“From the first establishment of (trade) which served reciprocal but not common purposes, a process has been going on for millennia which, by making rules of conduct independent of the particular purposes of those concerned, made it possible to extend these rules to ever wider circles of undetermined persons and eventually might make possible a universal peaceful order of the world.”[1]
Introduction
Rather than seek to put forth theories founded upon the opinions of F.A. Hayek, the mission of this essay is to use all the wisdom available pertaining to the subject, which wisdom stretches far beyond one person.
Untried Principle
“Christianity might be a top-notch thing if anyone ever tried it.”-George Bernard Shaw-[2]
The dismissing of trade’s usefulness for the promotion of civilized principles as naïve could very well be compared to the above statement. The notion of truly free trade stands as an untried principle, shoulder to shoulder with thousands of unapplied theories. Why has the idea been so discarded? Often, the reason for so doing is in pursuit of human rights. These human rights stem from basic morals espoused by the classical liberals, affirming man’s natural freedoms.
Arguments posed against free trade are consistently interested in pointing out how capitalism runs counter to these ideals of natural freedom, and how capitalism must be kept in check in order to ensure those freedoms. So many forget that trade in and of itself is a true value, consisting of quid pro quo, which religion and philosophy have taught as truth for centuries. Those who argue that the ethics of human rights overrule the principle of free trade, relegate one moral behind the others. Unfortunately, such is the position we find ourselves in at this time.
A Lack of Trust
Trust is the concept entirely lacking in the debate. This essay seeks to display how trust in government, and not in the governed, is what keeps the world from becoming a more peaceful place.
The belief in the individual and the individual’s propensity for doing good has been shrugged off as wishful thinking. Many follow a Hobbesian approach, thinking instead that mankind’s existence as a whole is “solitary, poor, nasty, brutish, and short.”[3] To overgeneralize not being among the least of sins, such an approach (while convenient) is not called for. We must look to and trust the individual, inasmuch as at an individual level, the process toward tranquil civilized behavior begins.
How far is the individual to be trusted? Gibbon stated emphatically in his Decline and Fall of The Roman Empire that “History is miniature more than the register of the crimes, follies and misfortunes of mankind,”[4] showing that the preponderance of evidence points towards a probative attitude towards the governed. Still, such estimations defraud the individual, propagating injustice, malice and contention. Among societies that value equality, who is being dealt with equity? The respond lies within the definition of trust.
Peaceful, Civilized Behavior
The conception of the social contract (postulated by both Hobbes and Locke) involves giving up some rights for the protection of others. These forfeited rights act as the trust (consent) of the governed in (to) their government. Locke described the fundamental rights of “life, liberty, and estate”[5] as those proper of being protected. Inherent and intrinsic in that protection is the government trusting the individual. It is the individual’s life, the individual’s liberty, and the individual’s estate that is necessarily protected. Any incursion of governmental authority is justified when it involves protecting these three quintessential rights. Historically, the government’s trust in the individual’s judgment of what is best for their estate and how to increase their property has been diminishing. Government regulates, taxes, monitors and decides. Government is set at odds with the individual, creating distrust between the protected and the protector. This dissociation destroys peace by creating sides instead of a cooperative.
Whereas peaceful nature is hindered in the situation by a lack of trust, it follows that even civilized behavior has a difficult time flourishing in such an environment. In a society where trade choices are limited by criteria, statute and excessive taxation, the breathing organism of civilization is anesthetized into a stillborn belief. Entrepreneurship and foreign investment in countries with higher taxation and regulation for social programs is consistently bad.[6] Civilization progresses under the auspices of commerce. Oxford’s English Dictionary defines civilize as “to bring out of a less developed stage of society.”[7] Again, the idea of economic increase here is applicable. Mistrust of individual commerce has led to the regulation of it, creating punishment for personal proactivity and development. Such regress stands opposed to the plan of civilization.
Peaceful, Civilized Behavior II
While we have discussed how loss of rights to free economic intercourse creates discord in the social contract, and regression in civilization, we have yet to examine how the exposition of those rights encourages peaceful, civilized behavior.
First, to civilize. Using Oxford’s definition, we are led to believe that in whatever free trade must do to accomplish the purpose of civilizing, it must “bring [the individual] out of a less developed stage.”[8] The individual is in a less developed stage when they begin the process of increasing their estate. Actions such as investing, consuming, and selling enhance the development of the individual. He learns practical application of mathematics, history and trends, and even social psychology. The individual is able to recognize and overcome problems because commerce has made him a problem solver. Commerce has brought him out of a less developed stage. To civilize is not to imbue the individual with civil rights. Rather, it is to broaden and deepen his understanding of society and motivation to do capable. Civilization is elevation. By eliminating barriers to investing, consuming and selling extant because of taxation, the individual is given the opportunity to finally make good of that which nature has already blessed him.
Peace is established when situation specific duties are competently performed. When those who govern have the best interests of the individual’s fundamental rights in mind, and work to protect them, government earns the trust (consent) of the governed. Revolts brought on by taxation have been justified, only when the government being protested has infringed upon the basic liberties afforded the individual by nature.
Is peace relative? Free trade is not about to bring world peace, even at its most liberated. Instead, free economic intercourse between individuals, is by its nature, peaceful. The Spanish word for business, negócios, denotes the peaceful exchange inherent in the action. While some would like to point out the similarities between business and warfare, less polemic etymologies exist:
- Economy – Greek origin, originally household management[9]
- Trade – English origin, German equivalent is Handel, implying the hand[10]
Of effect is the concept of trade involving the hand, and the peaceful nature inherent in the extension of it in Western culture.
Universal, Peaceful Order
Final consideration must be paid to the idea of a peaceful universal order in connection with the virtues of free trade. Of all the ideas discarded as naïve by current generations, the concept of a peaceful universal order is the most out of advance. To call such a belief intuitive is not enough; it is revolutionary.
In the same way that peaceful, civilized behavior could only be promoted by the development of mutual trust between government and the governed, a unifying, universal peaceful order of the world would necessitate a deeper human value than trust. Such an endeavor would require understanding. While free trade deepens the personality, and enhances the human experience, it cannot provide understanding. Understanding requires a human relationship between the individual and other individuals that free trade alone does not offer.
John Gunther, in writing about post World War II Communist Hungary said:
“The good reasons [for Hungarian prosperity] probably reside not in lenience by the authorities, but in the national character.”[11]
For all applicable reasons, free trade will not save the world. Free economic intercourse is designed so as to develop individuals of trust and peaceful purpose. Where regulatory hindrances vanish, peaceful, civilized behavior as described herein abounds. Until that trust is accentuated by understanding, until individuals view other individuals as more than mere consumers and strangers, peaceful, civilized behavior will not give way to universal composed order of the world.
[1] Hayek, F.A. Studies In Philosophy, Politics, and Economics. Chicago University Press, 1967, p.168
[2] Shaw, George Bernard. The Sayings of George Bernard Shaw. Ed. Joseph Spence, Duckworth Publishing, 1995, p. 34
[3] Hobbes, Thomas. Leviathan. Broadview Press, London, 2001, Chapter 13. Hobbes’ idea of a leviathan, or ruler being needed because of flawed human nature precludes the multiplicity of individuals for whom life is not as described above.
[4] Gibbon, Edward. Decline and Fall of The Roman Empire. Modern Library, New York, 2005, Vol I, Chapter 3
[5] Locke, John. Two Treatises of Government. Cambridge University Press, 1988, Chapter 2, section vi
[6] Aarsteinsen, Barbara. Talk to us, U.S. investors say. Vancouver Sun, Pacific Press, October 30, 1999
[7] Ed. Frank Abate. Oxford English Dictionary. Oxford University Press, 1997, p.131
[8] Ibid. p. 131
[9] Website en.wiktionary.org/wiki/Economy
[10] Website en.wiktionary.org/wiki/Trade
[11] Gunther, John. Behind The Curtain. Harper Books, New York, 1948, p. 54
Filed under Automobile Insurance Wiki by on Feb 27th, 2011. Comment. 
Over the past few months the news has been largely dominated by two stories, the outcome of the U.S. Presidential Election and the turmoil in the world-wide economy. Since the former appears to have been resolved in favor of Senator Obama, we can turn our attention to gaining an understanding of exactly what is occurring in the global financial markets.
Since the financial crisis began, everyone is concerned about the well-being of their money, which means that they want to know how that their money will be protected by their bank. To answer that question, we need to give a few definitions and a bit of history.
A Few Definitions
Merchant Banks are the oldest banks and can trace their historical existence back to Renaissance Italy. Merchant banks have traditionally limited themselves to international financial affairs of multi-national corporations and arranging loans to governments. Although certainly important to international finance matters, they will only be mentioned in passing in our discussions.
Investment Banks, traditionally, were involved in raising money for ongoing businesses and governments (national, state, and local) by selling new stock (for businesses) and bonds (for both businesses and governments) to investors. These investors range from private individuals to large pension funds to everything in between. The importance of the “traditionally” in the previous sentence will be explained below.
Commercial Banks are the type of banks that everyone is familiar with. These are the banks where you have a checking and/or savings account, the banks that maintain all those ATMs, and where you go to apply for a loan. Most commercial banks either sponsor credit cards or offer them as part of their banking services.
A Bit of History
Everyone has heard of the Stock Market Crash of 1929 and the Great Depression that followed. Banks got into pain during this period for two reasons.
First of all, people stopped borrowing money to hold things like houses and automobiles even though credit money was available and at very reasonable rates. The automobile, housing, and durable goods (things that last longer than a few years, such as household appliances) industries began to suffer. These industries began to lay off workers who, in turn, were unable to meet their bank payments on things that they had purchased on credit. The slowdown in demand meant that those employed in the scamper, mining, transportation, and other related sectors began to lose their jobs as well and the economy hit a downward spiral that resulted in the Great Depression.
Secondly, the banks of pre-Depression America were not subject to as remarkable oversight and regulation as they are today. This meant that banks were allowed to do business as they saw fit and, as long as the economy was strong and the banks’ profits were coming in, everyone was happy. In fact, some of the larger banks were so caught up in the drive to cash in on the then-booming economy that they began to make uncertain loans to people who were investing in the stock market.
If someone wanted to buy a block of stock in a given company he or she could approach a bank for a loan, which the bank would make and hold the stock itself as collateral. In fact, many banks were acting as stock brokers in addition to their banking functions. So long as the stock market was strong, the banks were protected against default on their loan because they could simply sell the collateral stock and make up their loss on the loan. It was a good system until the market crashed and stock prices fell to unprecedented lows.
By early 1933 the situation was desperate. People were defaulting on loans and banks were failing. Even those who had simply deposited their money in bank accounts were losing their savings. Into this dire situation stepped the “Man with the Plan” in the person of Franklin Delano Roosevelt.
Historians and legal scholars are still debating whether or not Roosevelt’s responses to the banking crisis were entirely honest. What matters is that he forced a total reorganization of the American economy and the financial industry. Of these changes, the most relevant to our discussion is something called the Glass-Steagall Act of 1933.
Under Glass-Steagall the federal government established, among other things, the Federal Deposit Insurance Corporation (FDIC), which protected bank depositors against losses should their bank fail. In order to pay off those that would take a loss when the government ordered a bank to close its doors, the Treasury Department simply printed more money in the form of Federal Reserve Notes rather than Gold or Silver Certificates (neither of which the government had enough of to back up the then-tremendous amounts of money needed to pay for the New Deal).
More importantly, the Federal Reserve, the “Fed,” was given authority to regulate the activities of its member banks. This regulation included making a sharp, unbreakable distinction between commercial banking and investment banking. In other words, banks were forced to decide what type activity they wanted to specialize in “and never the twain shall meet.”
This arrangement persisted for well over 50 years. Commercial banks had their sector of the financial markets and investment banks had theirs, until the government decided that the “traditional” separation of banks wasn’t very efficient and could be “improved.”
The results of that decision will be explained in my next posting.
Filed under Automobile Insurance Wiki by on Feb 22nd, 2011. Comment.
