Many people were shocked when over 1,000 protesters were arrested in the UK and jailed for various offenses including “violent disorder” and stirring up racial hatred. Most shocking were the cases of those arrested for posting social media comments on the riots, despite not being present at the scene and there being no evidence that anybody who joined in the riots had read any of their comments.

In societies which uphold the value of individual liberty, the only purpose of the criminal law should be to restrain and punish those who commit acts of aggression against other people or their property. The criminal law should not be used to prevent people from “hating” others or to force them to “love” each other. In announcing yet another raft of laws “to expand the list of charges eligible to be prosecuted as hate crimes,” New York Governor Kathy Hochul said that “During these challenging times, we will continue to show up for each other. We are making it clear: love will always have the last word in New York.” To that end, she introduced “legislation to significantly expand eligibility for hate crime prosecution.”

Attempts to promote love between different racial or religious groups in society, for example, by charging people with stirring up “hate” when they protest against immigration, misunderstands the role of the criminal law. Threats to public order entail violating the person or property of others—as happens in a violent riot—not merely the exhibition of “hate” towards others. Yet increasingly, public order offenses are linked to hate speech or hate crimes.

Laws prohibiting hate speech and hate crimes typically define “hate” as hostility based on race, sex, gender, sexual orientation, or religion. Often, hostility is understood simply as words that offend others. For example, in the UK, the Communications Act 2003 prohibits sending “a message or other matter that is grossly offensive or of an indecent, obscene or menacing character.” The Online Safety Act 2023 targets illegal content online including both “inciting violence” and the publication of “racially or religiously aggravated public order offenses.” Conduct online includes writing posts or publishing blogs or articles on websites.

Given that inciting violence is already a crime—“conduct, words, or other means that urge or naturally lead others to riot, violence, or insurrection”—there seems to be no discernible purpose in adding the concept of “hate” to such crimes. To give an example, writing “burn down the store” on social media might be seen as inciting violence, but writing “burn down the Muslim store” in the same circumstances would be categorized as a hate crime. Arson (actually burning down the store) is a crime, but based on the racial or religious identity of the store owner arson is deemed to be a “worse” crime—a hate crime—even though the harm in both cases and the loss suffered by store owners who are victims of arson does not vary based purely on their race or religion.

Therefore, no “hateful conduct” laws are needed to further “criminalize” what is already a crime. The conclusion is inescapable that the only goal of these types of “hate” laws is to create a special category of crime based entirely on the identity of the victim. Identity politics is now part of criminal law. “Hate” based on race or religion is now a priority in criminal law enforcement with resources increasingly diverted towards it. For example, New York has devoted a budget of $60 million to “fight hate.”

Events in the UK over the past week chillingly illustrate the consequences of an identity-based approach to law enforcement. In the ongoing police purge of rioters, those who wrote “hate speech” posts on social media platforms were charged with “inciting racial hatred” and sentenced to prison terms of up to two to three years. Far from fighting against “hate,” this is likely only to further fuel resentment and racial antagonism.

Free speech and the first amendment

The U.S. has so far avoided going down this socially destructive path, like the UK has, owing to the first amendment of the U.S. Constitution. The importance of the first amendment in thwarting attempts to outlaw “hate speech” can be seen in New York’s Assembly Bill A7865A (2021-2022), which provides that humiliating or vilifying anyone on social media based on their identity is hateful conduct and, therefore, illegal. The bill requires social media networks to report “hateful conduct on their platform,” and defines hateful conduct as “the use of a social media network to vilify, humiliate, or incite violence against a group or a class of persons on the basis of race, color, religion, ethnicity, national origin, disability, sex, sexual orientation, gender identity or gender expression.” This attempt to regulate “hateful conduct” is a clear restriction of free speech, and it was predictably opposed by free speech groups on grounds that it violates the first amendment.

In linking criminal law to the protection of property rights, Murray Rothbard argues that “incitement” is an element of free speech. Under the principle of free will, no one should claim that the reason he committed arson (a crime against the property of another) was that he read a post on social media saying “burn down the store.” The arsonist would be responsible for his own crime. He may have read the post but the choice to go out and commit the crime was his own. Rothbard explains:

Should it be illegal, we may next inquire, to “incite to riot”’? Suppose that Green exhorts a crowd: “Go! Burn! Loot! Kill!” and the mob proceeds to do just that, with Green having nothing further to do with these criminal activities. Since every man is free to adopt or not adopt any course of action he wishes, we cannot say that in some way Green determined the members of the mob to their criminal activities; we cannot make him, because of his exhortation, at all responsible for their crimes. “Inciting to riot,” therefore, is a pure exercise of a man’s right to speak without being thereby implicated in crime.

Rothbard adds that much would, of course, depend on the context: “there is a world of difference between the head of a criminal gang and a soap-box orator during a riot.” One of the British people in jail for social media posts wrote on Facebook that “Every man and his dog should smash the f—k out of Britannia hotel,” which was a hotel well known for housing immigrants. The writer of the post—a 28-year-old with no notable following—was not himself present at the riots, nor was there any reason to think those present at the riots had read his post or intended to follow his exhortation. In that sense, he seems to have been nothing more than a “soap-box orator” offering commentary on the riots from the safety and comfort of his armchair. Yet he was charged with “threatening, abusive or insulting words or behavior intending thereby to stir up racial hatred” and jailed for 20 months. That social media commentary is now treated in this way as a reason to jail people for “racial hatred” represents a grave threat to individual liberty, and illustrates the folly of criminalizing “hate.”

Originally Posted at https://mises.org/

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“Woke” people claim that they want to wake up racial and sexual minorities to the way they are being discriminated against. Because of past and present exploitation, blacks and other “protected” groups are not getting what rightfully belongs to them. The solution to this is that the better off, especially if they are white, should have their wealth and income seized and given to those they are exploiting.

The woke position rests on a fundamental fallacy. This is that there is a fixed amount resources, so that if the rich have more, the poor have less. But this is wrong. Resources in the free market are not a fixed sum. So long as the economy is growing, everybody can benefit. The ‘protected’ can do better without taking away what the rich have earned. The economist Paul Rubin, who died last month, gives a good account of the fallacy: “Karl Marx called his system ‘scientific socialism’ Modern leftists advocate a similar ideology and call themselves ‘woke’ to indicate that they understand the world better than the rest of us. Yet the worldview of Marxists and woke leftists alike is fundamentally primitive.

Folk economics is the economics of people untrained in economics. It is the economic view of the world that evolved in our brains before the development of the modern economy. During this period of evolution, the economy was simple, with little specialization except by age and sex, no economic growth, no technological change, limited trade, little capital, and warfare between neighboring tribes.

Zero-sum thinking was well-adapted to this world. Since there was no economic growth, incomes and wealth didn’t grow. If one person had access to more food or other goods, or greater access to females, it was likely because of expropriation from others. Since there was little capital, a ‘labor theory of value’—the idea that all value is created by labor alone—would have been appropriate, and there was little need to protect capital through property rights. Frequent warfare encouraged xenophobia.

Adam Smith and other economists challenged this worldview in the 18th century. They taught that specialization of labor was valuable, that capital was productive, and that labor and capital could work together to increase income. They also showed that property rights needed protection, that members of other tribes or groups could cooperate through trade, that wealth could be created with the proper incentives, and that the creation of wealth would benefit everyone in a society, not only the wealthy. Most important, they showed that a complex economy could work with little or no central direction.

Marx’s economic system was based on the primitive worldview of our ancestors. For him, conflict rather than cooperation between labor and capital defined the economy. He thought that the wealthy became rich only by exploiting the poor, that all income came from labor, and that the economy needed central direction because he didn’t believe markets were good at self-correction. The collapse of the Soviet Union, the largest and most expensive social-science experiment ever conducted, proved Smith right and Marx wrong.

Members of the woke left want to return to policies based on this primitive economic thinking. One of their major errors is thinking that the world is zero-sum. That assumption drives identity politics, which sees, among other things, an intrinsic conflict between blacks and whites. The Black Lives Matter movement and Critical Race Theory foment racial antagonism and resurrect xenophobia. Leftists vilify ‘millionaires and billionaires’ like Bill Gates and Elon Musk as evil and exploitative. They should recognize them as productive entrepreneurs whose innovations benefit us all.

Dislike of the rich makes sense in a world where one can become rich only by exploiting others, but not in a society full of creativity and useful inventions. Changing tax laws to soak the rich makes sense with a labor theory of value, but not with a sophisticated understanding of continual investment and technological change.

Adopting counterproductive woke policies such as racial job quotas, high taxes, excessive regulation of business, and price controls on some goods may not send us all the way back to the subsistence economy of our ancestors. But if policies that penalize saving and investing and that involve excessive government control are adopted, social capital, wealth, and real income will decline. If we bow to this primitive ideology, there will be increased racial animosity and conflict, slow economic growth, and fewer inventions.”

You might raise an objection to this. Even if the economy is growing, and the minorities can gain without taking resources from the rich, why should they be satisfied with what they get? Can’t they demand more of the growing economic pie? The answer is that doing this will hurt them, not help them. The way in which the economy grows is by capital accumulation, and the great bulk of this takes place through the investments of the well off. Confiscation of the income and wealth of the wealthy will slow down or stop the rate of economic growth. This will make the “protected” worse off. The great Ludwig von Mises proposes a thought experiment that brings out this point vividly: “A law that prohibits any individual from accumulating more than ten million or from making more than one million a year restricts the activities of precisely those entrepreneurs who are most successful in filling the wants of consumers. If such a law had been enacted in the United States fifty years ago, many who are multimillionaires today would live in more modest circumstances. But all those new branches of industry which supply the masses with articles unheard of before would operate, if at all, on a much smaller scale, and their products would be beyond the reach of the common man. It is manifestly contrary to the interest of the consumers to prevent the most efficient entrepreneurs from expanding the sphere of their activities up to the limit to which the public approves of their conduct of business by buying their products.”

There is another way in which the woke movement undermines our economy, and this may be the most serious one of all. The conjuring up of grievances encourages blacks to hate whites. Being white is regarded by many left-wing revolutionaries as evil, and murderous violence will result from this. As the great black economist Thomas Sowell points out: “Although much of the media have their antennae out to pick up anything that might be construed as racism against blacks, they resolutely ignore even the most blatant racism by blacks against others.

That includes a pattern of violent attacks on whites in public places in Chicago, Denver, New York, Milwaukee, Philadelphia, Los Angeles and Kansas City, as well as blacks in schools beating up Asian classmates – for years – in New York and Philadelphia.

These attacks have been accompanied by explicitly racist statements by the attackers, so it is not a question of having to figure out what the motivation is. There has also been rioting and looting by these young hoodlums.”

Let’s do everything we can to counter the woke plot to destroy our economy and to encourage the free market economic policies of Ludwig von Mises and Murray Rothbard. That is the way to a prosperous economy in which all groups can live in harmony.

Originally published at LewRockwell.com.

Originally Posted at https://mises.org/

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The Mises Institute is taking back economics education. In public schools, students learn that FDR’s New Deal and World War II got the US out of the Great Depression. They learn that total government control over an economy has its downsides, but so does pure laissez-faire, so the best system is a mixed economy with government intervention. The role of the entrepreneur is minimized or even completely ignored while the role of the state is emphasized and praised.

Public education indoctrinates students so that they become unquestioning citizens who will embrace price controls, taxes, inflation, and regulations.

To fight back, we’re producing a series of short lectures corresponding to Robert P. Murphy’s excellent textbook, Lessons for the Young Economist. The text is already widely used in homeschool curricula, but we want even more students to learn Austrian economics and become equipped to think critically about socialism and interventionism. To that end, here are the five lessons from Murphy’s textbook that I think are most important.

   1. Thinking Like an Economist

A solid understanding of economics is essential for making sense of the world. Thinking like an economist means viewing the world through the lens of human action: we use scarce means to attain our desired ends. All choices involve opportunity costs because the means we use to attain one end could have been used to attain a different end.

Henry Hazlitt and Frederic Bastiat showed that understanding this fundamental point is the key to making sense of a host of economic events and government policies. Both of them used the parable of the broken window to show that involuntary destruction, whether caused by a young hoodlum throwing a brick or a hurricane, does not “stimulate the economy” and create employment. It destroys scarce resources and redirects spending and employment. The same reasoning applies to all government policies aimed at “stimulating the economy.”

  2.  The Division of Labor and Specialization

There is a reason why Ludwig von Mises considered social cooperation in a division of labor “the greatest accomplishment of reason.” Robinson Crusoe would be able to eke out a meager existence at best. When we specialize in the tasks in which we have a comparative advantage and trade with one another, total productivity expands and standards of living can rise beyond subsistence to the levels we see and experience today.

The reason why the division of labor is so productive is because the opportunity costs (there it is again!) of production are minimized. Even if somebody has an absolute advantage in producing multiple goods, it still makes sense for that person to specialize in producing the good in which he has a relatively low opportunity cost.

   3.  Profit and Loss Accounting

The only way to rationally organize production for the benefit of consumers is with economic calculation. Entrepreneurs bid for factors of production based on their anticipation of what consumers will want in the future. Success yields profit, and waste results in losses. Profit and loss, therefore, provide an essential guide and incentive for producing what consumers want.

It’s difficult to overstate how important the mechanisms of profit and loss are for the market economy. It’s essential for students to learn what profit and loss mean so that they become immune to state propaganda and socialist envy-mongering. The economy is not zero-sum and profits are not the result of “corporate greed.” Government interventions that are aimed at reducing profits (like capital gains taxes) or mitigating losses (like bailouts and subsidies) only hamper the resource-economizing, consumer-satisfying market process.

   4.  The Failures of Socialism—Theory

Dr. Murphy covers both of the major theoretical problems with socialism: the “who will do the dirty, dangerous, and difficult jobs?” incentive problem and the economic calculation problem. While the first one is more well-known, the second is more devastating. Socialists answer the first one by claiming that with the advent of socialism, a “New Socialist Man” will emerge, with a new selfless, collectivistic human nature. Anyone and everyone will be happy to do the dirty, dangerous, and difficult jobs for the benefit of the community.

The reason the second critique is so strong is because it grants the socialists that dubious claim. Even if human nature fundamentally changes, the problem of knowing what to produce, in what quantities, using what resources remains. This problem is solved in market economies through profit and loss accounting, or economic calculation. As Ludwig von Mises famously argued,

[I]n the socialist commonwealth every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined. There is only groping in the dark. Socialism is the abolition of rational economy.

So, despite what some people say about socialism being “good in theory but terrible in practice,” socialism is theoretically bankrupt. (Students interested in the disastrous historical record of socialism will find that in Chapter 16 of Dr. Murphy’s textbook.)

   5.  Inflation

One reason inflation is confusing to both students and the general public is because its definition has shifted over the course of the 20th century. It used to refer to an increase in the amount of money, “especially by the issuing of paper money not redeemable in specie” (according to Henry Hazlitt’s copy of the American College Dictionary in 1960). Then it became synonymous with an increase in the “price level,” and nowadays people use it to refer to any increase in price. The terminological shift conflates cause and effect—people focus on the symptoms and not the underlying disease. The disease is, of course, government money creation.

But monetary expansion has many more negative consequences. New money enters the economy at a particular point, benefiting the people closest to the entry point at the expense of those further away. It enables massive amounts of government spending, discourages saving, distorts economic calculation, and destroys the culture. One of the most important consequences of monetary inflation, when the new money flows through credit markets first, is that it generates the boom-bust cycle.

Bonus Lesson: The Business Cycle

The boom-bust cycle is such an important consequence of inflation that Dr. Murphy gave it its own chapter. Ludwig von Mises first developed Austrian business cycle theory in his 1912 book, The Theory of Money and Credit. He showed that when new money is created by fractional reserve banks or the central bank, it results in artificially low interest rates. Normally, interest rates balance people’s desire to consume today versus tomorrow. When people decide to save more and delay consumption, this frees up resources for entrepreneurs to pursue new, longer lines of production.

But artificially low interest rates stimulate increased consumption and bigger production projects, even though the real resources haven’t been set aside. The economy experiences a “boom,” in which incomes increase, prices rise, businesses grow, and unemployment shrinks. But time will tell that this boom is unsustainable—it’s based on overconsumption and malinvestment. Once entrepreneurs realize their projects can’t be completed profitably (usually when interest rates rise), they liquidate their projects, unemployment rises, and the economy goes into a recession. Business cycles, therefore, are not a natural feature of the market economy, but are the result of artificial credit expansion.

Become Immune to State Propaganda

Every student should become acquainted with the fundamentals of economics, and I don’t mean the type of “economics” that is thinly veiled state propaganda. We’ve seen in these few short lessons that the market economy is a network of voluntary exchange and division of labor. It’s peaceful cooperation toward the goal of making the best use of scarce resources.

One thing the government is good at is duping people into thinking that its interventions are good for the economy, and the primary channel the government uses to spread its myths is through its grip on education. Break free with a solid economics education.

Originally Posted at https://mises.org/

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Given America’s history with slavery and eventual emancipation, especially the Emancipation Proclamation and the Thirteenth Amendment, the average person might be left with the impression that slavery was only ended thanks to the efforts of a powerful nation-state. In fact, one might even go as far as to assume that slavery could only be brought to an end through government policy and enforcement.

What this misses is the important fact that governments were key enforcers of slavery such that slavery could never have expanded and remained to the extent it did absent government policies and enforcement. In fact, while slavery has sometimes been ended by positive law and enforcement against it, it was largely eradicated by government’s non-enforcement of the slavery system.

Slavery is an ancient institution, common to all cultures. Of course, slavery in multiple forms has existed for millennia of human history. It is true that slavery could, would, and has existed absent the political state, however, the state was necessary to socialize, maintain, and enforce the slave system through the coercive legal apparatus.

Slavery, largely because of its high enforcement costs, was always vulnerable to cronyism. Politically-connected elites, as they often do, sought to privatize their gains and socialize their losses. In other words, how could slaveholders shift the economic burden off of themselves and onto others? The answer is that the only way this could be achieved was through employing the legal and coercive apparatus of government to enforce the system. This benefitted the slaveholders at the expense of everyone else.

Writing in his Cronyism: Liberty versus Power in Early America, 1607-1849, Patrick Newman observes the following about the beginnings of African slavery in America,

Significantly, planters also augmented the business of corrupt African chieftains involved in the slave trade. The labor system required a panoply of subsidies to stop escaping and revolting slaves. Among others, the colonies conscripted patrols to catch runaways and put down rebellions, regulated slave meetings and travels, required the return of fugitive slaves, and restricted voluntary manumissions. England assisted by incorporating the Royal African Company with a monopoly over African land and the slave trade. Colonial feudalism, from the land grants to the coerced workforce, embodied cronyism. (emphasis added)

From the beginning, slavery as we think of it, had to be propped up by the government via cronyism—corrupt use of the government apparatus to benefit private individuals or companies at the expense of others. The non-slaveholding population had to be forced to subsidize the enforcement of the slave system. Without this, the overall slave system would have been severely weakened.

How the slaveholders, via the government, forced non-slaveholders to subsidize slavery was usually through a few methods—slave patrols, fugitive slave laws, manumission restrictions, and propping up of the slave trade.

Slave Patrols

Subsidization was needed in the form of slave patrols to catch escaped slaves, suppress slave revolts, regulate slave meetings and passes. Because of the increased costs of enforcing slavery, the slaveholding elite externalized the costs of enforcement by requiring most white males to participate in slave patrol duty. These were established in every slave state. Non-slaveholding whites were legally responsible to enforce black codes, apprehend runaways, monitor pass requirements, break up large gatherings, etc. This required the expense of time, energy, money, and resources. This burden was paid by the non-slaveholding taxpayer. According to pro-slavery theorist George Fitzhugh, these conscripted patrollers were essential to the integrity of the maintenance of the slave system,

The poor…constitute our militia and our police. They protect men in possession of property, as in other countries; and do much more, they secure men in possession of a kind of property [slaves] which they could not hold a day but for the supervision and protection of the poor. (italics added)

Alan L. Olmstead and Paul W. Rhode, historians critiquing the “New History of Capitalism,” explain, “Slave owners created a police state that benefited a small elite at the expense of blacks and poor whites.”

Fugitive Slave Laws

A second way governments enforced the subsidization of slavery by the non-slaveholders was through fugitive slave laws. This example is even seen in the Constitution itself. In fact, it was a chief issue in the growing sectional conflict that led to the Civil War. In this case, simply, the national government required the return of escaped-fugitive slaves by free states. Free states, where slavery was illegal, were required by federal law(s) to subsidize and enforce slavery. Again, writes Newman in Cronyism,

Slavery survived, not because of technological advancements related to agriculture, but because of the nationalizing Constitution and its fugitive slave clause (along with the 1793 Fugitive Slave Act) that socialized enforcement costs and made it harder for slaves to escape. State regulations buttressed the fugitive slave clause, most notably mandatory slave patrols composed of poor white men.

Obviously, absent fugitive slave laws, it was understood that slavery would be severely weakened. In fact, this reality, despite fugitive slave laws, caused slavery to collapse in Brazil. One of the compromises at the Philadelphia Convention (1787) was the Fugitive Slave Clause (Art. IV, Sec. 2, Clause 2). If slave states were going to join in a stronger union with free states, then national law must require that the free states return escaped slaves. Ironically, the states in which slavery was illegal would have to help enforce slavery under the federal government and the Constitution. This issue, and the nullification of it by free states, would heighten sectional tension until the 1860s.

This was why some of the most radical abolitionists even supported secession, because it would then free the free states from the federal obligation to the Constitution and any other federal fugitive slave laws. For example, the abolitionists stated during the antebellum period, “Resolved, That the Abolitionists of this country should make it one of the primary objects of this agitation to dissolve the American Union.” William Lloyd Garrison, founder of the abolitionist newspaper The Liberator, viewed the constitutional protections of slavery as essential to the system, therefore, he believed that secession would free the free states from the obligation to enforce slavery. He wrote,

I tell you our work is the dissolution [separation] of this slavery-cursed Union, if we would have a fragment of our liberties left to us!… By the dissolution of the Union we shall give the finishing blow to the slave system;… (italics added)

From the opposite end of the spectrum, Alexander Stephens—vice president of the Confederacy—even admitted, “I consider slavery much more secure in the Union than out of it.” Whether or not this was empirically true, it is clear that Stephens, and many others, understood that by secession they were forfeiting the US federal government apparatus to enforce slavery.

Manumission Restrictions

One obvious question arises whenever discussing slavery: why didn’t slaveholders simply free the slaves? While there were many reasons why this was the case, it should be recognized that governments made laws that restricted the voluntary freeing of slaves. Simply, the government(s) made it legally harder to free slaves.

In addition to laws that forbade unlicensed slave meetings, gun control laws against free and enslaved blacks, the death penalty without benefit of clergy for conspiracy, and other laws, the Virginia legislature restricted voluntary manumission—freeing slaves. Murray Rothbard writes in Conceived in Liberty, “Moreover, even voluntary manumission of slaves by masters was restricted by the legislature and approval was required by the governor and the Council.” In other words people had to get the government’s permission—governor and Council—to free slaves.

The online Encyclopedia Britannica states that manumission was comparatively difficult in the American South—manumission was even forbidden in South Carolina (1820), Mississippi (1822), Arkansas (1858), and Maryland and Alabama (1860). Another online encyclopedia similarly explains, “On the eve of the Revolution, voluntary manumission was illegal in most of the South, and even where it was permitted, the practice was not common.”

Though many slaveholders would not have taken advantage of the opportunity to free their slaves voluntarily, had the manumission laws been eased, it is reasonable to assume that more slaves probably would have been freed than otherwise. The late economist Walter E. Williams used to point out that when there is a law restricting something—segregation laws, manumission, minimum wages, etc.—then that must imply that, absent the legal restriction, more of that restricted activity would occur than otherwise or there would be no need for the restriction.

Constitutional Slave Trade Subsidy

Another compromise made to gain agreement to the Constitution was a direct grant to slave importers and traders—the Slave Trade Clause (Art. I, Sec. 9). This subsidy required that Congress could not prohibit “importation” of persons by federal law for 20 years—until 1808. Fortunately, all states except South Carolina made laws to end the Atlantic slave trade, however, unfortunately, this also served as a market restriction that bolstered the domestic slave trade and artificially increased the prices of domestic slaves.

Thankfully, slavery did come to an end in the United States officially in 1865 through the 13th Amendment and several states had already put slavery on the road to extinction before that. Since it violates self-ownership and individual rights, kidnapping and slavery are crimes. That being said, we should not forget that slavery was largely socialized, maintained, and enforced by governments. Instead of being protectors from slavery by law and policy, governments have historically been enforcers of slavery by policy, getting non-slaveholders to pay for it.

Originally Posted at https://mises.org/

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Since early 2022, the big buzz in the tech industry, and among laymen in the general public, has been “artificial intelligence.” While the concept isn’t new—AI has been the term used to describe how computers play games since at least the 1980s—it’s once again captured the public’s imagination.

Before getting into the meat of the article, a brief primer is necessary. When talking about AI, it’s important to understand what is meant. AI can be broken down into seven broad categories. Most of the seven are, at best, hypothetical and do not exist. The type of AI everyone is interested in falls under the category of Limited Memory AI. These are where large language models (LLMs) reside. Since this isn’t a paper on the details, think of LLMs as complex statistical guessing machines. You type in a sentence and it will output something based on the loaded training data that statistically lines up with what you requested.

Based on this technology, LLMs can produce (at least on the surface) impressive results. For example, ask ChatGPT 4.0 (the latest version at the time of writing) the following logic puzzle:

This is a party: {}

This is a jumping bean: B

The jumping bean wants to go to the party.

It will output, with some word flair, {B}. Impressive, right? It can do this same thing no matter what two characters you use in the party and whatever character you desire to go to the party. This has been used as a demonstration of the power of artificial intelligence.

However, do this:

This is a party: B

This is a jumping bean: {}

The jumping bean wants to go to the party.

When I asked this, I was expecting the system to, at minimum, give me a similar answer as above, however, what I got was two answers: B{} and {}B. This is not the correct answer since the logic puzzle is unsolvable, at least in terms of how computers operate. The correct answer, to a human, would be I{}3.

To understand what’s going on under the hood, here’s the next example:

Dis be ah pahtah: []

Messa wanna boogie woogie: M

Meesa be da boom chicka boom.

This silly Jar Jar Binks-phrased statement, if given to a human, makes no sense since the three statements aren’t related and there isn’t a logic puzzle present. Yet, GPT4 went through the motions and said that I’m now the party. This is because—for all its complexity—the system is still algorithmically driven. It sees the phrasing, looks in its database, sees what a ton of people previously typed with similar phrasing (because OpenAI prompted a ton of people to try), and pumps out the same format. It’s a similar result that a first year programming student could produce.

Major Limitations

The above silly example proves there are tremendous limitations in the AI industry space. It works great if you ask it something simple and predictable, while it falls apart when you ask for something only slightly more complex, like trying to get an image generator to give you the image you wanted out of a simple four-sentence paragraph. There is, as the industry admits, a lot of work to be done while advancements are being made.

The problem? The whole AI experiment is ludicrously expensive and the cost accelerates well beyond the advancements in utility. OpenAI—the current leader in LLMs—is on track to lose $5 billion this year, representing half of its total capital investment. The losses only expand with the more customers the company signs up and the better their model gets.

There is a surprising lack of viable applications for which this technology can be used. Attempts to implement this technology in substantive ways have backfired badly. Air Canada’s AI assisted customer service and gave away discounted airfare. The Canadian court stated the company is liable for anything an AI assistant provides to a customer. The legal profession is—piecemeal—being forbidden from using AI in court cases across the U.S. after a string of high-profile events of AI programs fabricating documents. Major demonstrations were later to be discovered as heavily faked. Google’s new AI summary at the top of the search page takes roughly 10 times more energy to produce than the search itself and has near zero end-user utility. Revenues in the AI space are almost exclusively concentrated in hardware, with little end-user money in sight. There’s also the shocking energy requirements needed to operate it all.

To make matters worse, further development will likely only get more expensive, not cheaper. The hardware industry is at the tail-end of its advancement potential. Processor designers ran out of the clock speed lever to pull nearly two decades ago while single thread performance peaked in 2015. Processor design has been mostly getting by on increasing logic core count via shrinking transistors. Though this particular lever is expected to be exhausted next year when the 2nm process comes online. What this means is that, starting as early as next year, AI can’t rely on hardware efficiency gains to close the cost gap since we’re already close to the maximum theoretical limit without radically redesigning how processors work. New customers require new capacity, so every time another business signs on, the costs go up, making it questionable if there will ever be a volume inflection point.

With these revelations, a prudent businessman would cut his losses in the AI space. The rapidly expanding costs, along with the questionable utility, of the technology makes it look like a major money-losing enterprise. Yet AI investments have only expanded. What is going on?

Big Tech Easy Money

What we’re seeing is a significant repercussion of the long easy-money era, which, despite the formal Fed interest rate hikes, is still ongoing. The tech industry in particular has been a major beneficiary of the easy-money phenomenon. Easy money has been going on for so long that entire industries, tech in particular, are built and designed around it. This is how food delivery apps, which have never posted a profit and are on track to lose an eye-watering $20 billion just in 2024, keep going. The tech industry will pile in billions to invest in questionable business plans just because it has the veneer of software somewhere in the background.

I’m seeing a lot of the same patterns in the AI boom as I saw years ago with the WeWork fiasco. Both are attempting to address mundane solutions. Neither of them scale well to the customer base. Both, despite being formally capital-driven, are highly subject to variable costs of operation that can’t be easily unwound. Both apply an extra layer of expense to do little more than the exact same thing as done before.

Despite this, companies like Google and Microsoft are willing to pour tremendous amounts of resources into the project. The main reason is because, to them, the resources are relatively trivial. The major tech firms—flushed with decades of cheap money—have enough cash on hand to outright buy the entire global AI industry. A $5 billion loss is a drop in the bucket for a company like Microsoft. The fear of missing out is greater than the cost of a few dollars in the war chest.

However, easy money has its limits. Estimates put the 2025 investment at $200 billion which—even for juggernauts like Alphabet—isn’t chump change. Even this pales in comparison to some of the more ludicrous estimates like global AI revenues reaching $1.3 trillion by 2032. The easy money today doesn’t care about where that revenue is supposed to manifest from. The easy money will, however, give out when the realities hit and the revenues don’t show up. How much is the market willing to pay for what AI does? The recent wave of AI phones hasn’t exactly arrested the long-run decline in smartphones, for example.

At some point, investors will start asking why these major tech firms are blowing giant wads of cash on dead-end projects and not giving it back as dividends. Losses can’t be sustained indefinitely.

The big difference in the current easy-money wave is who feels the pain when the bust happens won’t be the usual suspects. Big players like Microsoft and Nvidia will still be around, but they’ll show lower profits as the AI hype dies down. They siphoned up the easy money, spent it on a prestige project, and will not face the repercussions of the failure. There likely won’t be a spectacular company collapse like we saw in the 2009 era, however, what we will see are substantial layoffs in the previously prestigious tech space, and the bust will litter the landscape with small startups. In fact, the layoffs have already started.

Of course, I could always be wrong on this. Maybe AI really is legitimate and there will be $1.3 trillion in consumer dollars chasing AI products and services in the next five years. Maybe AI will end up succeeding where 3D televisions, home delivery meal kits, and AR glasses have failed.

I am, however, not terribly optimistic. The tech industry is in the midst of an easy-money-fueled party. My proof? The last truly big piece of disruptive technology the world experienced—the iPhone—turned 17 not all that long ago. The tech industry has been chasing that next disruptive product ever since and has turned up nothing. Without the easy money, it wouldn’t have been able to keep it up for this long.

Originally Posted at https://mises.org/

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It might seem like common sense to say that good ideas should be clear, but the notion that good ideas should be obscure and inaccessible to laymen has long been prevalent in academic circles. Murray Rothbard describes Keynes’s General Theory of Employment, Interest, and Money as, “not truly revolutionary at all but merely old and oft-refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon.” Rothbard remarks that, “Often, as in the case of both Ricardo and Keynes, the more obscure the content, the more successful the book, as younger scholars flock to it, becoming acolytes.”

Similarly, Hunter Lewis in his introduction to W.H. Hutt’s The Theory of Idle Resources describes Keynes’s work as “a potpourri of fallacies supported by obscurity, shifting definitions, and other rhetorical tricks.” Hutt set out to debunk the fallacies propounded by Keynes’s theory of employment, aiming to explain the relevant principles in a clear and accessible manner that would help people make better decisions when faced with some of the practical problems of unemployment. To this end, Hutt began by highlighting the importance of “conceptual clarity” in understanding economic and social problems.

Ayn Rand’s “stolen concept fallacy” also addresses the problem of using words and concepts in a sense detached from their logical antecedents or “genetic roots,” so that the use of the word or concept becomes meaningless and people brazenly contradict themselves. She gives the example of “people who scream that they need more gas and that the oil industry should be taxed out of existence.” Rand is critical of a general tendency to “take the end result of a long sequence of thought as the given and to regard it as ‘self-evident’ or as an irreducible primary, while negating its preconditions.” In her example, the paramount need for gas is taken as given, while the precondition—the folly of destroying the oil industry if one needs gas—is negated. A contemporary example is Kamala Harris’s plan to give first-time buyers $25,000 to help them purchase a home, where little attention is paid to the inevitable adverse effect on house prices and availability of homes to purchase.

The particular concept that concerned Hutt in his Theory of Idle Resources was Keynes’s reference to “full employment.” Hutt questioned what Keynes meant by “full employment” or the “idleness” of the unemployed. To use Lewis’s example, the question may be posed as follows:

Is it more productive for a highly trained but unemployed engineer to bag groceries for pay or to invest time without pay in looking for an engineering job? If he or she took the grocery bagging job, Keynes would presumably be satisfied; we would be closer to full employment.

In addressing that question, Hutt argues that much depends on what is meant by “full employment” in the first place. He argues that it would be rather meaningless to say that everyone must be fully employed, because whether any resource is “fully employed” is a relative concept:

Given some basic ideal, e.g., consumers’ sovereignty, any particular resource may be said to be “under-employed” or “idling” when that ideal would be better served by the transfer of resources from other uses to cooperate with it. It would be “fully employed” in that sense if there would be no advantage in attracting other resources to cooperate with it. But it might then be working very slowly (as compared, say, to its former working). Even if continuously employed, the resources would appear to be “idling”; and yet they would be fully employed in the only rational connotation we can suggest for “full,” i.e., as a synonym for “optimum.”…“full employment” is a relative conception. That is, a piece of indivisible equipment is fully employed when other resources cannot be usefully (e.g., from the standpoint of consumers’ sovereignty) diverted from other occupations to cooperate with it.

When the question is put that way, it becomes clear that any government promising to create “full employment” cannot possibly have enough knowledge of all the potentially productive uses or value of available labor to achieve that goal. Free markets are based on voluntary exchange and, despite what Keynes may have thought, there is no benevolent overlord ensuring that all resources are “fully employed.” Any government that confers this omniscient and omnipotent role upon itself is doomed to fail.

Politicians promising “full employment” often give the impression that everyone will have a well-paid job of their preference in which they can realize their full potential. Taking the example of the periodic labor unrest in France, a typical headline reads that,

French PM vows to help youth get jobs after protest…Employers would be forced to pay additional taxes on short-term contracts to encourage them to hire on long-term contracts instead. Another proposal is for new graduates of modest means to receive a four-month extension to their study grants to tide them over until they find work.

This example illustrates Lewis’s point about obfuscation—nobody thinks punishing employers with higher taxes will create more jobs. At best, it will make conditions superficially better for those who do manage to find work, but it is unlikely to help the rioting youths who are unable to find work at all for numerous reasons, including lack of relevant skills and qualifications. Further, extending study grants may be a boon to specific recipients of the grant, but does not itself produce the promised jobs for the rioting youths. The promise to “help youth get jobs” turned out to have no discernible connection to the government’s proposals.

In Hutt’s view, it is important for the implications of government interventions to be made clear to everyone, including those not schooled in economics: economic concepts “should be immediately comprehensible by the layman.” In the absence of conceptual clarity, voters are easily beguiled by false promises—which is precisely why economists whose job is “selling policies in return for power,” as Hutt put it, obfuscate the way they do.

Hutt recognizes that an inordinate focus on conceptual coherence and clarity of exposition risks rendering a discussion “pedantic and useless” if carried too far in economic and policy debates, but he highlights “the necessity for constant redefinition” in understanding the key conceptual foundations of economic principles. He points out that although such concerns may seem purely “theoretical,” conceptual clarity is by no means a theoretical matter when faced with government obfuscation about the magical outcomes they promise to produce with their ill-conceived economic interventions.

The lesson to draw from Hutt’s argument is that conceptual clarity is indispensable in understanding why state interventions are doomed to failure and why proposed solutions are likely only to exacerbate the problems they purport to resolve.

Originally Posted at https://mises.org/

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