20 May 2009

Austrian Economics in Iraq

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Editor’s Note: A few weeks ago Edward Gonzalez contacted me and explained that he had come to believe that only Austrian economics could explain his experiences as a Marine in Iraq. I encouraged him to write short essays explaining what he had witnessed and the lessons he drew. For lack of a better outlet, I offered to run Edward’s first essay here on Free Advice. I encourage readers to leave comments directing Edward on how his subsequent essays could be useful. –RPM


The Effects of Government Spending in a Village
By Edward Gonzalez

I spent seven months as an advisor to the Iraqi Army in the Al Anbar Province of Iraq from July of 2007 to January of 2008. The nature of my particular mission placed me inside Iraqi farming and fishing villages along the Euphrates River. Within the villages there were the farmers, fisherman and their families, the local sheiks and village elders, an Iraqi Army Company, and an Iraqi Police Station.

Each village had different amounts of insurgent activity and attacks. The two villages that I spent the majority of my time in were not in good shape. As a result of the war and attacks by insurgent groups, the market places had minimal business and farmers and fisherman had very few people to trade with.

My first month in one of these villages was a wake up call. Americans and Iraqis were attacked by insurgent cells operating in the area. Most villagers were scared to speak with us for fear of reprisal. The insurgents that we did capture resembled nothing like I was told to expect in a religious zealot willing to die for a cause. While I knew the religious extremists were the ones organizing the insurgency, the insurgents I captured were all young men, angry, out of work, and uneducated. When questioned they certainly spouted a lot of jihad jargon, but when questioned further, most were recruited with promises of pay and better quality of life once the Americans were thrown out. I came to the realization that I could go on fighting insurgent cells forever and never accomplish anything as long as they were able to recruit. It was not until the economy was functioning that insurgent groups would no longer be able to attract young men as their foot soldiers.

I also found that the majority of Iraqis did not care about American or Al Quaeda ideals. They wanted a functioning society where they could have a job and their children would be safe and have a better life than they themselves have had. The most telling quote was from an Iraqi farmer. When asked what he needed he replied, “I want a safe place for my children to go to school, a good price for my crops, and for the government to leave me alone.”

Other Marines had noticed the same and had already begun to experiment with economic plans. Luckily, the Marine advisors that had gone before me had warned of mistakes they had made so I did not fall into the same trap.

Spending programs to stimulate local economies had been attempted by Marine advisors and not gone according to plan. The Marines hired locals to do work that the Marines could have done themselves, but gave them an excuse to pay the Iraqis in an attempt to jump start the economy. The short term results seemed very good. Young Iraqi men had jobs and attacks against coalition forces went down. However, it created a problem that was much greater. The young Iraqi men and the village economy began to depend on this source of American work and money. They would take the American dollars and travel to the cities to spend them, but no real production of goods was increasing at the village level. In fact, because the Americans were paying well, the men who were fishing and farming before were quitting that work and going to work for the Americans. As a result the village’s actual production of goods dropped dramatically. When the Marines stopped spending the young men were out of work again and the productivity of the village was less than before the spending. The village’s economy was worse off than before and attacks resumed. The results of spending to stimulate the economy was a short term gain but lead to long term problems more serious than the original.

The solution for me, and most other Marines learning from our own mistakes, was to concentrate on our primary mission, security. What this means is that Marines and Iraqi soldiers ensured people had the liberty to move freely and conduct their business. This involved constant patrols in the villages ensuring people were not being attacked in their houses, conducting constant patrols and over watch of the market place ensuring that the natural businesses of the town could flourish, and patrolling the roads to ensure they were free of IEDs. When farmers and fisherman realized they could work hard with minimal fear that they would be murdered or all their hard work be destroyed, the economy of the village really started to recover. Farmers were out harvesting their crops, more fishing boats were on the river, people that had left the villages when the war began were returning to their homes because they had gotten word it was safe. The market was open for business and trade was occurring. People from other villages were coming to the markets to trade their goods.

With the outsiders came insurgents and attacks. With a flourishing market place however, the villagers were more adamant about rooting out insurgents than the Marines. On one occasion, at 3am we heard shouting and saw flashing lights about one kilometer from our post. When we investigated the townspeople told us they saw three men attempting to emplace an IED along a path we regularly patrolled. The villagers chased them away. On another occasion, an IED was emplaced along a path that we travelled, and as we were walking a village elder ran in front of the patrol refusing to let us pass. When the interpreter was brought up he told us of the IED and who emplaced it.

The lesson I learned over and over again was that the Iraqis care very little for our American ideal of democracy, but a flourishing market place and the hope of a peaceful society gave the individual villagers every incentive to assist us in rooting out the violent insurgents. In addition, if we were willing to risk our lives protecting their lives and their village, they would do the same for us. Every IED planted within the villages I worked was made known to us by the locals, even though the insurgents openly threatened death to anyone giving information to the Americans.

At the time I left that area of Iraq, the village markets were open for trade and attacks within the two villages I had worked had dropped to almost zero. Attacks overall were down, but there were still reported cases of highway theft and murder on the stretches of highway between the villages and cities. However, the Iraqi military and police were beginning to expand their security operations to the highways when I left. Most of the checkpoints and combat outposts in the villages that were required when I arrived were being closed. The villagers, with a small local police force were able to protect themselves from insurgent attack. The bustling market places were a source of trade and intelligence reporting informed us that the insurgent groups were having more and more trouble recruiting young men as foot soldiers.

The economic lesson that I and many other Marines learned was that spending in order to stimulate an economy gives a false impression of success while the spending is occurring. When the spending stops, it is revealed that actual production has dropped and people are worse off than before. The solution is to protect the lives and property of the village and allow the natural businesses of the village to flourish free of tampering.

Edward M. Gonzalez is a graduate of New York University and served on active duty in the United States Marines Corps from January 2004 to August of 2008. He is currently a Captain in the reserves and works for a private school in San Jose, CA. The views expressed in this article are not necessarily endorsed by the United States Marine Corps.

20 May 2009

Oh Mr. Sandman, Bring Me a Book

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One of my former students, Heidi (not sure if she wants me to use her last name) is launching her independent bookstore this Saturday. (My birthday also falls on May 23rd this year.) The store is located in Punta Gorda, FL, but will do business online (I think?). Details here. Presumably Heidi will stock rare books of interest to libertarians.

20 May 2009


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I am really cheating on this one; my Firefox browser is filling up with tabs, so I’m putting things in this blog post to which “I shall return!”

* Jim Manzi gives a quick and dirty estimate of the costs and benefits of Waxman-Markey. Note that I literally haven’t even skimmed this yet, but in the past Manzi’s description of the climate models was the most useful I had found (word for word).

* The Center for American Progress criticizes the Spanish study on “green jobs.” There is some snark in here, but this is actually a decent critique. Don’t get me wrong, I still agree with Calzada and disagree with CAP, but the CAP writers raise legitimate points. I plan on writing a response within the next week.

* A list of Christian libertarian blogs. I haven’t checked any of these out, but I know some of you have expressed shock and awe at this blog, so here ya go.

19 May 2009

I Hope You Didn’t Spend Your Cap & Trade Rebate Check Yet

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Check out the latest [.pdf] on the Waxman-Markey climate change bill. Are you on the list for free allowances? When that MIT professor said the $3100 annual hike in prices for consumers would be offset by the government doing something socially productive with the auction receipts, is this what Keith Olbermann et al. took him to mean?

19 May 2009

Richard Duncan’s The Dollar Crisis

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Tim Swanson sent me this review of what appears to be a very insightful (or “inciteful” as the person at the link humorously misspelled it) book. Some excerpts:

Japan’s total reserves minus gold rose from around $5bn in 1970 to $100bn in 1989. Its money supply (including M2 and CDs) grew from 50 trillion yen to 450 trillion yen by 1989. Without the gold standard, Japan’s trade surplus persisted, leading to massive reserve buildups and huge credit creation. All this newfound credit had to find a home, and it went into the Japanese stock market and property markets. The Japanese stock market went up by more than 12 times from 1970 to 1989, with the Nikkei index trading at more than 60x PE before it crashed (today, it’s under 10x PE). Domestic credit as % of GDP went from 140% to more than 250%. Ultimately, incomes could not rise fast enough to catch up with the tremendous asset inflation that was occurring. In 1989, the Japanese stock market and property bubbles popped as debtors couldn’t pay their creditors; the Japanese banking system became flush with bad loans; and a painfully long recession ensued.

During World War I, governments dropped the gold standard in order to print enough money to finance the wars. The result: huge trade imbalances resulted, leading to credit creation in the US. Specifically, the United States was the producing the goods that the Allies were using to fight the war. US gold reserves rose 64% from 1914 to 1917 as Europe exchanged its gold for American goods. The US also began accepting government debt from the Europeans. The Europeans had to drop the gold standard, because Europe couldn’t afford to suffer the recession and credit contraction that would result from their fast-depleting gold reserves. In the US, the increase in reserves led to a doubling of the credit base from 1914 to 1920, which led to a boom in industrial production. When the real economy was no longer able to profitably invest the available liquidity in new plant and equipment due to overcapacity and falling prices, increasing amounts of money were shifted into the stock market. Ultimately, the bubble popped, share prices plunged, credit contracted and a banking crisis developed. Duncan’s thesis: it wasn’t infectious greed that caused the Roaring 20s and subsequent Great Depression. It was excessive credit creation that resulted from trade balances during and after World War I, which in turn resulted from the gold standard being temporarily dropped during World War I.

18 May 2009

Book Signing!

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Some photos from last week’s book signing in Nashville. Credits go to Ned the babysitter:

Huge book or tiny author?

“This guy makes a lot of sense.”

Taken from the Henry Cam.

18 May 2009

How Am I Like Jenny McCarthy?

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We’re both blond and sex symbols, but that’s not the connection. See Comments #5 and #7 here for the answer.

And I’m sorry guys but I’m trying for ratings. Click here for a topless photo.

18 May 2009

Obama (and Bernanke and Bush) Finally Solved the "Immigration Problem"

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One of the most sensitive subjects for me to write about is immigration, since so many people who “think like me” on 99% of the issues disagree with me on this particular matter. (For the record, I think it is economically destructive and immoral for INS agents to force people outside the borders of the US merely because of their birthplace.)

But Lew Rockwell explains that we can all get along now, because foreigners realize that they don’t want to sneak in here anymore.

Anthony Gregory’s comment on Rockwell’s piece is fantastic:

As much fun as it is to debate immigration, I always feared one day the debate would become moot and the question would become emigration.

Of course, a border system powerful enough to keep them out can also keep us in. Time for the anti-Obama right to stop calling for more border security, if they want to ensure their freedom to leave.