealth countries anyway (emphasis mine): Money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker's, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker's money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the. principal and a small rate of interest, according to the custom of bankers in other places. The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach, of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable on the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands. Make no mistake, I decry that epistemological degeneration. But I think that heavy reliance upon undoing this corruption as a means to trying to refute FRB in principle is cut off from reality. There is no doubt that part of eventual reform must include restoring the original meaning of deposit, but now that the practice of FRB has been normalised and has defenders not just among free-marketeers but even knowledgeable Objectivists it will take a damn sight more than linguistic reformation to deal with the practice. Without that extra work, these other Objectivists can and have condemned the deductions from the etymology of ‘deposit’ as rationalist. The need for extra work can be seen from the fact that the linguistic complaints can be satisfied by mere equally linguistic change. All that the financial institutions need do to maintain FRB while doing justice to epistemology and legal clarity is to abandon any and all reference to deposit and related concepts in their brochures, advertisements, and contracts. This is not a tall order, because a panoply of nouns and verbs with 'credit' as their root already exists and is in use in banking. For instance, instead of depositing into an account the bank will refer to customers crediting their accounts, or instead of withdrawals it is debiting, and so on. Likewise, instead of the bank making reference to “accessing your money” it could refer instead to the physical acts themselves along with catch-all words like “or” and “so on.” In this project, the financial engineer would use the services of the lawyer and the linguistic engineer. With that in place, the word "deposit" could then easily be returned to its original meaning by the courts without causing economic disruption, with all new contracts using the word treated accordingly (as instances should have been so treated all those centuries ago). The problem is the only thing that has changed is making public recognition of the fact that under FRB there is the use of credit alongside specie as a medium of exchange, interchangeable by means of common money-substitutes. There has still NOT been given any reason as to why credit should not be used in this manner. And so, other free-marketeers and those other Objectivists will continue to defend the principle in general until they understand the actual economics. Conceptual structure The argument I’m having with the legal-based opponents of FRB is not that their arguments are false - on that score they are substantially correct and I don’t have much quarrel with their arguments - but regards how broad the concept of FRB is. Their argument on this issue is that FRB applies only where deposit contracts are being technically violated by banks lending from the funds deposited. My argument is that they are right to identify the violation for what it is but are wrong to restrict FRB solely to the outcome of that violation. I am trying to point out that what the violation achieves in economic substance is the forcible (and hence immoral) transition of banker-customer relations away from bailment towards credit and the monetisation of that credit, which fact is being masked (extremely thinly) by continued use of depositary nomenclature, and yet that this particular outcome can also come about perfectly legitimately by simply entering into contracts of credit from the beginning. The conflict, therefore, is about conceptual structure. Here is the conceptual structure I have in mind: At the top-most level is fractional reserve banking in general. Its defining feature is the use of credit owed by banks to customers (whether or not identified as “depositors”) as media of exchange. This is fractional because there are more rights to payment on demand outstanding than there is cash on hand to pay those demands. Within this concept, differentiable by legality, there are two main variants (and other, lesser, demi-variants I wont discuss here). These are deposit-variant and credit-variant. The deposits-variant is where customers are told (or are lead to believe) that they are making deposits when they hand cash (or cheques or whatever) over to a teller etc. The etymology of the word ‘deposit’ once legally implied that the amounts so deposited were stored in vaults, in the same way that ore still in the ground is a deposit of that ore. They are also being lead to believe - or at least not being expressly disabused of the inference - that the money is there being safely held for them (*). This variant is fractional because that is not actually the case - only a fraction of the amount deposited is actually there as a physical deposit. (* At least, that is the claim I have heard from some quarters. From personal experience both anecdotally and as a former professional taker of surveys that included bank satisfaction surveys - I once worked for Roy Morgan Research and AC Nielsen - I know that real people from a variety of walks of life are nowhere near that naive. They know what happens to money in banks and credit unions and building societies. Heck, part of the charters of these latter two types of institutions includes member education.) The credit-variant is where customers are told that they are told (or have sufficient notice) that they are creditors to the bank and that when they hand over cash etc they are making loans to the bank. The customers can demand full or partial settlement immediately, whether by drawing on them in specie or through reassignment. This variant is also fractional because only a fraction of the amount that is legally payable on demand is actually available for payment. The legal-opponents rightly condemn the deposit-variant, but exclude the credit-variant from the broader FRB concept entirely. I don’t do that. These legal variants can then be further distinguished by the concretes of mechanical methods. There is the notes-variant of FRB, which is where the issuer has more paper notes outstanding than cash on hand to pay them, and there is the accounts-variant, which is where the issuer has more amounts listed under liabilities than there is cash listed under assets. Metaphysical claims A frequent element in treatments against FRB is the claim that two (or more) people are trying to lay claim to the same thing at once, that a given unit of specie is being used several times simultaneously. This argument against FRB requires that the law recognise multiple ownerships of the same thing - not in the form of shares of ownership, but that each is trying to claim 100% ownership at the same time as others are doing likewise. The problem with this is that it is confusing the issue of who exactly owns what. The law no longer recognises ownership of specie on the part of depositors - again, that is one of the things the finance industry took from Foley v Hill. By the violation of the deposit contracts, which then became normalised, the customer’s relation to the bank was forcibly switched into one of being a creditor. What the customers own is right to payment, not to a share in the present stock of what that payment must be in. The trade in ownership of rights to payment separate from trade in the goods actually payable with is no different to trade in any other intangible, such as in factoring, or in the rights to buy or sell stocks at given prices (calls and puts respectively) separate from the trade in stocks themselves (giving rise to the distinction between covered and naked). These rights are separate assets from the physical underlyings, are recordable in accounts books as such (cue arguments about expensing executive stock options...), can be used as collateral, and are subject to tax laws. Further, this trade in rights is but an instance of the broader trade in all intangibles in general, such as the purchase and sale of copyrights or other intellectual properties. So, so long as the debtor pays on demand and is not insolvent (ie total assets are greater than total liabilities), this trade should be and is recognised as perfectly normal by the courts. There is no metaphysical difficulty at all, so long as one properly identifies that the legalisation of the original violation of deposit contracts included the forcible switch of property relations from owners’ reclamation rights to creditors’ repayment rights, and that one remembers that intangible does not mean unreal. Again, if the issue of the meaning of deposit were resolved as reason and justice demand that would still leave this principle of trade in credit intangibles untouched, and would just see the marketing and legal arms of financial institutions try to push customers in that direction. Inflation and dilution One last issue I’ll discuss is whether or not the consequence of monetary expansion is always inflationary. This is the particular topic that got a few people emailing me after I published something on HBL. My answer is yes and no, but that properly speaking the answer is no and that Dr Binswanger is correct as far as he goes (but he is wrong to hold that there is nothing wrong with FRB). The answer is yes, if by inflation it is meant an increase in either the total money supply or in general prices. The problem is that I don’t hold to either of those identifications of “inflation”, so the proper answer is no. Inflation occurs under fiat currency, and is best kept strictly to that context. It is the act of increasing the quantity of notes or numbers in accounts denominated in a numeraire whose sole value lies in its ability to satisfy tax and legal tender laws. Without taxes and legal tender laws, fiat currency would have no value whatsoever - modern polymer notes wouldn’t even do as toilet-paper or kindling. Thus the expansion of fiat currency is an injection of worthless air, which is consistent with the etymological origin of the term. However, when the money supply is being increased through the monetisation of credit, ie where banks are borrowing money from current-customers in the form of credit notes or credit accounts (NOT credit cards, which is a different issue entirely) and where this credit is instantly reassignable by direct transference of substitutes from one person to another, I would not call this inflationary. Instead, dilutionary would be the better term (I don’t claim origination of the term - I co-opted it from Hazlitt’s dilution-of-wine idea he used to analogise inflation with). Dilution implies a thinning with something that is much more substantial, which something can and does have value in its proper context. Unlike fiat currency, the credit issued by the expanding bank does have real value independently of its use as a medium of exchange. The problem - and why it is a dilution - is that it does not actually add anything to the overall economy and merely redistributes value from everyone else in the economy to the issuer (and others to a declining degree in the spending cascade that follows). One could then discuss the interrelationships of inflation and dilution, but I wont go into that. Besides, right at this point in time I don’t have a matching concept for the opposite of dilution in the way that deflation is the opposite of inflation in the fiat context. “Concentration” strikes me as unwieldy in this context. Feel free to suggest something. JJM Automatic cross-post

Commenter MadMax asked me if I could respond to a post by Doug Reich about Fractional Reserve Banking. The topicality of that topic is a bit more 'perishable' than econ method, so I decided the latter can wait and I spent what time I had this past week on making that response. Besides, it also ties in with some on-going email (and now tardy) discussions I've been having with a few people and they all have the same issue that is at fault with Doug's post. I hope that this will help clear up a few things in that regard. Also, note that I am not here actually to defend FRB. Other than when there is a bona-fide physical dearth of specie, such as in remote and rarely-visited locations or where bad law hampers the circulation of specie, there is no economic benefit to the practice and so should be heavily frowned upon. There is no excuse for it in a free economy that has decent communication with the rest of the world. This is not all of my response, and I’ll post the rest later. It is not the best time of year to be doing this sort of thing! For those who missed it, previous posts by me are here, here, here and here. The essence of Fractional Reserve Banking The issue at hand lies in what exactly is FRB in principle. Over and over I see people having the same misunderstanding of this point, by means of them committing a particular conceptual fallacy, implicitly expressing faulty reasoning that includes that fallacy as a premise, and then on the basis of those fallacies subsequently drawing from the empirical data a particular hasty generalisation. The essence of FRB is the monetisation of credit. This is what it IS in economic substance, independently of how concrete forms of this monetisation historically came about. In all its variants, FRB is where a debt owed by a debtor to a creditor can be used by that creditor as a medium of exchange independently of the original principal. What makes it fractional reserve banking is that this new form of money is not wholly backed by tangible specie but by the general assets of the issuers of the credit, of which only a fraction is actual specie. The rest of the assets backing the money is other goods, both tangible and intangible. The different types of FRB differ on the mechanics by which credit is monetised. They also differ in the morality of those mechanics. Some implementations of FRB are immoral, such as the historical origin of particular implementations that gave the principle practical legs in the first place, but not all. In order to say that the whole of FRB is inherently something that ought be illegal one must say it should be illegal to use credit as money. The problem is that there are no grounds for such a law. By all means, one can and should criminalise particular practices that result in FRB, but that is as far as one can go in terms of what the law can say. As soon as you accept that it should be legally permissible to use credit as a medium of exchange you have accepted that at least some form of FRB can be legal. Once that is accepted then generating an instance of FRB that is consistent with both epistemology and morality is but a matter of technical know-how. In regards to those historical origins the legal-based opponents of FRB are committing the fallacy of the <a href="http://aynrandlexicon.com/lexicon/frozen_abstraction--fallacy_of.html">Frozen Abstraction. What the legal-based opponents are doing is rightly noting various immoralities, observing that they lead to FRB, but then concluding that the immorality is necessarily attendant with all instances of FRB. That is fallacious. They then mention the deleterious economic consequences of FRB, which they are right to note are indeed inherent in FRB as such (and why I am not a fan of FRB despite accepting that in principle it should be legal). But here they are committing another fallacy. They are implicitly reasoning that since the immoral is the impractical, instances of systematic impracticality can only arise from systematic immorality. They then integrate this fallacious reasoning with the actual instances of systematic immorality they've discussed and so further bolster their claim regarding the whole of FRB as such. Their reasoning is fallacious because there are other reasons for systematic impracticality besides immorality. The critical ones in this regard are systematic ignorance and systematic error, neither of which are inherently the result of immorality on the part of the ignorant or erroneous. For instance, you should see some of my grad school notes, written by some of the top members of the financial profession in Australia yet which have howlers such as “interest is the price of money.” Imagine the consequence of these howlers being taught to thousands of financial services students every year. Thus the systematic impracticality must be dealt with on economic grounds, because dealing with the particular immoralities of the referents of the frozen abstraction still leaves open moral means of generating a fractional financial system. It is time, then, to show how that impracticality arises by otherwise moral means. Constructing a notes-variant of FRB by perfectly legal means The actual fact is that FRB can proceed with its full vigour, without injustice, by the simple method of making the contracts of a credit nature from the beginning with everyone knowing exactly what is going on. (I’ll deal with the epistemological and metaphysical claims later). This is an example of that technical know-how - and note that it is the bread and butter of the financial engineer to think up things like this and put them into actual practice. The context is that the economy is laissez-faire, and that the money supply initially consists exclusively of specie. That is, there are physical coins circulating around, be they made of gold or silver or copper or whatever. This core constituent does not change. There are also banknotes circulating in the place of coin, where the contracts for those particular notes specifies 100% reserves. People in the economy are well-use to using these notes as substitutes for money. For all practical purposes, these banknotes can be treated as one treats coin. Joe lends Pete some coin, say $98. Pete gives Joe a verbal promise to pay $100 back at some specified later date, say three months hence. Joe accepts the verbal promise because he knows Pete well. Pete spends the $98 on something productive either by purchasing and using capital goods himself or on-lending it to someone else who will purchase and use capital goods (you can also daisy-chain that as much as you like, too). The profits of this investment will afford him a profit even after paying a little more back than he borrowed. One day, about a month later, Joe comes across Sally selling something that he wants. He finds that he does not have enough coin on hand... but he gets the idea of calling Pete and asking him if it is okay that he (Pete) owe the $100 to Sally instead. Both Pete and Sally agree to this. At no point is Pete required to go to Sally’s shop and provide $100 in coin, it is just a direct reassignment of debt. Sally accepts this because she wants Joe’s business, and she (like Joe) thinks Pete is a good credit risk anyway so she has a good chance of earning some interest. She accepts the debt for the value of say $98.67 (eg Joe had to pitch in an additional $1.33 in cash to buy something with a $100 price-tag). Do you follow that much? If you accept that it consistent with standard commercial law as should be recognised under laissez-faire then you’ve just accepted the economic basis for a legally legitimate system of fractional reserve banking. You’ve done that because the root of FRB is the reassignment of debt as a means of settling other debts (in this case, Joe settling his debt to Sally when he takes that $100 item). The monetisation of credit is where the practice of debt reassignment becomes widespread enough for it to be taken for granted and incorporated into people’s regular economic calculations: that is, they include the use of high-quality debt as a medium of exchange when examining the economy, when examining and calculating price structures, and when taking account of their own and others’ money stocks. To get from debt reassignment to credit monetisation (and hence an instance of FRB) that all we need is a series of tweaks, each tweak being equally legitimate. Follow this evolution, and see if you can point out where, if anywhere, an act that should be illegal has been committed. Instead of a verbal promise, Pete gives Joe a paper note evidencing the fact of credit by it saying “I, Pete, owe Joe $100, payable on or after X date.” By means of this paper, instead of Joe calling Pete to reassign the debt Joe just crosses his name out, signs this crossing-out, and puts Sally’s name there instead. This makes it easier to reassign the debt because it no longer requires Pete be available to answer his phone. It also makes the debt more marketable because the written evidence of who is owed what is clearer and more legally presentable. This has just described the economic substance of creating a Bill of Exchange. It is no accident that Bills of Exchange are included in expanded definitions of money and are known in the finance industry as an example of “money-market instruments.” It is also no accident that discussion of them in general, and also of the economic merits of their use as backing for notes issuance in particular, is included in arguments about FRB. Instead of a creditor being named on the note, it says “I, Pete, will pay the bearer $100 on or after X date.” This allows the debt underlying the credit-note to be reassigned much more easily still because it becomes “without recourse” and eliminates any lingering contingent liabilities on the part of holders who on-trade it. Bearer instruments and “without-recourse” clauses should be legal, and mostly still are. For instance, there are such things as bearer bills, bearer bonds, and also cheques payable to “bearer”. Similarly, many mortgages and other debts have without-recourse clauses in their contracts. This should continue to be legal under laissez-faire. Pete recognises the fact that his credit-note could be traded around, just as banknotes already are, so as an enticement to prospective creditors he breaks the single $100 debt into a series (called a ‘tranche’ in the jargon) of identical $1 credit-notes. There are now 100 of these credit-notes circulating around in the economy, used alongside coin as media of exchange and independently of the original $100 in coin that Pete borrowed and spent. There’s no disputing this tweak either. If one has the right to borrow as such then one is at liberty to break up that borrowing into as many little units of whatever size as one finds practical. Indeed, that is precisely what is done today, with the unit sizes being tailored to the market being targeted. Certainly, they do trade at a discount, of course, but so did fractional notes in actual history (ditto Bills of Exchange) and that didn’t stop them from being widely used as money (as money substitutes, to be precise), so one cannot claim lack of significance in trade to skirt the issue at hand. Pete recognises that his excellent reputation means that he can have quite a turnover of tranches going. So, he borrows $5,500 or so in the form of about 55 tranches of 100 $1 notes, each having three-month maturities such that one tranche matures each working day of the year. Each time he repays one tranche he issues another to replace it so that his total debt outstanding remains around $5,500. Now there are 5,500 $1 three-month credit-notes constantly circulating, with 55 different maturity dates. This is just more of the same as above, differing only in quantity. Again, the significance-of-trade argument is irrelevant. Tom, Dick, and Harry et al each independently see what Pete is doing and profiting from, so they repeat it themselves. They too borrow money and evidence the debts with multiple tranches of $1 credit-notes. Now there is say a hundred thousand dollars worth of paper physically circulating around the economy, all independently of the original principals. Again, this is just an increase in quantity. The financial houses see what is going on and so themselves begin systematically emulating Pete, Tom, Dick and Harry, issuing tranches of fungible $1 credit-notes by the truck-load. They are credit contracts, rather than the bailment contracts that the banknotes are issued under, and so do not legally require the whole of the outstanding amount of debt be backed exclusively by coin in their vaults. The amount of these notes circulating in the economy now runs into the millions. One cannot legally disallow this enormous increase in quantity given the previous developments! The credit-notes are exactly that – notes evidencing credit claims upon their issuers, and whose issuers back those claims by the totality of their assets and not just the small amount of cash actually on hand. By the ready transferability of the credit notes, and hence of legal title to the credit itself, that actual credit has been monetised and so the notes themselves have become money-substitutes. This is an instance of notes-based FRB even though the notes are not repayable on demand until on or after the maturity date, because the nominal amount outstanding is not backed by an equal quantity of specie held by the issuers. Just these straight-forward and completely moral tweaks on an equally moral original situation are enough to create a variant of fractional reserve banking. One could even envisage the lending of the notes themselves (which, again, must be legal), in time generating credit from credit in standard multiplier style - but it should be clear by now that this would be belabouring the point. I also can, and will, develop this into a demand-notes variant, but I wont just now because it would raise another issue that is the subject of misunderstanding and dealing with that just now would get in the way of that main point. The need for economic argument FRB can be done in a completely above-board fashion simply through sophisticated developments of the practice of reassigning debts, all of which are and must remain legal. At least some form of FRB in principle must be legal under laissez-faire because at no point in the evolution from simple debt reassignment to the mass monetisation of credit is anyone defrauded or stolen from, nor was there any epistemological corruption or attempted metaphysical voodoo. At no point may anyone forcibly intervene and say “You shall not do that.” Thus one cannot ban FRB without ultimately requiring a ban on debt reassignment for the ban on FRB to be effective - but such a ban is impermissible because it would be a violation of rights. The fact that the immoral is the impractical has the exact opposite consequence for this topic than the legal-based opponents intend: an effective ban on FRB would be enormously destructive. A ban on debt reassignment would redound not just on FRB but effectively destroy much of the short-term debt market - it would make Bills of Exchange illegal, for instance. The ban would also end up obliterating most of the liquidity of shares in corporations, because the sale of stocks requires that the debts owed by corporations, insofar as corporate debt is actually owed by the shareholders, is also transferred from a selling shareholder to a buying shareholder (ie not as Joe selling debt to Sally, but Pete clearing his debt through Eddie assuming it as part of him buying out Pete’s investments). The result of a ban, once consistently enforced, would be a wiping out of huge amounts of wealth, and, as it would constitute an enormous exit-barrier, would heavily discourage further capital formation. There are a number of other comparatively minor consequences too (eg to ban factoring), but to top this all off, a ban on debt reassignment would ultimately require that the government ban barter or any form of payment in kind whatever, dictate what shall and shall not be money, regulate its value, and institute legal tender laws. I’ve said before and I’ll say it again: a ban on FRB-in-principle damn-well IS an intervention, and once that process is begun it will lead to controls breeding controls. Trying to curtail FRB by means of legal proscriptions is totally the wrong way to go about it. You can and should ban wilful breach of contract, but that’s not enough to prevent FRB. So long as debt reassignment is legally allowed, as it must be, then at least some form of FRB can legally arise, with all the deleterious economic consequences that follow. More to the point, so long as debt reassignment is legally allowed at least some form of FRB will arise, as will those economic consequences, unless the hard work of making proper economic arguments is undertaken. The only normative prescriptions that can be made regarding FRB relate to what people should do in their capacity as customers of financial institutions and as participants in markets, not in their capacity as citizens and lawmakers. A pause Here is where I will stop for the time being. I’ve proven my chief point: it is wrong to say that all FRB should be always illegal, and the reference to particular injustices as though they exhausted the whole of what FRB refers to is to commit the fallacy of Frozen Abstraction. The heart of fractional reserve banking is the monetisation of credit, irrespective of the legal status of how credit comes to be monetised in any given instance. It is the economics that must be dealt with, not those particular injustices, if FRB is to be eliminated in entirety. When I come back I will continue tweaking so as to arrive at a full demand-notes variant and then convert it into a full demand-accounts variant, again by steps that are and must remain legal. I will then deal with the epistemological and metaphysical claims. JJM Automatic cross-post

This entire series on econ method from here on is a very truncated version of my own thoughts regarding induction and validation of various principles important to economics. It is the due concretisation of my post about proper economic method and my rejection of the exclusive use of deduction in determination of economic laws. This post is not about showing a worked out theory of induction. Rather, it is simply a demonstration of the sort of work in conceptualisation and induction that the economist ought properly be performing to generate and validate economic laws. I leave the full discovery of the theory of induction and its full application to the social sciences and economics for intellectuals more immersed in such issues than I. Nor will I show the validation of the axioms and causality, as that has already been done. If someone has an issue with just that much then he has bigger problems to deal with than economics. That being said, I will make direct use of one particular corollary of the laws of identity and causality, but more on that later. Rather than wait until I’ve done the whole lot, which looks as though it is going to run into umpteen pages, here’s the early work that precedes economics proper and focuses on foundational concepts and principles. I'll finish it when I can, though no promises when. Continued...

Here are some more thoughts I am working on. It's going to need more research, of course, but after much thought, reading, and integration, this is what I have come up with so far (in rough dot-point form) as to the methodology of the economic science: - identify the nature of value, the nature of man, and the nature of society - working from those, and observing key phenomena, identify the context of economics - use that context to identify instances and characteristics of critical economic entities - working with more observations and reasoning, continue to identify and refine valid economic concepts of economic actors and economic entities - figure out what is rational for an individual to do in the economic context in relation to those actors and entities - with observation of actual people, past and present, use the above to further determine what happens when lots of people actually act in that rational fashion, and attempt to identify principles of economic action - use observations of deviations from what would normally be expected if people were acting rationally as you thought they should as guides for further questions to be asked and answered in the whole of the above fashion - continue the above process, adding in more observations as required, in spiral fashion, to identify ever more economic principles and the structure of their interrelationships As you might imagine, economic method is just scientific method (with due deference for its application to social sciences) applied specifically to the economic context. As to what exactly is the economic context, I have figured that out to my own satisfaction. I have also intended to publish an article on the topic for The Objective Standard for a while now, but I need to research the history of a particular critical point in more detail before I can finalise it. I need to ensconce myself in a good uni library again for a while, which I haven't had time or occasion to do for a long time. It's well overdue. By the way, from what I have read, the Austrians focus heavily on the fifth there, and within that use almost exclusively deduction. Needless to say I raise an eyebrow at that blinkered methodology. There is nothing inherently wrong with point five, but the problem with the Austrians is that they treat that fifth point as an out of context primary, are highly rationalist in implementing it, and downplay (or worse) the necessary antecedent steps (the failure to be objective in formation of concepts and definitions is likewise common among rationalists). I have mined a fair bit of worthwhile material from the Austrians, particularly Menger and Bohm-Bawerk, and also von Mises, but I am not an Austrian and am not much of a fan of the later ones who came after von Mises. That's enough for the time being. JJM Automatic cross-post

Previous writing on FRB Revisited: Part One Part Two Part Three First up, I did not think I was going to be original in the details. I got the two core elements of my own opinions from Bawerk and Mises, which along with other discussions of theory and history (eg Salsman) I integrated into my own thoughts. I did NOT get any of my thoughts from Rothbard. Any correspondence of mine with his will lie in the common reference to Mises plus clear thinking (to the extent possible to Rothbard), not of me reading Rothbard. Moreover, the modern debates have been formally raging for two centuries. I am fairly confident that someone somewhere, probably also now long dead, and perhaps now obscure, has already said what I have come to think as a result of my own judgement. If that includes by people I would otherwise hold in contempt, so be it, and I’ll not apologise for publishing thoughts of my own that others may wrongly presume be sanction of everything that those other people had to say. (Edit: grammar + bad URL + a few expression faults + the three back-links) The hormesis-versus-LNT comparison There was a definite reason why I did not begin with a literature review. Aside from that I was not writing an academic paper, and that I did not want to bog the issue down with who said what and I was concerned to focus strictly on fundamentals, much of the literature and the on-going debate is shot through with absolute drivel and even worse. As far as I can see the extremely-high energy and frequently vicious nature of the discussion about fractional reserve banking looks distressingly similar to nature of arguments regarding exposure to ionising radiation between those who posit the hormesis effect and those who posit linear-no-threshold. For those who don’t know it, the hormesis idea is that a little bit of radiation exposure is actually good for you because the body’s detection of that little bit triggers more vigorous error-correction mechanisms in protein coding etc such that it also better deals with non-radiation-caused faults as well, and that only when the ionising-radiation goes beyond the capacity of the error-correction mechanisms to cope with does harm develop and radiation sickness begin to appear. The linear-no-threshold idea is that ionising radiation is harmful full-stop, that the higher the level the greater the harm that comes from exposure (after adjusting for various individuals’ peculiarities, of course), and that the implications for evolutionary theory that claims regarding error-correction mechanisms posited by the hormesis advocates have present questions that raise serious doubts about those claims. I draw this comparison because the violent debates on both controversies share many of the same critical features: - nobody worth taking seriously thinks that heavy exposure is not a problem and instead that everyone with a lick of sense recognises that the real debate regarding beneficial outcomes is smidgeon-versus-none, - both arguments have prima-facie plausibility, - the proper addressing of the issue requires sophisticated technical knowledge that most people just don’t have and that as a consequence of this fact the politicians et al who have to decide on legal responses have no choice but to take submissions from people on both sides and make judgement on what they are otherwise generally unable to judge on their own unless they have themselves been immersed in the field, - there is considerable public support on both sides, wherein people are loudly agitating for the above politicians to act one way or the other and are also in furious debate with each other, almost none of whom are in any position to say something actually meaningful, - amongst those who do have the capacity to say meaningful things there are good people on both sides yet there are likewise on both sides people who are dissemblers, have axes to grind, have ulterior sociopolitical motives and agendas, and have various types of large vested interests where possibly-unearned revenues are at stake on the outcome of the legal responses to the issue, - and that as a consequence of all the foregoing and people’s knowledge of it the debate ranges from polite and reasoned discussion (though frequently lacking the benefits of objective epistemology and value theory) through to vicious name-calling, ad-hominem, accusations of evasion and dishonesty (sometimes warranted sometimes not), and general emotion-fuelled spittle & mayhem. For the record as to the particular issue of radiation exposure itself, I am not competent to offer anything definitive. All I can say is that both hormesis and no-threshold do have plausibility, I am not remotely in any position to be more assertive than that, and that the only thing I am dubious about is the “linear” part because it strikes me as simple-minded nonsense contrary to what is prevalent in nature, manufactured by or otherwise for regulatory bureaucrats setting exposure standards etc without having to go to the trouble of hearing arguments and making reasoned judgement. That is all I have to say about this issue in the concrete. Yet the issue of fractional reserve banking does have one thing in its favour that the issue of radiation exposure does not: the sophisticated knowledge required to address the latter is of a degree both qualitatively and quantitatively considerably greater than that for the former. It takes decades of dedication spent learning, gaining experience, and conducting complex medical research to have a ghost of a chance of properly dealing with the nature of radiation exposure and determining how man ought deal with it. Only the dedicated professionals with access to expensive laboratories are capable of achieving this. In contrast, the sophisticated technical knowledge required to dispense with fractional reserve banking does not even require an academic qualification to acquire, nor access to materials any more expensive or hard to come by than the books and periodicals detailing principles and histories as one finds in a decent library. It does take years of good observation and thoughtful integration to generate a definite conclusion, but unlike medical matters the effort required for economics is within the capabilities of the diligent non-professional who resolves to put his mind to it. So, what option does the honest man with an interest in this topic have but to begin by ignoring everyone to start with, do his own research and thinking, make his own judgement independent of anyone’s alleged authority, and, while paying due attention to and making honest judgement of the calmer arguments offered by others, being so diligent as to make that conclusion definitive enough for him to make a stand on? Publius on Objectivist Answers The particular occasion for this post was me searching out a particular paper written by Lawrence White and George Selgin, as referenced by one "Publius" <a href="http://objectivistanswers.com/questions/592/is-fractional-reserve-banking-legitimate">over on Objectivist Answers. I think it is this one. Publius claims that White and Selgin proved that history clearly shows that laissez-faire leads to fractional reserve banking, not as a sad inevitablity or whatnot but as something benign and positive. Actually, neither history nor that particular paper prove any such thing. That paper may not be the one Publius had in mind, and it may well be that Publius had two separate works by each in mind instead, but Publius' claim is still wrong, and the critical sub-conclusion implied by White and Selgin here and which I imagine Publius is relying upon is not supported by the evidence they provide (nor can it ever be). The history of FRB stretches back WELL beyond just the 19th century American experience, an era so commonly referred to by fellow laissez-faire advocates but who are also pro-FRB. For instance, in his book "Money, Bank Credit, and Economic Cycles," Jesus Huerta de Soto recounts the history of repeated bank failures, going all the way back to Ancient Greece, and how they caused significant economic distress that was repeatedly partly ascribed to improper lending from what was not bankers’ to lend. Additionally, he also tells of how the Bank of Amsterdam came to be founded and why there was the vehement demand that it keep 100% reserves – people had discovered the hard way (again, that is) that when fractional reserve banking gets full swing and reserve ratios are permitted to fall markedly the result is the chaos and destruction of boom and bust cycles. (Hat-tip: Pater Tenebrarum) Of course, the point about de Soto’s recounting of history is to show a litany of actual frauds and the disasters that followed, along with the thoughts of learned men of the past regarding law and justice, in the attempt to support a claim of inherent fraud in the practice: “is fraud, so, therefore, is destructive,” is how we can paraphrase him. I will, however, point out that I have already demonstrated that the claim of fraud today is nonsense. As I said, the past is now the past, and irrespective of grave breaches of bailment contracts in the past the contracts for bank accounts we have today are of a credit nature and have legally been recognised as such for well over a century now (eg in England starting with Foley v Hill, 1 Ph. 399; 2 H. L. C. 28; 9 ER 1002, in 1848, with further details sorted out by 1921 in N. Joachimson v Swiss Bank Corporation [1921] 3 K.B. 110). The claims of present-day fraud from people who have the intellectual capacity and academic resources to know better, in brazen defiance of more recent history and the subsequent continued existence of due legal notice and precedent established long before any of us was born, are getting very tedious. The plain fact today is that bank customers are creditors and have absolutely no business complaining about not knowing this to be so when they joined up as depositors, and thus I say bluntly to the fraud-ranters, deal with it. But I am not so ready to pin down most the economic ills of Renaissance Spain or Italian City-States et al to just the practice of fractional reserve banking as de Soto is. Still, while how selective de Soto has been in his recounting of history I am not capable of saying, what he does show (particularly the story of the Bank of Amsterdam) certainly puts Publius’ claim in bad light. Nevertheless, even treating de Soto as an impartial observer, the merit in this White and Selgin paper is to show that when one has access to more details about historical events and examines them, it is clearer that a much more influential culprit is government interference – in regards to the European experience, not exactly a shining beacon of laissez-faire, it can be said that moral-hazard has a long and sordid history, and so I would suggest (as would White and Selgin were they to mention him by name) that de Soto is trying to claim too much. de Soto overstates his case and draws too strong a conclusion: a lesser one would have been valid, but that wouldn’t have suited his agenda. The problem with this White and Selgin paper is that they are guilty of the same excessive conclusion-drawing, albeit on the other side from de Soto. Whereas de Soto makes the assertion that history alone says reserves should be 100%, White and Selgin incorrectly imply – at least as Publius would have us believe (again the caveat on which work he has in mind) – that history shows that a little extent is safe and even a positive to be welcomed, and that problems only arise because of departures from laissez-faire. In the 19th century US, the closest we came to laissez-faire, the reserve ratios then and there hovered around the 30-50% mark, in contrast to today’s 5% area. If there were genuine free markets and the market discipline to match, and indeed with our even better communication and transport facilities compared to then, Publius would have us believe not simply that fully private banking would return to similar figures, and that we have nothing to worry about, but also that history shows it is proper that they should return and proper that fractional notes issued by sound banks facing strong market discipline always trade at par. Taken strictly on its own merits, the White and Selgin paper has valid points to make and which ought be widely disseminated. They demonstrate that proper laissez-faire in banking would be stable and also that we have nothing at all to fear in the private issuance of banknotes under such a condition even when issued by sound banks with only fractional reserves. That is their main conclusion, and it is sound. It is the implied assertion of inherent positivity and propriety of sensibly-fractional notes that is the too-strong conclusion. It is certainly true that at the time, when men were free and communications were good, even fractional notes from sound banks traded at par, and that should the same conditions arise again the same par will likewise probably arise again. The problem however lies in a superficial approach to why men of good sense did so voluntarily in the past and why they may do so again in the future. There are the assumptions that the actuarial value of the notes actually placed on them by men of good sense was and will be automatically at par, that men who in fact did or will do so were or will be automatically correct to do so, and the ignorance of the possibility that there were or will be non-actuarial factors militating against bothering to mess around with discounts on the part of men who did not or will not do so. Even were there testimony from every single man who did genuinely calculate par values, no amount of merely empirical reference to history will by itself ever demonstrate the rightness of what they did. The only way you can ever answer that question is to go into valuation theory itself, which requires one first go into investment and capital-formation theory, which is exactly what I did and why I did it. In regards to the non-actuarial factors, commonsense should have kicked in, especially given the reference to other reasons for non-par valuations. It takes effort to calculate and to work with the resulting numbers. It takes effort to have administrative systems to handle non-par valuations that just don’t exist when accepting par and washing one’s hands of what is usually trivial differences. This is no mere idle speculation, but a problem that has a long history and still plagues discussion of theory and practice today. In the past, the English Penny-Post was developed – one penny to post a regular letter to anywhere in England – because someone figured out that the administration involved in calculating the costs for different destinations was way more trouble than it is worth and it was more profitable to charge just one penny uniformly and be done with it. Today, we hear of the rabid complaints about the gouging interest rates charged by microfinanciers and pay-day lenders – complaints that are sometimes oblivious to the high proportion of the principal that is incurred as costs of administering such small debts, and complaints that sometimes whine incessantly about separately-charged administration fees sending effective interest rates up to gouging levels. And I recall a story I read once about some left-wing lecturer offering to borrow some trivial sum – $10 I think – from anyone in his audience at a 150% pa interest rate, then finding that nobody was interested, and using this finding as ‘proof’ that interest rates don’t perform the allocation role that free-marketeers claim they do, never for one second allowing for the possibility that chasing someone half way across the country for them to pay back $25 a year later wasn’t worth it. Given how those banknotes of old would have present-day values ranging from $20 to maybe $10,000, you should get the picture. But anyway, this is the fundamental issue that is truly at the heart of the fractional reserve banking debate: where, if anywhere, is the decision on the part of the ultimate beneficial owners of investible resources – not merely intermediaries but the free-and-clear owners themselves – to shift their preference on what is to be physically produced away from consumption goods and towards capital goods? The answer is: there is no such decision being made. It is that issue, the rock-hard reality of input physical resources and what arrays of material goods are actually wanted by the owners of those inputs to them, not the garbage about fraud or theft or voodoo, that brings fractional reserve banking down in a crashing heap. As I said, however, no amount of mere empiricism and historical reference will get you to that. Until that fundamental issue is addressed and integrated with proper concepts of money, demand for money, account types, saving, investment, and capital, mere historical empiricism will only net you that which had already been pointed out by level-headed economists from Smith onwards: that low reserve ratios are indicated as one of the efficient-causes of economic disaster but that under proper laissez-faire the self-interest of bank customers will see to it that reserve ratios are kept high. Those who say that history shows that reserves must be 100% and those who say that history shows that it is perfectly proper that they may not be 100% are both reading into the historical record that which is not there. Still, we can turn that historical empiricism into a proper induction by integrating it with morality and politics, and without needing sophisticated economic training to do so (basics will do): the moral is the practical, laissez-faire is both moral and practical, and so it is no surprise that history shows that departure from laissez-faire has negative consequences. The induction to be drawn is simply this: interference in the finance industry leads to bankers increasingly getting away with risk-taking with others’ money that is beyond what those others would voluntarily permit by preventing these others from exerting proper market discipline, and that since the finance industry is one of the commanding heights of the economy the consequences of this lack of discipline are apt to be catastrophic. When markets are free, bankers (like everyone else) are made subject to proper market discipline and their activities (also like everyone else) contribute positively to the health of the economy. There are no grounds for singling out bankers as especially prone to evil and for attacking them in the manner of drooling and angry junkyard dogs going after scrap pilferers. I must also add that no amount of monetary theory alone will do the job either. It is in vain to try to construct a theory of how money and fiduciary media will pan out in a market without reference to that physicality of resources and material production. That’s the sort of idiocy that lead to the idea that money is neutral and the over-stating of the importance of the money equation. As I said, the only place I can find for the practice of monetising credit is in remote locations with poor external communications and which have a bona-fide dearth of physical specie. The idea that fractional reserve banking is needed to stave off crises and depressions in whole sophisticated economies is arrant nonsense that is completely upside down - to the extent that an economy is predisposed to such crises and depressions the practice will make matters worse, not better, whereas to the extent an economy is not so predisposed the practice will be a mostly harmless and completely worthless distraction. Me as a mildly-Cernuschian free-banker I have long thought and said that under laissez-faire that the economic effects of the practice would be negligible, yet I must confess to having incorrectly given the impression of sharing the Chicken-Little attitude should there be the slightest deviance from 100% reserves – to the extent I gave such an impression, I was wrong. Under laissez-faire, without the requisite sophisticated technical knowledge coming into the hands of influential persons in the treasury departments of major corporations and governments, economies with reserve ratios once again in the 30-50% mark can be stable and prosperous with only a few obsessives (eg me) capable of and interested in pointing the pointlessness of the practice and its slight detraction from stability. If there are booms and busts in a laissez-faire economy, I wouldn’t finger FRB in principle and would be first inclined to look for government interference domestically and abroad – but I would however also wonder if a few key bankers dealing with an economic bottleneck of some kind had lowered their reserve ratios quietly and significantly. The circumstances of each case would give its own indications of where to look first. In terms of simple retail banking practice alone, its existence under laissez-faire is thus almost a non-issue, where what is of much greater concern under such conditions is the correctness of economic theory. This is because the failure to understand the pointlessness of fractional reserve banking implies failure to understand capital-formation theory and monetary theory properly, and that in turn is bad news for those of us with practical interests in hiring graduates to apply these theories to real-world financial matters. Of course, such erroneous thinking by others also opens the door for us to exploit opportunities for profit... I am therefore technically a free-banker... but in the vein of Cernuschi as applied to demand deposits as well as banknotes, though I would not be so cynical as to think that the events that would drive fractional deposits or notes to extinction would be tumultuous – sociopolitically controversial perhaps, but not economically troubling. Banks should be left free to offer both fractional savings and transaction accounts (as they do today, and which blurs the distinction between them), wherein customers holding them are creditors, and also to offer both non-monetised savings accounts and non-fractional transaction accounts (which returns the distinction to sharpness), wherein customers holding the latter are bailors. Laissez-faire also means that the rest of us should be free to discriminate against others based on their choice of accounts (hence that controversy), to demand that payments be made to and from only non-fractional transaction accounts, and so on – and that, the strong hand of major-corporate third-party influence (more controversy) and not retail second-party depositor revolt alone, is what I think the mechanism for the death of fractional banking under laissez-faire will consist of. Let freedom reign - laissez-faire first, full-reserve later. JJM Automatic cross-post

The principle of protecting individual rights is achieved in the concrete by actually protecting the rights of individuals. The police are obliged to protect every individuals' rights with favour to nobody. The Pastor was fully entitled to do as he thought fit with his own property. That action, in itself, was not a threat to anyone. The only threats to others arose from the reaction by barbarians. A more reasonable (but still inadequate) first response is to hold that they are the ones who we'd initially say should be billed because without their actions there'd be no cause for the police presence to defend the Pastor - but in the proper full-context analysis nobody should be billed for the reasons already mentioned: it would create a backdoor vehicle for governments to clamp down on free speech, both that of the Pastor and of protestors not breaking the law. Also, if there were any wrongdoers, eg someone firebombs the church or his home, even then they should not be billed for the work of police or the DA's office because that would set up an incentive for police and prosecutors to drum up business for themselves through wrongful prosecutions on flimsy foundations. Nobody should be billed in cases like these. The costs have to come out of the general budget, which budget is to be paid for by voluntary means. JJM

That's absolutely disgusting. It is saying in some of the most clear terms in decades that you and your product are the property of the state. The "technical difficulties" mentioned in the article are dancing around that fact while helping to legitimise it. If this is put in place, GET THE HELL OUT OF THE UK. I'm glad my parents emigrated in 1979, and I will never move back. JJM

Another new version of my Australian Constitution, in a new location that I hope is more stable. I'm slowly making commentary on contents in my blog. JJM