A Critique of the Medicare Payment Advisory Commission

The Medicare Payment Advisory Commission released its second annual report to Congress in June 2008. Titled “Reforming the Delivery System”1, the report outlines the change in direction that the Medicare program is likely to take in the coming years. The Commission recognizes that without change, “the Medicare program is fiscally unsustainable over the long run”2 and it believes that under the current Fee For Service (FFS) payment method, in which Medicare reimburses hospitals and physicians for individual units of service, incentives for reform under are limited for two reasons. One, paying for individual units results in a strong incentive to providers to increase volume of services, and two, separate physician fee schedule and hospital prospective payment systems discourage coordination between physicians and hospitals that might result in efficiencies or better outcomes. 3 As a result, the Commission makes a series of recommendations to move Medicare away from FFS payment method toward one that promotes better coordination and accountability.

While these goals are laudable, their fundamental error is that the Commission’s assessment fails to understand the cause of the symptoms it attempts to diagnose and treat. The tell-tale sign of this methodological mistake is encapsulated in one of their reform ideas: the creation of an independent entity to produce information about the relative value of the services for which Medicare pays. By “value”, the Commission means “the clinical effectiveness of a healthcare service compared to its alternatives,”4 which will include cost effectiveness. The report states that while “cost effectiveness is not the primary mission, the Commission does not rule it out,”5 obviously because it recognizes that questions of value cannot be divorced from questions of economic calculation.

However, under Medicare’s central planning authority any rational economic calculation about the relative value of different health services is practically and theoretically impossible. This is the root cause of the inevitable long term collapse of the Medicare program and as we shall explore later the root cause of the inevitable collapse of our entire health care system. Any health care system resulting from central planning is not just of higher cost, lower quality, reduced innovation, uncoordinated, inefficient and ineffective, but literally and truly impossible. Austrian economist Ludwig von Mises in his 1920 treatise “Economic Calculation in the Socialist Commonwealth” developed this fundamental insight about the nature of all central planning.6 I rely heavily on his analysis of the impossibility of economic calculation under socialism to understand the inherent problems in the healthcare system created by the Federal government under the auspices of Medicare.

From a practical perspective, one can imagine a central planner judging the value of health care goods which require very simple production process, such as picking and consuming an orange from a tree in order to replenish the body of needed antioxidants that may aid in the prevention of certain cancers. One can also imagine this central planner valuing goods that are required in a slightly longer production process such as using lumber, a saw, a hammer and nails, to build a ladder to be used to climb a tree to pick fruit more efficiently. This is because in these simple examples, the planner can measure income and expense across the relatively short period of time it takes to build a ladder and pick fruit. But matters get very complicated very quickly when the central planner needs to decide on the level of reimbursement for a chemotherapy agent that took a pharmaceutical company years and millions of dollars to discover, test and manufacture, for the oncologist who supervises the delivery of the drug and who invested thousands of dollars and years of his life to understand the cancer disease process and for the hospital that invested millions of dollars and decades to build the infrastructure within which to deliver the drug.

This type of valuation is quantitatively more complicated because chemotherapy agents, physicians’ intellectual development and hospitals require very long and wide production processes across time and geography and complex interconnections between people, producers, quality, revenue and cost. In addition, to this one particular health product at one particular point in time and geography, the Medicare planner must consider hundreds of thousands of other health care goods and services, tens of thousands of hospitals, pharmacies, nursing homes, surgery centers, diagnostic centers, laboratories, home health agencies, hospices, long term acute care hospitals, ambulances, and millions of patients physicians, nurses, therapists and clinicians, across time and space. The central planner must therefore consider a practically infinite number of permutations in order to correctly allocate half of the healthcare dollar spent in the US.

Some may argue that the advent of the information age will resolve this practical calculation problem. But even if the Medicare planner possessed the most advanced computer information systems, it is only logical to assume that hospitals, physicians and producers of healthcare goods and services will possess similar computer systems as aides in the management their own internal operations and that hence, together, they would be capable of generating more information than the Medicare planning computer could absorb and process meaningfully. So paradoxically, information technology actually makes the economic calculation problem for Medicare more difficult to resolve.7

The Medicare planner must also consider two additional exacerbating factors.8 The first one is that like all goods, healthcare resources by their very nature are to a greater or lesser degree substitutable for one another. This is the phenomenon that the Commission is attempting to resolve by creating another commission to study the relative value of different health care services. For some types of breast cancers, for example, chemotherapy, radiation therapy and surgery may be substituted or complemented with one another. The challenge for the Medicare planner is to discover and approximate the myriad of natural substitutability of all healthcare goods and services in accordance with the exchange relations that an unhampered healthcare market economy would take place automatically and instantaneously.9

The second factor exacerbating the calculation problem is that since time is a scarce resource, capital can be accumulated and invested in order to lengthen any process of production and improve the efficiencies and quality of any healthcare good or service. This further multiplies the permutations required to evaluate alternative plans for the allocation of capital for the production of not only health care goods and services that Medicare patients consume, but also of capital required to manufacture the goods and services used by producers to fabricate the goods and services that hospitals and physicians purchase. For example, hospitals may decide between investing their capital in robotics for pharmacy or the operating room in order to improve the productivity and accuracy of pharmacists and surgeons or they may hire additional pharmacists or more experienced surgeons, or varying combinations between all or none of the above. Simultaneously, the manufacturer of robots would need to decide to invest capital to develop either pharmacy, operating room, radiation therapy or automobile robots and varying combinations between all or none of the above, and so on and so forth up the production chain of producers of software, research, education, parts, raw materials, financial services, etc., etc. So another challenge for the Medicare planner is to discover and approximate the natural substitutability of all alternative production chain possibilities that an unhampered healthcare market economy would discover automatically and instantaneously.

The infinite complexity of actual and potential relationships among producers, suppliers, providers and patients require precise calculations of income, expense, assets and liabilities across time in terms of a medium of exchange, i.e., money. Monetary calculation under conditions of private property and freedom of exchange, allows all consumers and all producers in very complex and long production processes to simultaneously solve the economic calculation problem detailed above by what Mises calls an “intellectual division of labor.” 10 This process is twofold. On the one hand, each and every consumer makes monetary bids for goods and services based on his individual subjective valuation resulting in objective money exchange ratios for goods and services (i.e., market prices for goods and services). On the other hand, every producer seeking to engage in production and seeking to maximize profits, bids against one another for the factors of production (labor and materials) resulting in objective exchange ratios for labor and materials (i.e., wages and prices for materials). In this way, Mises points out, not only end products ready for consumption but all intermediate goods used in the production of those end products “receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and social needs.”11

When prices in the health care market are not the result of unhampered exchanges between economic actors but are mandated by a central planning agent, the capital structure of health delivery systems is distorted. This is because the prices of goods and services set by Medicare create different profit expectations in the minds of hospitals, physicians and the rest of the producers of healthcare goods and services up and down the various chains of production than the prices that would have been created by the free market. For example for years Medicare has handsomely rewarded hospitals and physicians who set up ambulatory radiation oncology programs. This preferential pricing not only encourages the proliferation of radiation centers and the associated stimulation of demand by patients, but also affects each and every intermediate step in the entire production chain necessary to build and operate a radiation center. This includes, for example, the production, marketing and distribution of linear accelerators, the programming of software to design treatment plans and control the accelerator, the production of CT scanners that feed patient’s anatomical information into the treatment planning and accelerator navigation systems, education facilities to train radiation technologists, physicians, physicists and administrators to diagnose, plan, treat and manage the accelerator, the production of lead, aluminum, steel, plastics and other raw materials needed to build and produce all of the physical components of accelerators, facilities and supplies needed, etc., etc. The length and scope of this production process alone and hence the capital structure required to bring about thousands of radiation treatment centers across the nation is as deep as it is wide.

All of these intermediate industries are interrelated using hundreds of thousands pricing signals. By making pricing decisions on the reimbursement of radiation therapy services based on criteria other than the subjective valuation of patients and producers, the Medicare planner affects all the pricing signals throughout the production process of each intermediate industry; however, the central planner, by definition, will never comprehend or have the means to comprehend and test how his pricing decisions cause changes in the structure of health care production, because the only rational way to test these cause and effect relationships is via the monetary calculation made possible by exchanges between patients, providers and other producers of healthcare goods and services in a free market.

At the outset of the Medicare program, its central planners were able to set their prices as parasites of the then existing competitive private health care price structure, just like their Soviet Union counterparts unable to resolve the economic calculation problem were forced to copy and use the price structure of Western economies to direct Soviet production processes and subsist for 80 years, albeit at inefficient and meager levels. This strategy was recommended by the Medicare Payment Advisory Commission in it’s first Report to Congress in March of 1999 which argued that Medicare’s primary payment system objective is “to establish payment rates that approximate the competitive prices that would prevail in the long run in local health care markets.”12

But as the proportion of Medicare expenditures continue to grow as a result subsidization and unintended stimulation of demand, as additional Medicare programs are brought on line, such as prescription coverage, as the proportion of Medicare eligible population increases relative to the rest of the population and as additional government programs such as Medicaid grow faster than the private sector, the percentage of the health care economy under the control of the government expand and central planners crowd out the fewer pricing signals produced by a diminishing private sector. If to this one adds the already existing inadequacies of the pricing signals produced by the private health sector, such as the distortions produced by a tax policy that encourages employer provided health insurance arrangements, the mixing of both uncontrolled risk (e.g., family history) as well as controlled risk (e.g., eating habits) in health insurance risk pools, is it any wonder that health costs are out of control and that unsubsidized members of society have been priced out of the market for health services?

In addition to facing the practical calculation problem outlined above, the labyrinthine payment methods created by Medicare totally misunderstand the theoretical nature of prices and hence do not recognize the theoretical impossibility of its attempt. Unlike the weather forecaster who faces a technical problem that can be ameliorated by the use of better satellites and faster supercomputers, the Medicare planner simply cannot determine the market prices for the services that it reimburses because by definition health care prices can only be arrived by the free and unencumbered interaction between patients and providers.

There are two reasons why it is theoretically impossible for the Medicare planner to arrive at a rational pricing structure for healthcare. The first, prices of goods and services are not determined by their costs of production. Prices are determined by the instantaneous valuations made by consumers bidding for goods and services. By a process of imputation that flows from the consumer to the producer, prices of goods and services impute value to the factors of production necessary to make the goods and service that consumers demand. This imputation of value occurs when producers and entrepreneurs bid for the factors of production (labor and materials) in response to expected future profits and which sets wages for labor and prices of materials.

For more than two decades now, Medicare planners have come up with alternative valuation methods that unsuccessfully attempt to arrive at a rational price structure for health services. Despite the Commission’s assertion that cost-based payment methods (in which reimbursement is determined by allowable costs supplied by providers) are being phased out because “they are complex, they result in unpredictable payments and spending for providers and Medicare, and they weaken provider’s incentives for efficiency”13 and that they are being substituted for prospective payment methods (in which an initial operating and capital payment base rate is adjusted by wage indexes, case mix, medical education costs, charity burden, short or long lengths of stay, etc.), payment rates are still determined by cost information. This is because the initial operating and capital payment base rate that prospective systems use is determined by “the operating and capital costs that efficient facilities would be expected to incur in furnishing covered” health services.14 “Operating payments cover labor and supply costs; capital payments cover costs for depreciation, interest, rent and property-related insurance and taxes.” 15 Despite the fact that this initial base rate is later modified by wage rates, geographic differences, case mix, etc., the initial rate is still cost based. Again, the first reason why it is theoretically impossible for Medicare to rationally set prices is that prices determine production costs and not the other way around. When the Medicare planner tries to use cost information to arrive at a price, he has the economic cause and effect relationship backwards.

The second reason is that prices in a market economy are continually, instantaneously and simultaneously being created, destroyed and recreated by the individual subjective valuations of consumers and producers facing the passage of time and hence changing expectations, economic conditions, wants, needs, technological advancements, etc. This information about valuations is not created until after consumers and producers place their respective bids in the intellectual division of labor process outlined above, so it is impossible to transmit it before it is created. Before bids are made, all you have is a universe of possibility in the minds of each economic participant that do not constitute information. But once bids take place and information created, transmitted to the central planner, processed and returned to the market place in its original or distorted form, it is old and useless information that cannot have rational guiding content. Moreover, if the information returned by the planner is coercive in nature, bids do not take place and future pricing information cannot be created.

As a result, all the Medicare planner does, to use Mises’ phrase, is grope in the dark. The Medicare planner may know exactly what final health care goods and services are needed to meet the needs of Medicare patients. Indeed, in the Commission’s own words, “Medicare’s primary goal is to ensure that its elderly and disabled beneficiaries have access to medically necessary acute care of high quality.” 16 But as Mises points out, this is only one of two simultaneous equations that are needed to resolve the economic calculation problem. The second equation is the valuation of the means of production to ensure that those needed goods and services are produced. Without market derived pricing signals, hospitals, physicians and producers of healthcare goods and services up and down the production structure (and the Medicare planner) are all left without the bearings of economic calculation. The Commission’s greatest concern, therefore, should not be that “the Medicare program is fiscally unsustainable over the long run,” as worrisome as that is, but that our entire healthcare system, including the capital structure needed to support a wide array of lengthy production processes, is unsustainable over the long run, being left, to quote Mises, “floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation.” 17

It is highly unlikely that the arguments advanced here will slow the accelerated movement toward the complete socialization of the healthcare delivery system in the US. Most supporters of socialized medicine do so for aesthetic, moral, political or religious reasons. But at a minimum, it is my hope that the above ideas will be a warning to those who expect a rational system of economic calculation that will guide consumers and producers of healthcare services to come out of command and control Medicare reimbursement systems.

Ludwig von Mises warned Marxists economists in the 1920’s that economic calculation in a command and control economy was literally impossible. In the end, the collapse of the Soviet Union and the rest of the Eastern Block caught unaware the great majority of Western economists. It is not just that these economists were unable to play their expected role and spare humanity of all of the grave errors committed by the planned economies in the East, but that on the contrary, economists encouraged the very same policies that caused untold misery and human suffering in the East. Sadly, Western economists instead of openly manifesting profound regret for their failure and instead of rethinking the theoretical underpinnings of their science, to this day continue to study their science and make policy recommendations as if nothing had happened.

In blindly following the advice of health economists who practice within a bankrupt theoretical framework and in suggesting that Medicare central planners can come up with rational pricing and payment methods for health services, the Medicare Payment Advisory Commission makes exactly the same intellectual error that Soviet planners made 90 years ago. One can only qualify as overbearing arrogance the Commission’s presumption: that Medicare central planners in the US are smarter than their Soviet counterparts.



1 Medicare Payment Advisory Commission, “Report to Congress Reforming the Delivery System, June 2008” http://www.medpac.gov/documents/Jun08_EntireReport.pdf

2 idem, p. xi

3 idem, p. xi

4 idem, p. 107

5 idem, p. 108

6 Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth” http://mises.org/pdf/econcalc.pdf.

7 Jesus Huerta de Soto, “Socialismo, Calculo Economico y Funcion Empresarial”, p. 105,

8 See Joseph T. Salerno, “Poscript: Why a Socialist Economy is “Impossible”.”, p. 35 http://mises.org/pdf/econcalc.pdf.

9 Mises, p. 9.

10 Mises, p. 15

11 Mises, p. 15

12Medicare Payment Advisory Commission, “Report to Congress Medicare Payment Policy, March 1999” p. 5 http://www.medpac.gov/documents/Mar99%20Entire%20report.pdf

13 idem, p. 4

14 Medicare Payment Advisory Commission, “Hospital Acute Inpatient Services Payment System”, October 2007 p. 3 http://www.medpac.gov/documents/MedPAC_Payment_Basics_07_hospital.pdf

15 idem, p. 3

16 Medicare Payment Advisory Commission, “Hospital Acute Inpatient Services Payment System”, October 2007 p. 4

17 Mises, p. 15-17

El Socialismo del Banco Central de EEUU

La perspectiva de los que proponen más intervención por parte del estado como solución a los ciclos económicos que periódicamente han experimentado los sistemas económicos durante los últimos 150 años, tanto los que llamaríamos menos socialistas como Estados Unidos y los más socialistas, como la gran mayoría de Europa y China, Cuba y la Unión Soviética, desconocen las causas fundamentales de esos ciclos económicos.

Marx fue uno de los primeros en estudiar el hecho de que el capitalismo de la revolución industrial padecía de ciclos económicos (es decir, "booms" y depresiones) que fases anteriores del desarrollo de la humanidad no había experimentado. Sí, es cierto, de vez en cuando algún rey se metía en una guerra, subía los impuestos o se robaba el oro de los súbditos, causando una hambruna, pero en lineas generalas, pero nunca hubo un ciclo generalizado de crecimiento y depresión que se repitiera continuamente como durante la revolución industrial. Los marxistas creen (o creían) que esos ciclos eventualmente se agudizarían, las masas se rebelarían, el capitalismo caería por sus mismas contradicciones internas, la propiedad privada sería abolida y el comunismo se establecería como sistema. Y la gran mayoría de los economistas no-marxistas desde principios del siglo xx a raíz de la teoría de John Maynard Keynes, piensan que el estado interventor puede modular y estabilizar esos ciclos y depresiones. Pero ambos están de acuerdo en que la culpa la tiene el capitalismo y que lo que nos puede salvar de los ciclos es una intervención masiva del estado. Eso es lo que hemos visto a propósito del paquete de rescate que acaban de aprobar en USA, apoyado por parte de los centros del poder en Wall Street, Washington y los medios de comunicación tanto de izquierda como CNN, como los de derecha como Fox y el Wall Street Journal.

Lo que Marx no pudo reconocer porque muy pocos economistas hasta ese entonces habían desarrollado el aparato teórico para analizar lo pasaba, era que junto con la revolución industrial también se desarrolló la industria bancaria de reserva fraccionaria.


La banca evoluciona jurídicamente desde una etapa en la que es inmoral e ilegal prestarle a terceros tus depósitos a la vista sin tu permiso, a una en la cual esa práctica de crear crédito es aceptada por los banqueros y legalizada y empujada por el estado mediante el banco central. El sistema de reserva fraccionaria es muy sencillo. Si tú depositas $100 en un banco, este le presta $90 a terceros y se queda con $10 como reserva (10%). Tú como depositante actúas como si en realidad tuvieras $100 en el banco, es decir, tus patrones de consumo no cambian porque en cualquier momento, tú puedes ir a retirar tus depósitos inmediatamente.

La banca evoluciona jurídicamente desde una etapa en la que es inmoral e ilegal prestarle a terceros tus depósitos a la vista sin tu permiso, a una en la cual esa práctica de crear crédito es aceptada por los banqueros y legalizada y empujada por el estado mediante el banco central. El sistema de reserva fraccionaria es muy sencillo. Si tú depositas $100 en un banco, este le presta $90 a terceros y se queda con $10 como reserva (10%). Tú como depositante actúas como si en realidad tuvieras $100 en el banco, es decir, tus patrones de consumo no cambian porque en cualquier momento, tú puedes ir a retirar tus depósitos inmediatamente.

El problema comienza cuando esas personas quienes recibieron el préstamo de $90 a su vez depositan ese dinero en otro banco, ya que ese banco va a quedarse con $9 en reserva (10%) y va a prestar $81. Esos $81 prestados entran en otro banco como depósito a la vista nuevamente y se quedan como $8 de reserva (10%) y ese banco presta $73 y así sucesivamente hasta que se crea un "paquete chileno" como se dice en Venezuela o una pirámide en la que de tu depósito inicial de $100 la banca crea en esos primeros tres pasos $244 ($90+81+$73) de la nada. La banca por supuesto apoya ese sistema porque esta gana dinero prestándolo. En ese sistema bancario de reservas fraccionarias, los bancos se mantienen solventes siempre y cuando los depositantes no retiren sus ahorros a la misma vez. Los bancos centrales son creados por los banqueros y el estado para facilitar ese proceso de creación artificial del crédito. A los banqueros prefieren esa intervención del estado porque les permite a todos ellos coordinar sus acciones en conjunto y porque el estado les deposita aún más efectivo en sus activos, dándole más oportunidades para crear aún más crédito. Y al estado le interesa el banco central para poder financiar sus gastos mediante otro proceso complementario a los impuestos que es el de la inflación, puesto que los primeros en gastar ese dinero nuevo lo hacen antes de que los precios suban. En líneas generales, son los empleados del gobierno, los militares y los más allegados al estado quienes se benefician de ese dinero nuevo. Una vez que ese dinero comienza a circular, suben los precios y baja el poder adquisitivo de las clases menos allegadas al estado, generalmente la clase media, los pobres, los empleados del sector privado y los profesionales.

A medida que esa creación de crédito artificial de la nada sin una verdadera base real de ahorros, disminuye la tasa natural del interés. Un crédito en realidad no es sino un un bien en el presente (dinero en efectivo que puede ser usado ahora) intercambiado por un bien en el futuro (el pagaré que nada más puede ser usado mañana). Como la gente siempre prefiere dinero en el presente en vez de la misma cantidad en el futuro, el dinero en el presente siempre comanda una prima por sobre el dinero en el futuro. Esa es la tasa de interés y esta es determinada por el valor que la gente le pone al presente en comparación con el futuro. Mientras la gente valora al presente menos, van a consumir menos y ahorrar más y por la misma razón la tasa de interés va a bajar. Mientras más ahorro existe proporcionalmente al consumo, más baja es la tasa de interés y más inversión existirá. Esa es la clave para el crecimiento económico, el ahorro.

Cuando el crédito es creado de la nada por la banca, cuando el estado promueve ese crédito y dinero fácil mediante el banco central, también baja artificialmente la tasa de interés. Un interés bajo da la señal a los emprendedores de que la gente está ahorrando más que antes y que por ende son rentables aquellos proyectos de inversión en bienes de capital como maquinarias, procesos industriales y construcción, que a un interés natural más alto no eran rentables. Los emprendedores comienzan sus proyectos capitales y para emplear a sus trabajadores tienen que aumentar el salario para atraerlos de sus empleos actuales en industrias de bienes de consumo (alimentos, ropa, bebidas, servicios, etc.). Esta es la fase del "boom" económico en la que los sueldos y los ingresos suben y que como regla general afecta al sector capital de la economía pero no afecta al sector de bienes de consumo (alimentos, ropa, etc.). Pero hay que darse cuenta de que la creación de créditos de la nada por parte de la banca y el estado y la creación de ese "boom" se hace sin la base fundamental del sacrificio de no consumir bienes de consumo (alimentos, ropa, etc.) en el presente, es decir, el ahorro.

En cuanto el emprendedor dueño de un proyecto comienza a pagarle a los trabajadores esos salarios más elevados, los que reciben esos pagos en realidad no han cambiado sus patrones de consumo y ahorro que una tasa de interés baja indicaría, sino que ellos van a consumir y ahorrar ese ingreso en las mismas proporciones que antes. Los trabajadores no van a querer ahorrar más de lo que estaban ahorrando antes y van a gastar el dinero en bienes de consumo (alimentos, bebidas, ropa, etc.) en vez de ahorrar para cubrir los costos de las maquinarias, equipos y materia primas en la que los emprendedores invirtieron. Los trabajadores valoran al presente en la misma proporción que antes y por ende van a forzar la tasa de interés a subir al nivel natural que existía antes del "boom". También recordemos que la industria de bienes de consumo no ha crecido. La industria que ha crecido es la de bienes capitales. Ahora la industria de bienes de consumo va a reaccionar ante ese incremento en la demanda de sus productos y va a crecer mientras que los emprendedores en en las industria de bienes capitales no van a poder pagar por sus maquinarias, equipos, materia prima, etc. ni por sus empleados, quienes ahora están siendo atraídos por las industrias de bienes de consumo. Esta es la esencia de una depresión. Es la etapa de corrección por la que inevitablemente hay que pasar para liquidar la mala inversión causada por la seducción de intereses bajos manipulados por el sistema bancario de reserva fraccionaria apoyado y aupado por el banco central del estado.

Si el estado no controlara a la banca mediante el banco central (en USA el Federal Reserve Bank) y no apoyara al sistema de seguro bancario (en USA el Federal Depositary Insurance Company o FDIC), es imposible que todo el sistema bancario de reserva fraccionara coordinara sus actividades y crease estos "booms" y depresiones. Sin un banco central y sin ese seguro del estado, cada banco correría un riesgo enorme de un los ahorristas se darían cuenta que el banco no tiene suficiente capital para respaldar sus ahorros los retirarían, causando un pánico bancario en ese banco. Al esto suceder, el banco tendría que retirar sus préstamos y declararse en banca rota. Eventualmente solo sobrevivirían aquellos bancos que no practicasen reserva fraccionaria.

Sin reserva fraccionaria y sin banco central, bajos impuestos y poca regulación por parte del estado, sería la proporción entre el ahorro y el consumo lo que determinaría la cantidad de capital acumulada en una sociedad y por ende su desarrollo económico. El mismo Marx reconoce que el capital es lo fundamental y por eso titula su obra maestra Das Kapital. La clave del crecimiento es el ahorro. Mientras la gente sacrifica más el consumo en el presente y guarda el dinero dentro de una sociedad de mercado, más oportunidades existirán para que los emprendedores inviertan ese dinero en procesos productivos intensivos en el uso del capital. Pero los cambios en las proporciones de cuánto ahorran y cuánto consumen y por ende los cambios reales en la tasa de interés serían lentos que tardan décadas en hacerlo. Ello le permite al emprendedor, si es que es competente en su profesión y en pronosticar, de comenzar y terminar su proyecto. Y también le permite aumentar la productividad del trabajador. Por ejemplo, en vez de construir un carro a mano, el capital te permite construir 100 carros usando maquinarias. A su vez aumenta el consumo, bajan los precios y se obtiene un crecimiento sostenible. Y la clave es que sin banco central y sin reserva fraccionaria, el trabajador recibe su salario de manos del emprendedor, y como este va a consumir y ahorrar en la misma proporción que siempre había consumido antes, no hay desequilibrio entre los sectores productivos de la economía (bienes de consumo y bienes capitales) que existe con una banca de reserva fraccionaria y un estado interventor y el emprendedor puede entonces llevar a cabo su proyecto.

Entonces, es el estado quien está en la médula de las crisis económicas y por definición, el estado no puede resolver el problema. Economistas como Keynes y sus seguidores piensan que el estado puede determinar la tasa de interés, pero es que cómo va a saber el estado cuál es la tasa de interés natural, es decir, el precio del dinero, a menos que deje que el mercado la calcule? El experimento comunista de la Unión Soviética, China, Cambodia y Cuba y los millones de personas que murieron de hambre al esos estados eliminar al mercado demostraron contundentemente que el estado no puede determinar los precios del sistema económico sin crear caos, hambre y muerte. El experimento socialista Keynesiano de un estado interventor y regulador en USA, Europa, y el resto del mundo vienen demostrando ya por más de 150 años que el estado tampoco puede regular la política monetaria del sistema económico sin causar ciclos económicos.

Los que acusan al supuesto experimento neoliberal de los últimos 30 años ignoran el hecho de que ha sido una era de un intervencionismo agigantado por parte de todos los estados y sus bancos centrales, en especial el Federal Reserve de USA. No tienen sino que reconocer los déficits, las guerras, las inflaciones y los programas sociales de esos estados en los últimos 30 años. No ha sido un experimento liberal. Ha sido la continuación y la aceleración del mismo proceso interventor que comenzó a principios del siglo XX. Sí, es cierto que cuando Reagan, Thatcher, y Pinochet, por ejemplo, se trata de echar para atrás la regulación del estado un poco, pero llamarlos liberales es un error, en especial porque todos apoyaron a la banca de reserva fraccionaria, al banco central, a sus proyectos militares y demás gastos por parte del estado. De hecho ninguno de ellos logra disminuir el tamaño del estado. El que Pinochet hubiese arreglado el desastre económico de Allende no es gran cosa. De la misma manera, cualquier pistolo podrá arreglar el desastre que es Cuba con simplemente dejar que la gente pueda tener propiedad privada.

El engaño, entonces, no es del mercado. El engaño es del estado, quien mantiene tanto a las masas en una ignorancia que solo beneficia al estado mismo, sus burócratas, sus militares, al sistema bancario, y a los intelectuales que los apoyan.

El engaño en el que participan los intelectuales defensores del estado es especialmente grave. Cómo es posible que mantengan que los derechos humanos que son inalienables por definición, puedan ser alienables? Los derechos pueden ser violados por el estado o por otros individuos, pero jamás son alienables. Les pertenecen a los seres humanos porque son, porque existen. Es axiomático, esa es la definición de un derecho inalienable: yo soy dueño de mi cuerpo, del fruto de mi trabajo, de mi propiedad privada, de mi libertad, de lo que intercambio voluntariamente, de mi vida. El estado no crea esos derechos. Los crea Dios. Nadie te los puede quitar, ni tú mismo. Por ejemplo, tú no puedes entrar en un contrato de esclavitud permanente. En cuanto caemos en el error intelectual de pensar que esos derechos son alienables o que el estado crea esos derechos o simplemente que los garantiza de alguna manera, cometemos un error fundamental y de allí pasamos a pensar que el estado tiene que intervenir para garantizarlos. No, esos derechos los tenemos que garantizar todos y cada uno de nosotros mediante nuestra acción individual y mediante el reconocimiento de la ley natural. El mercado ni la participación en el mercado como productores o consumidores definen los derechos humanos. Pensar que solo tenemos derechos humanos cuando participamos en el mercado es un error de lógica. Todo lo contrario, son los derechos humanos los que definen la necesidad del mercado. Es justamente el hecho de que somos creados libres lo que determina el que solamente en un mercado libre podemos actuar con libertad. Esos derechos humanos crean al mercado libre. En cuanto el estado fuerza esas relaciones de acción interpersonal, mediante los impuestos, mediante sus prohibiciones, mediante la manipulación de la tasa de interés, o cuando otras individuos violan esos derechos, por ejemplo, el derecho a la propiedad privada cuando un banco presta a terceros el dinero de los que ahorran sin su permiso, se crean las crisis y los problemas.

A menos de que los que promueven al estado interventor propongan una teoría coherente de porqué suceden los ciclos económicos y que explique cómo más intervención estatal evitaría los ciclos, vamos por malísimo camino. Puede ser que la catástrofe mundial causada por el intervencionismo del estado en la política monetaria que va a ser agravada y alargada por este paquete de rescate recientemente aprobado nos haga reflexionar e imponer sensatez en es asunto.

That 70's stagflation is back!

Recent articles on the specter of stagflation are right on. What is not made explicit is the cause of stagflation: the Federal Reserve. Since its creation in 1913 when the federal government nationalized our money supply, we have allowed the hand of politicians inside the cookie jar of easy money. As expected, they can’t stop eating.

The root cause of stagflation has been known for over a hundred years. As the Fed creates money out of thin air to finance politicians’ expenditures, prices must increase (inflation). Printing of money also causes a reduction of the interest rate below its natural level. The natural rate of interest is not controlled by the Fed but is controlled by the proportion of income consumers save versus what they spend. The more they save, the lower the natural interest rate, the higher the level of investment, the higher the productivity of labor and the higher the level of economic prosperity. But an interest rate artificially below what real savings rate supports gives investors, entrepreneurs, businesses, banks and homeowners the wrong economic signal: projects that would not have been profitable and would not have been started now become viable, at least for a while. But the inevitable correction necessary to liquidate all of these malinvestments always come because the distorted capital structure in the economy is not supported by real savings. Instead, the capital structure is supported by nothing, by thin air, by paper money. As this paper money flows from the Fed to the central government to banks to businesses and finally to consumers in the form of higher wages and as consumers save at their natural rate rather than the higher rate implied by the artificially low interest, they spend more on consumer goods and less on savings. As the economy grapples with an amount of consumer savings that is insufficient to support the total investment in capital to which business and entrepreneurs are committed, like a pyramid scheme, those now unprofitable capital projects on the bubble collapse (it could be investments in the stock market, businesses, dotcoms, mortgages, whatever) and are liquidated (recession).

If at the same time that the bubble bursts the Fed accelerates the money printing machine, as it is doing now and as it did back in the 70’s, we get a recession caused by manipulation of the interest rate with inflation caused by printing money (stagflation). Boom and bust cycles and inflation are not inevitable characteristics of capitalism free from government intervention. But these cycles are the predictable consequence of the actions of the Federal Reserve. Politicians cannot fix the mess they got us into by printing more money and lowering interest rates because that was the cause of the mess to begin with!

The only way to manage our politicians’ addiction to the cookie jar of paper money is to smash their jar once and for all: dismantle the Federal Reserve, privatize our money supply and bring back the gold standard. Until politicians can figure out how to create gold out of thin air, the gold standard is the only way to force stability on our supply of money and the only way to stop them from causing inflation and recessions. Plus, it is the only way to keep politicians at the federal level honest: with their ability to get their hands in the cookie jar gone, they would be forced to increase taxes rather than print money in order to finance federal expenditures, just like state and local governments are forced to tax to spend. This was one of two critical elements of the vision for sound money of our Founding Fathers (the other one was to severely restrict the ability of the federal government to impose taxes on individuals). Thomas Jefferson fought hard and eventually succeeded in closing down Alexander Hamilton’s federal reserve/central bank scheme. Jefferson knew that giving the power to create money to the federal government would be the beginning of the end of the American experiment. Jefferson was and still is right. I mean, if we all intuitively know that printing money is wrong for private individuals, what in the world makes us think that it is right for the Fed to counterfeit at such monumental levels?

Why health insurance does not work

The object of insurance is to cover a large loss to the policy holder triggered by an event that is outside one's control. The probability of the loss caused by this uncontrolled risk and the cost associated with it must be calculable in a large group of random policy holders so that in exchange for an affordable premium, the insurance company can pay for the loss and make a profit.

Sickness combines both controllable risks and uncontrollable risks born by the policy holder. Breast cancer, for example, occurs at predictable rates in large groups of females and is beyond the control of the policy holder; therefore, it can be insured against. But routine diagnostic tests, for example, follow patterns that are influenced, at least in part, by the individual choice of the policy holder and are hence a type of risk controlled by the policy holder. The more that diagnostic tests are covered by insurance, the more that the insurance contract encourages their use and the higher the costs to the insurance company. This is the phenomenon of “moral hazard” in which the actions of the policy holder change the value of the insurance contract. Facing this type of uninsurable risk, insurance companies react by increasing premiums, copays and deductibles. There comes a point in which premiums, deductibles and copays become so large relative to the protection offered, that the covered group faces “adverse selection” and becomes non-random as healthier policy holders chose to drop out and only high cost individuals remain insured.


The only sensible system to cover risks controlled by the patient is in an environment in which fee for service dominates the market, similar to the car maintenance model. This is, of course, what we had in the US prior to the hospital and physician sponsored Blue Cross and Blue Shield and HMO plans of the 1920’s and 1930’s. These plans were the first ones to introduce first dollar coverage for risks controlled by the policy holder and, while they may have attempted to manage the business consequences of moral hazard and adverse selection, they did not understand the negative economic and political consequences that their business model would cause decades later. These consequences (enumerated below) were exacerbated by two factors. One, the prevalence of employer provided health benefits resulting from the wage and price controls imposed by the US government during WWII and the tax code which forced employers to compete for qualified personnel not via wages but via tax deductible benefits such as group health insurance. Two, the introduction of Medicare and Medicaid, modeled after Otto von Bismarck’s Health Insurance Act scheme implemented in Germany in the 1880’s. Bismarck’s plan was the first one to ever attempt compulsory social insurance. Lenin and Stalin in Russia, Mussolini in Italy, Franco in Spain, Hirohito in Japan, Hitler in Germany, Castro in Cuba, Peron in Argentina and FDR in the US, have all followed Bismarck’s model: welfare payments mandated by the state and paid for through taxation, government debt and inflationary monetary policy.

The economic consequence to the manner in which private health insurance and socialized welfare medicine are structured in the US is obvious to everyone: over utilization, high costs, high taxes, poor outcomes, rationing, price controls, adverse selection, large pools of uninsured, etc. The cause and effect mechanisms that result in these problems all stem from a pricing structure that is not the result of the free exchange between patients and providers, but the result of government intervention. Without the clear guide of prices, patients, hospitals, insurance companies and physicians cannot rationally plan their actions. The details of these mechanisms are beyond the scope of this article, but some of them are explored by this author here and here. The political consequence of this structure in the healthcare market is that industry, welfare, professional associations and business interest groups continually call for more government regulations and more medical socialism and that politicians of both parties effectively respond to those calls. Practically nobody is seriously challenging the flawed assumptions of the existing healthcare model. If anything, in the hopes that more government intervention will help save the current system, movement towards medical socialism has accelerated in the past two decades.

A sensible step towards reform away from medical socialism would be the deregulation of the private health insurance industry and allow individuals and families to deduct individual policy premiums from their income tax. Such a deregulated environment would encourage individuals to take responsibility for their controllable risks, would bring back a fee for service environment for a small but significant portion of the healthcare market and would allow insurance companies to:

1. Insure primarily against uncontrollable risks
   
2. Not insure against controllable risks, which result in moral hazard and adverse selection
3. Underwrite individual policies, the practice of determining how much coverage the policy holder should receive and determining the premium
4. Move away from community rating, the practice of charging the same premium to healthy people and to sick people
   

These reforms will re-introduction a rational pricing system for at least small but meaningful sectors of the medical market that can guide the actions of patients, physicians, hospitals, other healthcare providers and entrepreneurs.

Eminent domain, border fence & immigration

The newpaper reports about the Tamez family of El Calaboz , Texas who is resisting the plan for a border fence on their property, is a chilling reminder of how far we have allowed the federal government to take away our rights, especially since 9-11. In a sense, the terrorists have won. They have conned us into accepting a pact with the devil: “give me your freedom”—he says, “and I will give you security.” Now the people implementing that pact, the same people who gave visas to the 9-11 terrorists, the same people who could not thwart the 9-11 plot, the same people who suspended our right to seek relief from unlawful detention and the same people who monitor our bank accounts, listen to our international phone calls and read our emails without a search warrant issued by a judge and without our knowledge, these same people are going to use eminent domain to expropriate the Tamez land. The whole affair should remind us that what is at stake here with all the anti-immigration hysteria is not the Tamez family’s “psycho-historical attachment to the land,” nor Americans’ inability to “understand their own history” as one of your interviewees in the article below suggested. No. The question the Tamez family plight raises is how the border fence and all other anti-immigration efforts violate our own private property rights here in America.

Eminent domain is a fancy name for the violent expropriation of our private property by the state. It forces a law abiding US citizen to give his property to the state in exchange for “fair market value.” This is simply a violation of the natural right to use and enjoy our private property according to our wishes, as long as we are not violating anyone else’s rights. Eminent domain expropriation is a form of involuntary violent exchange. Even if there is payment by the government at a “fair market value” this does not make the expropriation legitimate because the government cannot ever compensate a property owner for the subjective value he assigns to his property. Fair market value is only meaningful when both parties to the exchange voluntarily agree to a price, which is how things work in a true free market. Expropriation, therefore, is more akin to highway robbery than the sale of any good.
One powerful argument for the border fence is that it will prevent illegal immigration. But do we ever ask ourselves if restricting immigration (legal or illegal) violates our individual private property rights? As long as the illegal immigrant is moving into a piece of private property whose US owner is willing to take him, there is nothing wrong with their exchange. This is a voluntary transaction, free from coercion and without any victims. When the immigrant crosses the border and is employed by a factory that needs labor, eats at a restaurant that needs patrons, rents a vacant apartment from a landowner, whose rights are violated? These are mutually beneficial forms of economic exchange in which both parties agree to a price and exchange goods and services. Nobody’s rights are violated. But on the other hand, when the government tells a farmer that he cannot hire an immigrant from Mexico to pick tomatoes, when it tells a mother that she cannot hire a babysitter from Guatemala to care for her children, when it tells a landlord that she cannot lease her apartment to an immigrant from Nicaragua to fill a vacancy, when it tells a hospital that it cannot hire a nurse from the Philippines to take care of patients, when it tells a high-tech company that it can not hire a programmer from India to program its computers, when the government does this to prevent immigration, whose rights are violated? The private property rights of farmers, mothers, landlords, hospitals and high tech companies to use their property for their own business goals. Does this mean that Mexican immigrants have an inherent right to come here simply by virtue of their economic plight in Mexico or by virtue of the demand for their services? Absolutely not. But what it does mean is that property owners have the right to decide who they want in their property, regardless of the legal status of the person with whom they are making an economic exchange. As long as both the immigrant and the property owner agree voluntarily to the terms of the exchange and as long as they are not violating other people’s rights, there is nothing wrong, unnatural, unethical, improper or unconstitutional with such arrangement.

p>Some would argue that since immigrants and illegal immigrants abuse our welfare system and use our libraries, schools and other so called “‘public goods”, the rights of property owners must be superseded by the government acting act on behalf of the common good, the nation or the taxpayers. But this argument is in fact more of a condemnation of welfare rather than of illegal immigration. Among many evils, welfare creates a permanent underclass, promotes dependency on the state, increases unemployment, destroys the moral character of the recipient, reduces the spirit of giving and is financed by coercive taxation of working men and women. We must end the welfare state for everybody, not just immigrants.

Others argue that since immigrants might use welfare in the future we should also curtail immigration now. This argument is also wrong. If it was correct, it would mean that we should incarcerate all young black males on the grounds that some of them will commit crimes in the future or that we should prevent Hispanic females from having children because some of them will be involved gang crime when they grow up. In any event, all these “public goods” should be privatized, thus eliminating the illegal immigrant free rider problem. But even if we don’t have the political will to do so and public goods remain subsidized by taxation, I am certain the tax bureaucracy in Washington and the state capitals can figure out a way to keep track of and force immigrants to pay their share of taxes, just like it forces the rest of us.

Finally, some make perhaps the most powerful argument against illegal and legal immigration--that immigrants will destroy the American culture that makes freedom itself possible. But once again, this is incorrect. First of all, we are no longer the freest country in the world. Hong Kong , Singapore and Australia already score higher than the US in the Index of Economic Freedom published by the Heritage Foundation. Second, countless immigrants and their children and grandchildren have promoted freedom throughout our history. Third, at least in the near future, these "conniving" immigrants would be using owr own democratic system to destroy our way of life. But think about it, that millions of Hispanics could vote for communism, socialism, Nazism, welfareism or other interventionist programs is more a condemnation of the US system of democracy than of illegal immigration. That anybody, not just immigrants, can vote to support the right of a third party to forcefully take away our property is the biggest real threat to our freedoms. These freedoms have been taken away systematically using majority rule voting ever since President Lincoln waged the War to Prevent Southern Independence; therefore, we know this erosion started prior to the current wave of Mexican illegal immigration. Granted, many of those past voters were immigrants from Italy , Ireland or Germany , but by and large, we must admit that regardless of our migratory background, we have been the ones using democracy to undermine our own freedoms.

If we are serious about significantly curtailing Mexican immigration, there are very effective and very inexpensive ways to reduce it to a trickle without violating US citizen’s private property rights. It is simple: the inevitable tendency for people to migrate from poorer countries with excess supply of labor (like Mexico ) to richer ones with shortages of labor (like the US ) has a direct and opposite counterbalancing flow that is currently blocked: the flow of capital in the opposite direction. The federal government, therefore, could unilaterally declare the full free flow of capital from the US to Mexico and the free flow of goods from Mexico into the US . Under such unilateral free trade conditions, entrepreneurs and capitalists would take advantage of cheaper labor in Mexico and move their capital across the border to build plants and equip farms. If those Mexican goods were allowed to freely flow into the US , American consumers would benefit from more and cheaper goods and American capitalists would benefit from a higher return on capital. But more importantly, these flows of capital and goods will cause an increase in the demand for labor in Mexico, which will increase wages in Mexico and will thus reduce the pressure that the Mexican poor feel to migrate to the US. Ergo: no need for artificial restrictions on immigration, no need for a fence, no need to violate Americans’ private property rights. But alas, that would mean the unmasking of the political machinery of fear and xenofobia that seems to have taken over America. Therein lies the rub.
For the newspaper report on the Tamez family plight, click http://www.valleymorningstar.com/news/land_15400___article.html/border_tamez.html

Outline for a critique of HillaryCare II

The Clinton Campaign unveiled their health care plan this week. It features a mixed bag of carrots and sticks that are to end the cost spiral and give universal coverage for all Americans (see note 1 below for summary). HillaryCareII will be financed by increasing taxes for the rich and reinvesting the savings from running a more efficient system. Efficiencies will be gained by promoting the adoption of information technology to cut costs, research and promotion of best practices for providers and paying for prevention rather than acute care.

HillaryCareII features the “Principles of Shared Responsibility”:
1. Drug companies should offer fair prices
2. Insurance companies should cover everyone regardless of pre-existing conditions, expectations of illness
3. Providers should collaborate to provide quality care
4. Employers should contribute to health coverage, large firms required to provide insurance; small business should take advantage of tax credits
5. Government will make insurance affordable through tax credits, provide a safety net so that insurance is not a financial burden, and will end cost spiral.
6. Individuals required to buy insurance

It is easy to see that while HillaryCare II may reach universal coverage for all Americans, it will not solve the problems of the current health system, including the cost spiral. This is because HillaryCareII does nothing to question the paradigm under which the current system rests: that government can rationally design the reimbursement mechanisms and set payment rates for provider services, the same governmental comand and control tactics that have failed int he past.

Democratic and Republican reform initiatives leave untouched Medicare’s command system of setting prices for health services based on costs of production. The prices of healthcare services (or any consumer good for that matter) are NOT based on the costs of labor, supplies, rent, capital, etc. Medicare administrators and their supporters in academia and government have the cause and effect relationship between prices and costs exactly backwards! Costs of production do not cause prices. Prices are set by the subjective judgments and valuations of individual producers and consumers exchanging goods in a free market, irrespective of production costs. In response to these prices and expected profits, entrepreneurs and business managers bid up the prices of factors of production like labor and supplies. That in the long run or that in perfectly competitive markets prices equal costs of production plus the interest rate is irrelevant. What determines the price of a service here and now is the short run adjustment mechanisms that allow producers to bid for factors of production to meet a consumer need and make a profit.

When Medicare tells providers what they will get paid for a heath service, it sends a signal to providers to bid up the prices of labor, supplies and equipment to meet the new price level. The result is a feedback loop between Medicare and providers, out of control costs, distortions in labor markets for physicians and nurses and a capital structure for health services ready to break down. The solution to the government induced mess in healthcare is as simple as it is politically incorrect: get the government out of the healthcare financing business, privatize Medicare and let the free market rationally allocate capital, labor and other resources based on consumer preferences.


Theoretical problems with HillaryCare II from an economic perspective:

The problem of the imputation of value
The problem of calculation
The problem of dissemination of knowledge Hayek
The problem of entrepreneurship P 698 Human Action
The problem of disruptive technology p. 706-707
The problem of the allocation of capital . p 704
The problem of allocation of the factors of production without prices
The problem the computation of profit and loss without prices in P 701
The problem of changes in consumer tastes p. 706


Note 1: Key carrots (+) and sticks (-) of HillaryCareII are:

For Individuals:
+Individuals can keep their current health plan.
+The congressional private health plan menu is expanded to the general population
+Medicare expanded to the general population as an additional choice.
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.
+Expand Medicaid to all low income individuals
+Expand health plan menu to fill the gap for early retirees before qualifying for Medicare
-Repeal Bush tax cuts and redirect revenue to fund program.
+Limit premium payments to a % of income yet maintain consumer price consciousness in choosing plan

For Insurance Companies:
-Medicare overpayments to HMO’s phased out.
-Guaranteed issue, automatic renewal
-No rating based on age, gender, occupation…
-No excessive profits or marketing costs
-Cannot deny coverage or renewal, unfair prices, excessive premiums
-Cover preventive care
-Cover chronic illness care management
-Promote prevention

For pharmaceutical companies:
-Pharmaceutical companies regulated to control their relationship with providers, cut prescription drug ads, prohibit direct to consumer ads.
-Medicare is allowed to negotiate directly with pharmaceutical companies to cut prescription drug costs

For providers:
-Disproportionate Share payments phased out.
+Apply technology and clinical best practices to improve quality, reduce errors, eliminate waste via technology, care coordination, best practices
-Align Medicare payment with performance, reduce geographic variation in care, information to consumers,
-Expand pay for performance based on outcomes

For employers:
+Tax credits for small businesses
+Employers expected to provide health insurance to their employees
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.

For more details on HillaryCareII go to http://www.hillaryclinton.com/feature/healthcareplan/

Federal Reserve Kool-Aid

The Federal Reserve could not resist the heat of the subprime mortgage market correction and is passing out more of the same Greenspan Kool-Aid: lower interest rates. This is the same drink that caused the housing bubble to burst in the first place! Every time the Fed lowers interest rates it signals entrepreneurs to mal-invest in long term projects that would otherwise be deemed unprofitable and unwise. When these expanding businesses bid up the price of labor, land, supplies, etc., we all feel the sugar high of the Kool-Aid in the form of increasing wages. Eventually, however, our economy cannot handle this boom and we have the inevitable sugar low of a market correction.

The true signal for businesses to invest more or less is not the Fed, but the natural relationship that exists between the proportion of income we want to dedicate for consuming today and the proportion of income we want to save for the future. This consumer time preference determines the free market interest rate. The more we want to consume today, the higher the interest rate. The less we want to consume today, the lower the interest rate. Think about it, if we expected the world to end next year, we would all want to consume as much of our income as possible before the end and we would save little or nothing. In this case, the interest rates would be very high as nobody would want to lend any money unless the return was extremely high. Conversely, if we were all made immortal, there would be no need to consume our income rapidly. On the contrary, we would want to save as much as possible for the future. In this case, the interest rate would be very low as everybody would be willing to lend money at extremely low rates.

Because of Fed-manipulated low interest rates, businesses believe that our time preference has changed, that we want to consume less now and save more for the future, so they go ahead and mal-invest in long term capital projects, thinking that we have the savings to back-up those investments. In reality, nothing has changed, our time preference has remained the same, we want to continue consuming today the same proportion of our income that we always have consumed. When the higher incomes resulting from the boom hit our pockets, we start demanding more consumer goods today. But the capital structure of the economy is not equipped to supply those goods today because instead, businesses invested in projects to produce goods for the future, not for today. The end result is that the entrepreneurs who mal-invested go out of business, incomes drop, workers lose their jobs, etc. This inter-temporal distortion in our capital structure of production caused by the Fed is the root cause of bubbles and bursts for the past 100 years, including the Great Depression, the stagflation of the 70’s, the high-tech bubble of the 90’s and the current housing bubble.

If we had an actual change in the time preference and consumers indeed consumed less today and saved more for the future, then interest rates would drop and entrepreneurs would get the signal to invest in long term projects. As these projects bid up our wages and the extra income hits our pockets, we would save a higher proportion of our new income and would not cause an increase in the demand of consumer goods for today. Eventually, as the new capital projects start producing consumer goods, the prices of consumer goods fall and our standard of living increases, all without a bust and without inflation, indeed, with a drop in prices or deflation.

The way out of boom and bust cycles is simple: get the government out of the money business and eliminate the Federal Reserve.

Medicare Rx

The fundamental flaw with Medicare’s system of paying for healthcare services is that it attempts to find out what it costs to produce medical services. These costs are then used to set provider fees using complicated cost-plus-profit methodologies (RVU, DRG, RUG, etc.). Medicare collects these provider costs through various vehicles that include requiring providers to submit cost reports (See http://www.cms.hhs.gov/CostReports/ for a summary of these reporting regulations).

The basic assumption of Medicare's complex approach is this: that the price of a healthcare service is based on the costs of producing that service. But Medicare administrators and their supporters in academia have the cause and effect relationship between prices and costs exactly backwards! This is the same mistake that Karl Marx and his predecessor Classical economists David Ricardo and Adam Smith made in their unsuccessful attempt to explain how prices are supposed to be a reflection of labor costs and other factors of production costs like land, supplies, capital, etc. Costs do not cause price! The price of a product is set by the subjective judgments and valuations of individual suppliers and consumers exchanging goods in a free market. And it is this price that then determines costs of production! This takes place through a process of "value imputation" that flows from the consumer back to the factors of production. This "value imputation" happens when entrepreneurs and managers bid up the prices of factors of production in response to expected future profits.


Let us first illustrate the complexity of Medicare's attempt to collect cost information and then set prices. Medicare uses the following formula to determine the fees paid to physicians:

Work RVU x Budget Neutrality Work Adjustor x Work (GPCI)+Practice Expense (PE) RVU x PE GPCI+Malpractice (PLI) RVU x PLI GPCI= Total RVUxCY 2007 Conversion Factor of $37.8975= Medicare Payment

The three Relative Value Units or RVU's in the formula represent the value assigned by Medicare to the various resources needed to provide each physician service. The RVU's are supposed to reflect the work effort, skill, time, intensity and risk required of the physician depending on his specialty, his expenses in providing each service adjusted by a geographic practice cost index (GPCI), liability insurance costs (PLI), a "budget neutrality" cap on total Medicare payments to physicians mandated by Congress and the "conversion factor" which translates each RVU into a dollar amount.

RVU's were developed by the good folks at the Harvard School of Public Health in the mid 1980's when Medicare administrators awarded them a contract with the intent of establishing a rational, equitable and distortion-free approach to physician fees. Additional help was provided by KPMG Consulting who was charged with the development of the liability insurance cost factors. For a more detailed account of how those liability factors are determined go to http://www.ama-assn.org/ama/upload/mm/363/pliwhitepaper.pdf. And later still, more help was provided by experts in econometrics at the Urban Institute who developed the geographic practice cost index. Go to http://www.urban.org/publications/900540.html for fascinating account from one of its developers.

To coordinate the whole process, Medicare also enlists the help of the American Medical Association, the American Osteopathic Association and the major national medical specialty societies, all of whom participate in an advisory group ( RVS Update Committee http://www.ama-assn.org/ama/pub/category/16401.html) responsible for compiling data obtained from physician surveys to determine the time spent in performing the medical service and ranking the service relative to existing services.

There are over 10,000 values for each of the above three RVU categories, hundreds of GPCI's and PLI's adjusting each of those 30,000 RVU's resulting billions of potential combinations for physician fees. In the near future, Medicare will adjust this formula to reflect each physician's clinical outcomes or quality, which will result in another exponential increase in the number of potential combinations for fees. And this is only for the professional component of physician reimbursement. Physicians also receive Medicare payment for the facility components of certain procedures performed in their offices.

If one adds to this already mind-boggling array of physican fees calculations more layers of complexity represented by fees to hospitals, home health agencies, hospices, Medicare HMO's, ambulances, nursing homes and pharmacies, each with their own assigned methodologies for Medicare reimbursement, and one adds the mechanism by which the AMA and the government manipulate the supply of medical education (http://www.cogme.gov/) and hospitals and some state governments influence the supply of hospital beds through certificate of need regulations, one can only begin to appreciate the mammoth size and the power of the bureaucracies needed to attempt to centrally manage our healthcare system.

I wrote earlier that unlike what Medicare administrators assume, prices determine the cost of production. Let us illustrate the correct causal relationship between prices and costs with an example. Diamonds are expensive not because they cost a lot to produce, but because high demand and low supply forces prices to be high, which then allows producers to engage in the very expensive process of discovery, extraction and commercialization of diamonds. When diamond entrepreneurs are wrong in anticipating the price at which they will sell diamonds and their production costs are higher than the market price, their companies go out of business. When they are right and their costs are lower than the price at which they sell, they make a profit and prosper.

The higher their profits, the more other diamond entrepreneurs will enter the market, which bids up the prices paid to the factors of production or increases the quantity produced until, in the long run, the market for diamonds and the market for the factors of production of diamonds may approach equilibrium. It is only then that price of diamonds equal the costs of producing them. And it is then that casual observers are deceived into thinking that the price of diamonds is caused by their cost of production. This is because we tend to experience only the resulting price and costs of those companies that survive the competitive process. When we erroneously conclude that the value of a product is inherent in the costs of the inputs of the production process, we ignore the more vital and essential role played by the short run process of adjustments.

Theoretical work by the Austrian School of Economics since the 1870's has clearly refuted the incorrect theory of value that we inherited from the Classical school and Karl Marx and that economists and policy makers, including Medicare administrators, continue to use to this day. For an account of the Austrian approach and the theory of value imputation, see Ludwig von Mises' "Human Action" Chapter XVI, pp. 328-347 http://www.mises.org/humanaction/chap16sec2.asp:

"Attempts to establish cost accounts on an "impartial" basis are doomed to failure. Calculating costs is a mental tool of action, the purposive design to make the best of the available means for an improvement of future conditions. It is necessarily volitional, not factual. In the hands of an indifferent umpire it changes its character entirely. The umpire does not look forward to the future. He looks backward to the dead past and to rigid rules which are useless for real life and action. He does not anticipate changes... Profits do not fit into his scheme. He has a confused idea about a "fair" rate of profit or a "fair" return on capital invested. However, there are no such things... In a changing economy profits are not determined with reference to any set of rules by which they could be classified as fair or unfair. Profits are never normal..." pp. 346-347

The key insight of the Austrian approach is that not only are prices of consumer goods subjective, but that production costs are also subjective and determined through voluntary exchanges in a free market through a proces of value imputation that flows from consumers to producers to owners of factors of production. The collapse of the Soviet Union's economy has shown us that a centrally planned socialist approach based on an erroneous theory of value does not work in practice. This collapse has vindicated the work of many Austrian School economists who have shown since the 1920's that economic calculation under a centrally planned economy is theoretically impossible (for a devastating attack on central planning, see Ludwig von Mises' 1922 "Socialism" http://www.mises.org/books/socialism/contents.aspx).

Attempts by a central bureaucracy to use costs to set prices are not just difficult or "thorny" practical issues to resolve. Bluntly put, it is theoretically impossible for a PhD economist or a Medicare bureaucrat to figure out healthcare costs and therefore impossible for him to figure out the correct reimbursement rates for any healthcare service anywhere at any time. Only an unregulated free market where patients and physicians and other providers of healthcare services can voluntarily make exchanges can correctly solve the puzzle. The market for healthcare is not an exception to this inexorable and axiomatic economic law.

With the government sector accounting for more than 40% of healthcare spending (http://aspe.hhs.gov/health/costgrowth/) and with insurance and managed care companies and individual patients following Medicare's methodologies, the overwhelming majority of players in the healthcare market in the US are following a centrally planned socialist approach. The process and the results are disastrous and inevitable. First, Medicare compiles observed production cost data to calculate reimbursement rates or prices. Then healthcare providers take this price and it's implied expected future profit to bid up the price of the factors of production. The following year, these factors of production are then fed back to Medicare as costs to be used to determine the new reimbursement rates, and so on and so forth, into an ever ending negative feedback loop.

Is it any wonder that we have a collapsing healthcare system with ever increasing costs, misallocation of capital, meaningless prices, shortages, cues, rationing, cherry picking and fraud? Is it any wonder that a significant and ever increasing portion of patients are being priced out of the market and turning up in our emergency rooms as uninsured? Is it any wonder that patients, physicians, insurance companies and hospitals are pitted against one another with missaligned incentives in a battle to maximize Medicare dollars? Is it any wonder that Medicare taxes and deficit spending are causing an unprecedented inter-generational transfer of income from younger working poorer uninsured Americans to older, retired, insured and wealthier Americans?

CMS administrators should recognize that they are using a mistaken socialist economic theory to set their fees that will inevitably continue to bring the healthcare system to its knees. Physicians and hospitals should recognize that with this approach in which their own professional societies have actively participated, they have have lost complete control of their practices and hospitals and have simply become instruments of the state. And patients should recognize that their beloved Medicare has eroded the patient-physician relationship beyond recognition, one in which physicians can no longer respond to patient needs but to a bureaucracy in Washington.

Part 3 Benedict’s 2nd Encyclical: Bigger Government?

As indicated in my prior posts, Pope Benedict XVI is set to publish his second encyclical on the subject of economics. Among its themes, it is reported that the new encyclical will urge more regulation of world trade and economic systems and condemn tax evasion as “socially unjust.”

I argued earlier that if the above report is true, this future encyclical may represent a departure from the last social encyclical of Pope John Paul II, which seemed to open the way to a reconciliation between a market economy and Catholicism, and that it may represent a return to traditional Catholic Social Doctrine with its reliance on socialist economics, philosophy and propaganda. In this last part 3 of this series, I will argue that there may be an affinity between Pope Benedict’s writings on Christianity as a philosophy of freedom and the tradition of Liberalism as expressed by certain variants of the Enlightenment, specifically a connection to Saint Thomas and the late scholastic Spanish Dominicans and Jesuits of the School of Salamanca (Soto, Mercado, Molina, Mariana, etc.).

Several economists have already pointed out the strong philosophical connection between the development of the economic theory of free markets and Catholicism. To my knowledge, this was first explicitly developed by Murray Rothbard in the 1950’s.

In a memo written in 1957 titled "Catholicism, Protestantism and Capitalism," http://www.mises.org/rothbard/RothbardOnKauder3.pdf Rothbard is recommending to a publisher the work of Emil Kauder and his research into the Aristotelian-Thomistic background of marginal utility and Austrian economic theory:

Kauder, in fact, turns the Weber thesis on its own followers by attacking Smith and Ricardo for being influenced by [Protestantism] to develop the “labor theory of value.” Schumpeter also leaned in this direction. The brunt of this important new thesis is this: rather than saying that Hume and Smith developed economic theory almost de novo, economics had actually been developed, slowly but surely, over the centuries by the Scholastics and by Italian and French Catholics influenced by the Scholastics; that their economics was generally individualist methodologically, and stressed utility theory, consumers’ sovereignty and market pricing, and that Smith really set back economic thought by injecting the purely British doctrine of the labor theory of value, thus throwing economics off the sound track for a hundred years. Here I might add that the labor theory of value has had many bad consequences. It, of course, paved the way, quite logically, for Marx. Secondly, its emphasis on “costs determining prices” has encouraged the view that businessmen push up prices or that unions push up prices, rather than governmental inflation of the money supply. Third, its emphasis on “objective, inherent value” in goods led to “scientistic” attempts to measure values, to stabilize them by government manipulation, etc. Now, Kauder’s interesting thesis is in two parts: one, that the above was the historical course of events in economic thought; and two, that the reason for this forgetting of utility theory and replacement by a labor-cost theory was influence by the Protestant, as opposed to the Catholic spirit...
...We may sum up the Case for Catholicism as follows: (1) Smith’s laissez-faire and natural law views descended from the late Scholastics, and from the Catholic Physiocrats; (2) the Catholics had developed marginal utility, subjective value economics, and the idea that the just price was the market price, while the British Protestants grafted on a dangerous and ultimately highly statist labor theory of value, influenced by Calvinism; (3) some of the most “dogmatic” laissez-faire theorists have been Catholics: from the Physiocrats to Bastiat; (4) capitalism began in the Catholic Italian cities of the 14th century; (5) Natural rights and other rationalist views descended from the Scholastics.

This line of thought was fully developed by Murray Rothbard in his “Economic Thought Before Adam Smith” Volume 1.

A similar approach was explored by F.A. Hayek in his "Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice" University of Chicago Press 1978, note #15 to Chapter 9, p. 178-179. Here, Hayek states that the origin of capitalism is not to be found in Calvinism but in Jesuit Spanish scholastics and that these Jesuit scholars in the 16th century were the first to recognize that prices determined by just conduct of the parties in the market (no violence, fraud, etc.) is all that justice requires. Any particular application of "social justice" in the real world, including Catholic Social Doctrine, can only be accomplished via socialism.

Others who have explored the historical, philosophical and theological connection between Catholicism and Liberalism.

1) Bruno Leoni in ”Freedom and the Law”
2) Alejandro A. Chafuen in “Faith and Liberty, The Economic Thought of the Late Scholastics”
3) Jesús Huerta de Soto in “Juan de Mariana and the Spanish Scholastics” http://www.jesushuertadesoto.com/madre2.htm
4) Thomas E. Woods Jr. in “The Church and The Market”

All of these authors convincingly argue that the late scholastics had discovered and developed not only most of the basic tenets of the Liberal Anglo-Saxon movement, but also the principles of the free market economy, all from a Thomistic perspective.

If Kauder, Rothbard, and Hayek are correct, then Catholic economists, theologians and philosophers need to go back to the Catholic roots of Liberalism and extricate both Liberalism and Catholic Social Doctrine of the errors of Protestantism, Rationalism and the Enlightenment. And while Kauder, Rothbard, Hayek, Leoni, Chafuen and de Soto explore the historic and the philosophical connections between the two, to my knowledge, few have explored the deep theological connections between Catholicism and Liberalism. It is precisely here where Benedict XVI comes in, not only because he explicitly states, as I argue below, that this is needed, but because his own emphasis on the theology of freedom, he provides a possible bridge between a Catholic theology of freedom and free market economics.


1) My first area of exploration for possible affinities between Pope Benedict’s theology and Liberalism, is derived from a reading of his first encyclical “God is Love” http://www.vatican.va/holy_father/benedict_xvi/encyclicals/documents/hf_ben-xvi_enc_20051225_deus-caritas-est_en.html

b) Love—caritas—will always prove necessary, even in the most just society. There is no ordering of the State so just that it can eliminate the need for a
service of love. Whoever wants to eliminate love is preparing to eliminate man
as such. There will always be suffering which cries out for consolation and help. There will always be loneliness. There will always be situations of material need where help in the form of concrete love of neighbor is indispensable. The State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person—every person—needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need....In the end, the claim that just social
structures would make works of charity superfluous masks a materialist
conception of man...

This passage, at least implicitly, recognizes that it is precisely in a system of Liberalism which does not purport to have the state solve everyone’s problems. Liberalism leaves space open for voluntary associations as one of the mechanisms complementing the free market through which
Christians can actively participate and institutionalize love for one’s neighbors.

2) My second area of exploration comes from my reading of “Introduction to Christianity,” where Pope Benedict XVI, then Cardinal Ratzinger, fully develops the connection between creation and freedom. He starts by asserting that the Christian belief in God is not identical with either the materialistic conception of being (that everything we encounter is matter) nor with the idealistic conception of being (that what we encounter is ultimately the product of thought, where mind is the original reality) p. 156-157, 1990 edition, Ignatius Press:

Christian belief in God means that things are the being-thought of a creative consciousness, of a creative freedom, and that the creative consciousness that bears up all things has release what has been thought into the freedom of its own, independent existence.

This goes beyond idealism. For the idealist, everything that “is” is explained as being-thought by single consciousness. For the Christian, everything that is being-thought is sustained by a creative freedom that imbues what is with the freedom of its own being. (P.157). Therefore, creation itself must be understood as creative freedom.

The idea of freedom is the characteristic mark of the Christian believe in God as opposed to any kind of monism. At the beginning of all being it puts not just some kind of consciousness but a creative freedom that creates further freedoms…Christianity is a philosophy of freedom. For Christianity, the explanation of reality as a whole is not an all-embracing consciousness or a single materiality; on the contrary, at the summit stands a freedom that thinks and, but thinking, creates freedoms, thus making freedom the structural form of all being. (P. 157-158)

Pope Benedict then, after identifying the very structure of the world with freedom, goes on to state that Christians believe in the personal nature of the freedom that thinks. God is not an anonymous neutral consciousness but rather a person, therefore, (p. 158).

The highest is not the most universal but, precisely, the particular, and the Christian faith is thus above all also the option for man as the irreducible, infinity-oriented being. (p.158)

Pope Benedict further argues from this that a person is not just an individual, a reproduction of the world of ideas into matter, a secondary reality, like the Greeks thought, but, precisely, a person: a unique, irreproducible, particular, free created being who has supremacy over the universal. (P. 160).

The moral logic behind the right to private property, including ownership of our own bodies, arises from Christian tradition’s concept of the dignity of every single human being. Theologically, the concept of the dignity of the human being is partially derived from God’s creation, in which we are called to be inalienably responsible to God for our own use of liberty, but it is derived and confirmed in its entirety by the mystery of the Incarnation. God gives us the right to private property simply by restoring the fullness of the dignity we received when God created us. When God becomes man and gives himself back to the Father in an act of pure love, God redeems creation by giving us the opportunity to use our liberty to give ourselves to others.

The Pope traces the birth of freedom in his "Theology and the Church’s Political Stance" to Jesus Christ himself: “to Caesar what is Caesar’s and to God what is God’s”.

The modern idea of freedom is thus a legitimate product of the Christian environment; it could not have developed anywhere else. Indeed, one must add that it cannot be separated from this Christian environment and transplanted into any other system, as is shown very clearly today in the renaissance of Islam; the attempt to graft on to Islamic societies what are termed western standards cut loose from their Christian foundations misunderstands the internal logic of Islam as well as the historical logic to which these western standards belong, and hence this attempt was condemned to fail in this form. The construction of society in Islam is theocratic, and therefore monist and not dualist; dualism, which is the recondition for freedom, presupposes for its part the logic of the Christian thing. In practice this means that it is only where the duality of Church and state, of the sacral and the political authority, remains maintained in some form or another that the fundamental pre-condition exists for freedom. http://www.lewrockwell.com/orig6/ratzinger2.html

So the following logical steps from citations above can be used to secure the concept of freedom of Liberalism on more solid theological grounds.

a) Creation is the being-thought of a creative consciousness that is free
b) Creation is imbued by the freedom of its own being
c) Freedom is the structural form of all being
d) Christian God is personal
f) Human beings are not individuals but persons who are unique, irreproducible, particular, free, supreme over universals
g) Human dignity is partially derived from God’s creation, in which we are called to be inalienably responsible to God for our own use of liberty
h) Freedom in the West is a product of the dualism of State vs Church established by Christ's dictum "Give to Caesar what is Caesar’s, and to God what is God’s"

To my knowledge, however, Pope Benedict does not write anything related to what the above steps would mean for the world of politics and economics, the free market and freedom from state aggression and intervention. One can easily imbue these arguments with of Rothbard’s “Ethics of Liberty” http://www.mises.org/resources/b66a8bf2-9db3-428e-84d0-44ac1514873c to present a Catholic reading.

3) The third possible area of affinity between Pope Benedict XVI’s theology and Liberalism comes from his writings on the development of the concept of freedom since the Enlightenment.

In his essay “Truth-Tolerance-Freedom” he links the concept of freedom in the Enlightenment with Reason alone. He recognizes that this trend is varied and at times contradictory. He distinguishes two trends. One is the Anglo-Saxon trend which is based on natural law, rejects positive of man-made law, and recognizes that man has rights because he was created free. This approach is revolutionary because it stands against the absolutism of the state and because it is not merely a political claim but a metaphysical claim. “Inherent in being itself there is an ethical and legal claim.” (p. 238 of Truth and Tolerance, Ignatius Press, 2004). Being is not just material, it bears within it dignity and an ethical dimension that has a legal claim of nature against the existing institutions of government. These claims take the form of rights of individuals over and against the state and its institutions (p.239). And two is the more radical continental trends exemplified by Rousseau, the French Revolution, Marx and dictatorships they generated, which promised a freedom unregulated by anything. He concludes by stating that:

Since man is a being who exists in being-from, being-with and being-for, human freedom can only exist in an ordered coexistence of freedoms. Law is, therefore, not the opposite of freedom, but its necessary condition; it is indeed constitutive of freedom. (P.256)

Most modern Popes confused the Liberalism of the French Enlightenment (that was rationalistic, Cartesian, Rousseauian, Hegelian, Marxist, materialistic, contractual, utilitarian, anti-Semitic, atheistic, democratic and that led to the French Revolution, the Reign of Terror, democratic dictatorships of all sorts, communism, fascism, socialism and nazism) with the British tradition of common law (that was almost its exact opposite: anti-systematic, anti-utopian, empirical and Protestant).

To my knowledge, Pope Benedict is the first Pope to make this distinction between both movements explicit. Now, he does link through a cause and effect relationship both movements, with Anglo-Saxon Liberalism degenerating into French Liberalism, but the fact that he at least makes the distinction between them is critical, because from there, one can explore how Protestant philosophers who were well versed in the scholastics (Grotious and Pufendorf, for example) influenced the likes of Adam Smith. Unfortunately with the passage of time, the existence of this connection between Saint Thomas, the late Spanish scholastics and British common law was lost. This lost link contributed, I think, to the anti-liberal thinking of most modern Popes, who threw out the proverbial baby of Thomistic Liberalism with the bath water of Enlightenment Liberalism.

Both Enlightenment Liberalisms were dead ends that had and continue to have a very wide influence. The Liberalism articulated by Adam Smith, for example, gave us the mistaken labor theory of value that resulted in the development of the economics of Karl Marx, Keynes and Catholic Social Doctrine. As pointed out by Rothbard and Hayek, the late scholastics had discovered and developed not only most of the basic tenets of the Liberal Anglo-Saxon trends described by the Pope, but also the principles of the free market economy from a Thomistic perspective which can shield us from these mistakes. For example, they asserted that the value of a commodity is not based on its labor content, like Smith and Marx thought, but in the subjective valuations of buyers and sellers in a free market. Economists like Menger, Mises, Rothbard and Hayek took up these principles and fully developed into what is now called the Austrian School of Economics.

So this third area of affinity between Pope Benedict XVI’s theology and Liberalism is based on his explicit acknowledgement of a dichotomy between Natural Law Liberalism as expressed in the Anglo-Saxon tradition of Common Law and the French Enlightenment Liberalism. What is lacking in his perspective is a more elaborate connection to Saint Thomas and the Liberal Spanish Dominicans and Jesuits of the School of Salamanca. While one can take a leap and make the connection without, I believe, any major theological or philosophical problems, I am not sure if Benedict himself took that step.

4) A fourth area of affinity, however, is derived from his call to re-attach to the Enlightenment its Christian roots. By making this call, he does come close to making the connection between Liberalism and Saint Thomas. In "Christianity and the Crisis of Cultures" Ignatius Press 2006, he criticizes the banishment of Christianity from the European Constitution resulting from a “laicist Enlightenment” philosophy cut from its Christian roots.

…Enlightenment culture is substantially defined by the rights to liberty. Its starting point is that liberty is a fundamental value and the criterion of everything else…At the same time, it is equally obvious that the concept of liberty on which this culture is based inevitably leads to contradictions since it is either badly defined or not defined at all… p. 34-35-36

Above all, however, we must affirm that this Enlightenment philosophy, with its related culture, is incomplete. It consciously cuts off its own historical roots, depriving itself of the powerful sources from which it sprang. It detaches itself from what we might call the basic memory of mankind, without which reason loses its orientation… p 41

A tree without roots dries up…In affirming this, we are not denying all the positive and important contributions of this philosophy. Rather, we are stating that it needs to be completed, since it is profoundly incomplete…p. 43

Rothbard presents us with a very similar argument when he labors to find a philosophical and ethical foundation for the Austrian School of Economics on the Spanish Scholastics, Saint Thomas and Aristotle, in stark distinction to Mises utilitarian and value free approach. Here is Rothbard:

Thus, while praxeological economic theory is extremely useful for providing data
and knowledge for framing economic policy, it cannot be sufficient by itself to enable the economist to make any value pronouncements or to advocate any
public policy whatsoever. More specifically, Ludwig von Mises to the contrary notwithstanding, neither praxeological economics nor Mises’s utilitarian liberalism is sufficient to make the case for laissez faire and the free-market economy. To make such a case, one must go beyond economics and utilitarianism to establish an objective ethics which affirms the overriding value of liberty, and morally condemns all forms of statism... http://www.mises.org/resources/765d4a0d-02c8-4098-9862-823b7021d3b1

Pope Benedict’s argues that since the Enlightenment is Christian in origin, and that since it was only born in places where Christianity had taken hold (p.48), even if we cannot find the path of accepting the existence of God, we should at a minimum heed to Pascal’s advice and direct our lives as if God existed.

Even the one who does not succeed in finding the path to accepting the existence of God ought nevertheless to try to live and to direct his live as if God did indeed exist…This does not impose limitations on anyone’s freedom; it gives support to all our human affairs and supplies a criterion of which human life stands sorely in need. p. 51

In that fashion, one can reconnect the Enlightenment to its lost Christian roots, rebuilding and reinforcing the framework within which Western civilization developed.

Let me conclude by stating that Catholic economists and theologians must build a stronger connection between Catholicism and Capitalism, a connection that will prove more fruitful than the one between Protestantism and Capitalism that has given us, particularly through its Calvinist streak the type of socialism exemplified by the current US welfare state. F.A. Hayek, it is reported, influenced the development of John Paul II’s views of capitalism in Centesimus Annus.

11."During the last months of his life, Hayek had the opportunity for a long conversation with Pope John Paul II. There are signs of Hayek’s influence in certain portions of the pope’s encyclical Centesimus Annus. In paragraphs 31 and
32, in particular, Centesimus Annus employs unmistakably Hayekian insights."
Michael Novak, "Two Moral Ideas for Business," Economic Affairs
(September-October 1993): 7. (See Jesús Huerta de Soto, “The Ethics of
Capitalism” http://www.acton.org/publicat/m_and_m/1999_fall/desoto.html).

So perhaps the same dialogue will eventually take place between Pope Benedict and a Catholic economist or philosopher knowledgeable of both the Pope’s writings and the Thomistic roots of the Liberalism and make that final connection explicit.