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Criticism of Bagus Criticizing Reisman on Deflation

Deflation: When Austrians Become Interventionists by Philipp Bagus criticizes George Reisman and five other Austrian economists regarding their views on deflation. This post will respond to the criticism of Reisman. My goal here is just to point out a few errors, not to discuss Bagus' overall view of deflation. All italics in quotes are my emphasis.

Yet, Reisman’s plan of monetary reform is not the direct abolition of government interventions into the monetary system, which would bring about deflation, but it is a new intervention, guaranteeing the results of past interventions. He proposes a new government intervention into the economic system, i.e., according to his own standards, a violation of freedom, in order to bail out the unsound banking system.

In Capitalism: A Treatise on Economics, Reisman explained why the results of past interventions and injustices should be guaranteed and left alone, in general, after a time limit passes. Property rights must be made secure, as quickly as possible, so that people are in a position to work to improve their property and to plan for the future.

If claims about past injustices can result in new redistributions of property, then my property isn’t secure. Whatever I think I own, I can’t count on it.

Reisman explains this regarding land reform and it applies to all types of property:

The Demand for Land Reform

The doctrine that present titles are invalid because of past acts of violence in the appropriation of property, is often associated with demands for “land reform.” Land reform is a demand that property be forcibly transferred from its present owners to a new group of owners. The connection to the violent-appropriation doctrine exists whenever this new group is alleged to be descended from earlier possessors whose rights the ancestors of the present owners allegedly violated.

It should be realized that no amount of past violence in the appropriation of land can justify land reform. Land reform is simply a new, fresh act of violent transfer of land. It is one thing for the actual victim of a dispossession, or his children or grandchildren, to demand to be put back in the possession of the property that was forcibly taken from him. But if for any reason these individuals are denied justice, it becomes a fresh injustice to later on dispossess an owner on the grounds that his ancestors, or the ancestors of some previous seller, lacked just title. In order for justice to be done, there must be a time limit on the recognition of claims for the redress of past injustices.

If this were not the case, no one could be secure in his property. At any time, parties could step forward claiming dispossession of their ancestors by the current owner’s ancestors or by the ancestors of some previous seller of the property. And claims of any one group of alleged victims could in turn be superseded by the claims of still another group of alleged victims able to trace the dispossession of its ancestors further back. In a country like England, for example, the same piece of ground might be contended for by those able to trace the dispossession of their ancestors to the War of the Roses, or, alternatively, to the Norman Conquest, or to the still earlier invasions of the Danes, Saxons, Romans, and even Picts and Celts.

It would certainly be a gross injustice to ask anyone to work and save to improve his property, and then take it from him on the basis of such claims. For justice to be done, conditions must be such that people can work and save to improve their property. And for such conditions to exist, property rights must be put beyond challenge as quickly and as completely as possible. This means, as a minimum, a strict time limit on the recognition of claims based on past injustices.

Once private property rights are made secure, not only are the effects of past injustices washed away, but, as should already be clear, the land of a country is quickly put to its most efficient uses.

The issue also comes up in the section From Socialism to Capitalism: How to Privatize Communist Countries:

Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.

Let’s move on to a second point by Bagus:

At one point, [Reisman] stresses the practical difficulties of mass bankruptcies during a deflation:

[M]ass bankruptcies, which, given the inability of today's judicial system to keep pace even with its current case load, would probably take a decade or more to get sorted out. That would mean that in the interval the economy would be largely paralyzed, because no one would know just who owned what. (1996, p. 961)

The ability of the present-day judicial system to handle cases of mass bankruptcy is not, of course, a theoretical argument against deflation. For Reisman's argument deals with the practical difficulties a severe deflation might have to face in today's judicial system. Yet there is no theoretical reason why there could not be a judicial system that could settle the lawsuits quickly. But let us deal with this practical argument.

The quote starts mid paragraph, leaving out a sentence by Reisman which reads:

Solving the problem of “an excessive debt burden” by means of inflation in any form is a reprehensible practice.

Bagus agrees with Reisman that that's reprehensible. Omitting that part of Reisman's view was misleading. Bagus presents Reisman as defending inflation using a weak argument (a mere practical point rather than a theoretical argument). But Reisman wasn't trying to defend inflation, he was just bringing up an important practical consideration about not destroying civilization.

Bagus continues:

It must be stressed that an increased demand for judicial services on the free market brings about an increased supply of those services. Yet, Reisman could contend that we face a government monopoly of judicial services. However, politicians would likely come up with emergency measures if deflation caused bankruptcies which overstrained the judicial system.[35] For politicians are eager to search and find problems they can fix. Also the judicial system itself could come up with solutions for this problem.

The basic theme of Bagus’ article is that six Austrian economics aren’t, in his opinion, radical enough, not even Rothbard. Bagus wants full 100% capitalism and freedom no matter what. I read him as such an anti-government libertarian that I think he’s an anarchist. With that context in mind:

Why is Bagus expressing his confidence in the government to come up with some emergency measures to fix a problem? Why does he think this is something politicians can fix effectively? I don’t get it. Here Bagus is objecting from a perspective of trusting government competence much more than Reisman does, contrary to the general themes of Bagus’ other comments.

Bagus provides no arguments about why government would be able to succeed at improving the judicial system. We've seen historically that the importance or urgency of an issue, such as war, education or healthcare, does not automatically make governments wise or competent.

Of course some entrepreneurs can have difficulties in the sense, that other entrepreneurs who anticipated the price drop and held their money back, can bid resources away from them. Entrepreneurs who anticipate price changes can always profit relative to the entrepreneurs who did not anticipate them.

Is the job of the entrepreneur to anticipate market conditions, anticipate government policies that affect market conditions, or both? Bagus seems to find it acceptable that businessmen lose money, including going bankrupt, for not anticipating new government policies that cause deflation.

I think a businessman's job should be focused on his industry, not on understanding politicians, lobbying for policies (being a cause of government policy makes it easier to anticipate), getting friends in high places to give him tips about the balance of power, etc. I want businessmen to be separate from government. See Atlas Shrugged for further discussion of political pull – it was men like James Taggart, not Hank Rearden, who were better able to anticipate new government policies.

Elliot Temple on December 13, 2019

Messages (3)


>> How far can the principle of small states go? You are for example open to the idea of Bavaria seceding from Germany, or Upper Bavaria then from the rest of Bavaria. Ludwig von Mises stopped at the communal level, thinking that the secession of individuals would be unrealistic. You as well? Is there a point when your rule – the more decentralized the better – is not true anymore?

> Philipp Bagus (PB): In principle not. We don’t want to arrogate, however, to know the optimal size and to say that this state is too small and that one too big. The optimal size would be determined in competition through the right of secession. If an apartment tower or street secedes from its municipality and then concludes that there are problems which were previously done better, then the secession could be revoked and the two entities reunited. Are they are better off alone, however, they will stay seceded. In this competition it will then show how successful small states can be.

Anonymous at 11:24 AM on December 14, 2019 | #14850 | reply | quote

> I think a businessman's job should be focused on his industry, not on understanding politicians,

I agree.

Businessmen should be focused on how to deal with reality in order to create value for the marketplace. Guessing the contents of a bureaucrat's mind isn't dealing with reality in the same way that figuring out how to make a delivery drone or better smartphone is

Justin Mallone at 12:27 PM on December 14, 2019 | #14851 | reply | quote


Even if a businessman successfully guessed the contents of a bureaucrats mind, nobody knows which bureaucrats ideas will become law.

Anonymous at 3:11 AM on December 15, 2019 | #14863 | reply | quote

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