Introduction: Dr. Richard Ebeling is a senior fellow at the American Institute for Economic Research in Great Barrington, Massachusetts, and professor of economics at Northwood University. He has been a visiting professor at Trinity College in Hartford, Connecticut (2008-2009), served as the president of the Foundation for Economic Education (FEE) (2003-2008) and was the Ludwig von Mises Professor of Economics at Hillsdale College, in Michigan (1988-2003). Dr. Ebeling is the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010), Austrian Economics and the Political Economy of Freedom (Elgar, 2003) and is also the editor of the Selected Writings of Ludwig von Mises (Liberty Fund), based on the "lost papers" of Ludwig von Mises, which he recovered from a formerly secret KGB archive in Moscow, Russia. The last of this three-volume set was published in April, 2012. In the early 1990s, Ebeling consulted on market reform and privatization with the emerging new democratic government in Lithuania when it was still part of the Soviet Union, and witnessed the violent, attempted Soviet crackdown on the Lithuanian freedom movement in January 1991. He also was with Russian defenders of freedom in Moscow during the failed hard-line coup in August 1991. Dr. Ebeling earned his PhD in economics from Middlesex University in London, England.

Daily Bell: Give our readers an update on your activities.

Richard Ebeling: Well, in 2010 my book, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition was published by Routledge. It offers an explanation of the Austrian approach to economics and public policy through an analysis of the life and writings of Ludwig von Mises, the most original and influential member of the Austrian School of Economics in the twentieth century.

I present a detailed analysis and comparison, for instance, of the Austrian and Keynesian conceptions of money, business cycles and the causes and cures for the Great Depression of the 1930s. I explain the similarities and differences between Mises and Joseph Schumpeter on money and economic fluctuations, as well as a contrast between the Austrians and the Swedish or Stockholm School of Economics.

I also discuss in great depth Mises's analysis of the monetary, fiscal and interventionist policies that plagued Austria and Europe in general in the years leading up to the First World War, and then between the two World Wars in the 1920s and 1930s, as well as his policy prescriptions about how nations can restore systems of political and economic freedom that he wrote during the Second World War.

I draw upon many of Mises's "lost papers" that my wife, Anna, and I unearthed and retrieved from a formerly secret Soviet archive in Moscow, Russia. The Gestapo had ransacked Mises's Vienna apartment shortly after Nazi Germany's annexation of Austria in March 1938. They boxed up and carried away a huge cache of his personal documents and articles, manuscripts, correspondence and policy papers that he prepared during the nearly quarter of a century from 1909 to 1934 that he made his living in Austria as a senior policy analyst for the Vienna Chamber of Commerce.

At the end of the Second World War, these papers had ended up in the hands of the Soviet Army and the KGB. They were brought to Moscow and housed in a special archive devoted to captured and looted documents and collections that fell into Soviet hands by the end of the war.

My wife and I found out that Mises's papers had survived the war and were in Moscow. Anna is Russian, and through her friends in Moscow we were able to gain access to the archive and return to the United States with photocopies of virtually the entire collection of Mises's "lost papers," numbering close to 10,000 pages of material.

For several years, now, I have served as the editor supervising and preparing translations of a large selection from these "lost papers" for publication by Liberty Fund of Indianapolis, Indiana, as a three-volume set under the general title, the Selected Writings of Ludwig von Mises. Liberty Fund published the last of the three volumes in April of 2012. All together they offer nearly 1,000 printed pages of additional writings by Ludwig von Mises, mostly on various monetary, fiscal and interventionist policy issues that have never been published before and certainly never in English. They cover Mises's policy writings from the early years of the twentieth century during the era of Austria-Hungary and the Hapsburg Empire up to the Second World War.

As I explain in the preface to Volume I, for those who have often wondered, "Well, how do you apply Austrian Economics to 'the real world'?" here is the answer in the writings of that individual who was considered the most thoroughgoing and consistent member of the Austrian School in the twentieth century.

I also have been co-author and co-editor of a series of books called, In Defense of Capitalism, with a third volume in this series in preparation; it will be published by Northwood University Press later this summer.

I have been writing on various aspects of the current economic crisis, especially the failures of government interventionist policies and the dangers of mounting government debt in the United States and Europe. Last year I testified on inflation and America's debt problem before the US House of Representatives Subcommittee on Monetary Policy that is chaired by Ron Paul.

Right now, I am working on a series of essays that I plan to weave into a general history of the Austrian School of Economics.

Daily Bell: You took up a new, permanent position as a professor of economics at Northwood University in Midland, Michigan. How's that working out?

Richard Ebeling: I had served for five years as the president of the Foundation for Economic Education (FEE) from 2003 to 2008, after having been the Ludwig von Mises Professor of Economics at Hillsdale College in Michigan for many years.

My work at FEE had been very rewarding and highly successful in bringing the message of liberty to a generation of young people and adults in the United States and other parts of the world, including the former Soviet-bloc countries in Eastern Europe. But after a half a decade, I decided to return to academia to my first love, teaching, and for the greater time to write.

Northwood University is a unique institution of higher learning. It is devoted to educating young men and women in a wide variety of business majors at the undergraduate and graduate levels in the challenging new world of global entrepreneurship. But that quality business education is presented within a wider political-philosophical setting of the ideas and ideals of individual liberty, free markets and constitutionally limited government, without which a free and prosperous society cannot survive in the long run.

This is what attracted me to Northwood. And for the three years, now, that I have been at the university, I have the great pleasure to teach and interact with an outstanding student body of men and women hungering for and appreciating the free-market ideas that I have the unrestricted opportunity to teach in my classes.

This includes the opportunity to teach each year a course devoted to Austrian Economics, that most thoroughgoing and consistent school of free market ideas.

Daily Bell: Lately libertarianism and Austrian economics have come under attack. Are you aware of this?

Richard Ebeling: It is not surprising that classical liberal and libertarian ideas are often attacked. After all they are the ideas that consistently oppose the current political systems of plunder, privilege and power lusting. The philosophy of liberty proclaims that each individual is unique and possessing inherent rights to his life, liberty and honestly acquired property. That government, if it is to exist, is to serve as the protector and guardian of our distinct individual rights, and not the master of men who are obligated to sacrifice themselves for some asserted "national interest," "general welfare," or "common good."

The only reasonable meaning to the "common good" or the "general welfare" is when each individual is free to peacefully live his life as he chooses and is at liberty to voluntarily associate and interact with his fellow men for mutually beneficial improvements to their lives.

Whenever the political authority goes beyond a "defensive role" in society, it inescapably ends up using its police powers in ways that benefit some at the expense of others. It is virtually inevitable that those who use political power for their own gain at their neighbor's expense will vehemently resist and oppose any attempt to stop them from feeding at the government trough.

But the strident nature of these attacks against classical liberalism and libertarianism shows just how much the supporters and users of political power fear the arguments being made by the friends of freedom.

In the United States we are in the midst of a most serious "class conflict." I do not mean a class conflict in the bankrupt Marxian sense. I mean it in the sense that was understood by a number of early nineteenth century French classical liberals, such as Charles Dunoyer, Jean-Baptiste Say and Frederic Bastiat.

There is on the one hand, as Dunoyer expressed it, a class of "industrious peoples" everywhere who wish nothing more than to peacefully go about their private business of working, saving and investing and trading with their neighbors for mutual improvements in their lives in an arena of free market exchange.

On the other hand, there is everywhere a class of plundering peoples – politicians, bureaucrats, special interest groups – receiving tax-based income redistributions and subsidies and benefiting from anti-competitive regulations and protections against and at the expense of their fellow human beings.

This is the great battle of the twenty-first century; it is what is really at the basis of all the current financial and debt crises confronting so many countries around the world. Its outcome will determine the fate of mankind for the remainder of this century and then into the next.

Austrian Economics, not surprisingly, has been attacked precisely because of its insightful and cogent analysis of how it was government intervention and central bank monetary manipulation that generated the unsustainable boom in the last decade that set the stage for the inescapable bust, which the world is still suffering from. The Austrians have also shown why it is the continuation of such political interventions and monetary mischief by central banks that have prevented and delayed any normal recovery out of the current recession.

How can the members of that plundering class, to which I referred, admit that they caused and have prolonged this boom and bust cycle without confessing the bankruptcy of both the ideas that rationalize and the policies that perpetuate their plundering ways?

Daily Bell: Let's spend some time talking about the current 'Net attacks on libertarianism and Austrian economics. Are all libertarians the same?

Richard Ebeling: In the house of liberty are many mansions. There are "natural rights" libertarians and "utilitarian" or "consequentialist" libertarians. There are libertarians that ground their view of man and rights in theology, while other libertarians look to reason and nature. There are limited government libertarians and there are anarcho-capitalist libertarians.

Many years ago, C. S. Lewis wrote a book called The Abolition of Man, in which is said that the search for Truth, with a capital "T," is like climbing a mountain, and if you could reach the summit, you would have attained that ultimate understanding of Truth. He argued that each philosophy and religion tries to climb that mountain by a different route, and each climbs that mountain as far as their philosophy or religion allows them.

For the classical liberal and libertarian, the climb up a mountain for Truth is the search for a path that will lead to the top from which point a provable, or justifiable, or most convincing case for human liberty will have been successfully discovered. And each of these theories for liberty climbs as high up that mountain in search for that ultimate, demonstrable case for freedom as far as their philosophical approach allows.

We have not, yet, discovered that "proof" for human liberty that all can be persuaded about and agree to. How do I know this? Because libertarians have not agreed about this among themselves, nor have they been able to persuade enough others in society to move the world further away from the collectivist premises and the interventionist-welfare state policies that guide so much that goes on in the world.

I once wrote an article called, "There is No Central Plan for Liberty." The gist of my argument was that there are as many ways to explain the case for freedom, as there are people who need persuading. Some people are moved by moral and philosophical arguments. Others are like the man from Missouri – "show me it works" – who will be influenced by a more pragmatic case for freedom because it "delivers the goods" of material prosperity.

I happen to have been most strongly influenced by the "natural rights" defense of liberty, and especially as formulated by Ayn Rand in her philosophy of Objectivism. But I am also an economist and I know the power of the utilitarian or consequentialist argument to demonstrate that a free market gives man both individual liberty and a world of material and cultural betterment and improvement.

They are, at the end of the day, two sides of the same coin for the case for freedom. And I believe that when combined the moral and the economic defenses of human liberty are powerful intellectual tools against our statist opponents.

For example, at Northwood University, every student, regardless of their major, must take a capstone course on the "Philosophy of American Enterprise" in their senior year. It presents a philosophical and economic and historical explanation of and case for the ideal and institutions of a free-market order. There are few students, I have found, who are not persuaded, by the end of the semester, that there really is no desirable and workable alternative to s society of liberty as understood by classical liberals and libertarians.

Daily Bell: What's an anarcho-capitalist? Are you one?

Richard Ebeling: An "anarcho-capitalist" is someone who believes that all the core responsibilities usually assigned to government – police, courts, national defense – can be supplied by private enterprise, just like the supply of shoes, hats, or coffee.

First, it is argued that if one believes that the use of any and all forms of coercion are morally unacceptable in human relationships, then this should also imply that any compulsory taxation, even when for the funding of defense and legal justice, is unjustifiable. And, second, it is argued that the private sector could provide such admittedly essential services far more efficiently and cost-effectively than the monopoly agency of government. Murray Rothbard and David Friedman probably have been among the most well-known and articulate proponents of the anarcho-capitalist position over the last 50 years.

Others like the Ayn Rand, Robert Nozick and Ludwig von Mises have made the case for constitutionally limited government. Their counter arguments have centered on the ideas that conflicts over jurisdiction, disputes among private defense agencies contracted by different individuals who have disagreements, and the likelihood that "defense" would turn out to be a "natural monopoly" anyway – that is, a tendency for one agency to end up being the single provider of defense and judicial services over a wide geographical area – raise questions about the long-run workability and sustainability of competing defense companies in society.

From a moral perspective, I am in sympathy with the anarcho-capitalist position, in that I find the compulsory taking of people's income and wealth without their consent for whatever reason to be ethically repugnant. On the other hand, from a pragmatic point-of-view, I am not certain that such a system of competing defense agencies could successfully work.

So what is my answer? Well, I think all classical liberals and libertarians should keep in mind that there are very few of "us" and a whole lot of collectivists who are controlling the political, economic and social affairs of our societies.

We should focus on what we all agree upon: the freedom and dignity of the individual human being; and the attempt whenever and wherever on our part to reduce, repeal and abolish all forms of regulation, control, restriction, prohibition on the peaceful and honest affairs of our fellow men.

If the day ever comes that the government had been shrunk to the limited functions of the "night-watchman state," then there will be plenty of time for libertarians to debate about the privatization of that night watchman.

The United States Supreme Court, just the other day, declared constitutional President Obama's national health care legislation, including the mandate that every American purchase health care insurance, subject to a tax imposed by the government to cover that individual's health insurance expenses.

This is an extremely dark day for all friends of freedom in America. All such friends must realize that trying to reverse this legislation, given the Court's decision, is far more important in the here and now, than any debate on privatizing police and judges far in the future.

Think about this Court decision. It is saying that if you do not buy health insurance the government will tax you to pay for it. If you refuse to pay the tax, the government will end up attempting to seize financial assets or real property you own in lieu of failure to pay. If you try to prevent this taking of your property, you are subject to arrest and imprisonment. If you resist arrest or imprisonment, the police have the authority to force you to comply – up to and including lethal force to subdue you into obedience.

Thus, in the limit, the government will threaten to or actually kill you in the name of assuring that you have appropriate health insurance!

Now, of course, the Court and other supporters of Obamacare, as it is called, say that your refusal to purchase minimal health insurance coverage may adversely affect others, since other people's premiums may have to go up to cover your uncovered medical expenses.

This means that the Supreme Court has said that you are the slave of "society" and the government that represents "the people," since, in principle, anything that you do or not do can be argued to have some affect, positive or negative, on others. Thus, you better eat your spinach, or better work out in a gym or take that daily two-mile run and not eat high fat food; otherwise your actions may have adverse affects on medical costs and services for others in society.

Once you accept this premise, there is no end to the minutest detail and content of your life and actions the government cannot claim jurisdiction over to regulate, control or prohibit. Here is that end-of-the-road of the notion of unlimited democratic rule by "the people" and those who claim to speak for "the people" and rule on their behalf.

Daily Bell: Does Ayn Rand represent libertarianism?

Richard Ebeling: Ayn Rand, of course, rejected any connection or compatibility with libertarianism. She argued this on two grounds. First, she felt that too frequently libertarians spoke of individual freedom, free markets and limited government, but failed to explicitly and clearly ground their political-economic ideas in a demonstrable philosophy of man, nature and society. Second, she rejected the anarchist elements in the libertarian movement, believing that any reasonable analysis of the reality of man and the human condition strongly suggested the inescapable need for a single legal standard for defining and enforcing individual rights and a single authority to as impartially and "objectively" as possible enforce laws defending each individual's rights to his life, liberty and honestly acquired property.

She was, however, sympathetic to the libertarian concerns about the coercive nature of all forms of taxation. That is why she suggested a variety of non- or less coercive methods of funding government, such as user fees or lotteries.

It remains a fact, however, that many libertarians, for several generations now, have been greatly influenced by Rand's fiction and non-fiction writings. It would be hard to imagine the current freedom movement in America if not for her books, especially Atlas Shrugged, which is one of the truly great philosophical and political statements about the dignity and uniqueness of the creative individual whose contributions have generated all that we call civilization.

Daily Bell: Why didn't Mises back Ayn Rand's philosophy? What were the big differences between Rand and Mises?

Richard Ebeling: Ayn Rand believed that man's reasoning power gave him the capacity to understand and master the nature of the reality of the world in which he lived. She also believed that one could deduce those conditions essential for man's survival and flourishing, without which his existence is perilous. Thus, right reasoning makes its possible for man to discover the "ought" – the way things should be – from an understanding of the nature of the way things are.

Ludwig von Mises came out of a different philosophical tradition, one in which it was argued that man's reason can be used to understand the nature and the workings of the world, but that there was no way to go from the "is" to the "ought." Ultimate ends or values were subjective (that is, personal to the individual) and could not be grounded in any objectively correct standard of value.

Rand's political philosophy arises out of the "natural rights" tradition, that rights are inherent in the nature of man and precede government. Mises believed that rights were, in a sense, "social conventions" that had evolved out of the discovery that certain social institutional arrangements were more conducive to the mutual betterment of all members of society for achieving their individual goals and values.

What they did agree upon was that, given their respective conceptions of the basis of individual rights, there was no social and economic system more consistent with the protection of those rights and more likely to generate the material and cultural achievements that are potentially possible than laissez-faire capitalism. And in the twentieth century, Rand and Mises were two of the most principled and uncompromising advocates for the completely free market society

Daily Bell: Is state monopoly central banking ever justified? Is the Fed a private institution or does it hide behind the state and thus can it be considered a private/public mercantilist – entity?

Richard Ebeling: The fundamental fact that should be kept in mind is that central banking is a form of monetary central planning. This involves the government or an agency appointed by it having a monopoly control over the issuance of the legal media of exchange. Through this power government and its appointed agency – in the United States, the Federal Reserve System – can influence the amount of money in society, the value of the money in our pockets, and manipulate interest rates in financial markets with potentially distortive affects on the amount and types of investments undertaken by private borrowers with the money created by the central bank and lent through the banking system.

This is the origin of price inflation, the business cycle of booms and busts and degrees of social instability and distortion. Government control of money is the potentially most dangerous and damaging form of government power short of outright socialism.

A German free-market economist named Gustav Stolper, then exiled in America from war-torn Europe, expressed this most clearly in a book that was published in 1942 called, This Age of Fables:

"Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system . . . A 'free' capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits government interference to go. Money control is the supreme and most comprehensive of all governmental controls short of expropriation."

In spite of any legal mumbo-jumbo, the fact is the Federal Reserve is a branch of the government. Next year will be the hundredth anniversary of the establishment of the Federal Reserve System by an Act of Congress on December 23, 1913. Federal Reserve employees are government civil servants. The Board of Governors of the Federal Reserve are nominated by the President and approved by the Senate, just like an ambassador appointed to serve the United States government in a foreign country. The Congress has the authority and has in the past modified the goals, rules and policy tools with which the Federal Reserve can perform its manipulating "responsibilities" in the US economy.

Central banks are creatures of the governments that create and ultimately control them.

Daily Bell: If central banks can print all the money a state needs, why are there taxes?

Richard Ebeling: There is an old saying, "There is more than one way to skin a cat." Well, there is more than one way for a government to fleece the citizens over whom it rules.

Government basically has three ways to acquire the income and wealth of its citizens: taxation, borrowing and printing money. But the fact is that any one of these methods pushed by itself too far in one direction runs the risk of generating strong negative "blowback" for the government. Raise taxes more and more, and the incentives for work, savings and investment start to be sufficiently weakened to the extent that there may be less rather than more for the government to siphon off from the national "economic pie" produced by private industry. Furthermore, the tax take may be reduced due to tax evasion and tax-avoidance, as the cost of finding ways to hide your wealth is less than what you will lose if you remain too visibly in the taxing crosshairs of the government. And, at the end of the day, tax oppression has resulted in the actual overthrow of governments and those who hold political power.

Borrowing to cover government spending is a politically useful device for politicians to get elected and re-elected. They can offer a seemingly unending stream of "goodies" to networks of special interest groups in the form of government expenditures without having to explicitly tie a tax cost for providing them. Voting groups get government dollars as payment for their votes, but the cost of paying for those expenditures remain hidden in the midst of some "tomorrow" when presumably the borrowed billions and trillions will have to be paid back (with interest) with the tax burden to do so falling on some unspecified future "someone."

However, as we are seeing in Europe right now, and perhaps not too far in the future in the United States, finally the ability to borrow begins to dry up. The cost of borrowing rises and the financial creditworthiness of government starts to fall like a rock. Governments teeter and then fall in the face of all those groups who have been eating at the government trough, but who do not want their taxes increased to pay for their own redistributive benefits and do not want any cuts in the programs and transfers that they have come to view as irrevocable "entitlements."

So, governments throughout history have turned to the monetary printing press to fund the expenditures not covered by taxes or borrowed money. But this, too, has its limits. Printing money inevitably starts bringing about a general rise in prices in the economy. The worse the price inflation the more damaging it becomes in terms of reducing the real value of people's savings and wealth, as each dollar buys less and less in the face of higher and higher prices.

In addition, increases in the supply of money do not bring about uniform and simultaneous rises in prices throughout the economy. Instead, the structure of relative prices and wages are impacted upon in various time-sequence patterns depending on how the new money had been injected into the economy (usually through the banking system); who are the first recipients (often in the form of business investment and related loans); and on what goods and services those recipients spend the newly created money (clearly, on the particular commodities, resources, capital goods and labor services reflecting the demands for which they wanted to use the borrowed money).

From there, the newly created money proceeds to pass from hand-to-hand, from market sector-to-market sector raising one set of prices and wages and then another, until finally all prices and wages will have been affected and prices and wages in general will have increased to one degree or another over an extended period of time.

This "non-neutral," or uneven, impact on prices and wages in the economy during the inflationary process brings in its wake distorted profit margins, misallocations of resources and labor and various mal-investments of capital. Here are the seeds for the artificial and unsustainable "booms" that invariably come crashing down in the "bust" once the monetary expansion that has set it all in motion is stopped or slowed down.

An inflation cannot continue indefinitely, because as was shown in the famous cases of the German hyperinflation of the early 1920s, or the great Chinese inflation of the 1940s, or more recently in places like Zimbabwe, such monetary madness threatens to undermine and destroy the very social and economic fabrics of a society.

Thus, those in government try to play juggling games of pushing up taxes, or increasing their borrowing, or generating inflation to varying degrees and in various combinations to keep their plundering going, while attempting not to push any one of their methods of fleecing the public too far that it threatens their power and positions.

Daily Bell: What is money anyway? Are gold and silver money?

Richard Ebeling: Money is the most widely used and generally accepted medium of exchange. It overcomes the difficulty people would face if they had to trade their respective goods and services directly one for the other. It is very sad to say, but if I went into my local supermarket to buy groceries and offered the store manager to pay for the food items I wanted by delivering to him and his employees a series of free-market economics lectures, I fear that I would go home empty-handed and rather hungry.

But in a money-using economy, I can sell my lecture and teaching services to Northwood University for a sum of money and then enter the market as a consumer and pay for what I want with some of the money that I have earned as supplier of economic wisdom for my students. Those who accept the money from me in exchange for the things I want do so since they, too, can turn around and spend the money they have earned on the goods and services they desire.

But contrary to beliefs that have been held in the past, money was not originally the creature or the creation of the State. Money emerged out of the process of market traders discovering that some commodities were more useful and more widely acceptable as a medium through which they could acquire the goods they really wanted to obtain and use.

Thus, money is one of those many social institutions – like language, custom and traditions, rules of law, manners and etiquette and notions of justice and "right" conduct – that are, as it has been said, the results of human action, but not of any prior human intention or design.

Historically, gold and silver were those commodities that were found through the market interactions of multitudes of people to be the objects most useful in terms of their qualities, attributes and characteristics to serve as media of exchange. Over the last hundred years government have done everything in their power to first weaken and then eliminate gold and silver as money, so they could have the unrestricted and arbitrary power to create money and manipulate its value in market transactions.

Daily Bell: Do you believe in a formal gold standard where the state sets the rates?

Richard Ebeling: I believe that the choice and use of money should be left to the market, that is, to the free and voluntary interactive decisions of those buying and selling in the market. I consider a private, competitive free banking system to be the only one consistent with a truly free market society.

If we are talking about a "return" to a government-managed gold standard of the type, say, that existed before the First World War as a steppingstone to a denationalization of money and the monetary system, there have several proposals. For instance, Ludwig von Mises suggested that the first order of business would be for the monetary authority to cease any and all monetary expansion. Then after a brief time during which the exchange markets would more or less settle down to a rate of exchange between gold and the dollar, the government and central bank should legally recognize that as the formal or legal rate of exchange at which gold might be redeemed for dollars. (He modeled this proposal after the method followed when Austria-Hungary moved to a gold standard in 1892.)

Another method might be to halt any further monetary expansion. Make an inventory of the amount of gold in the ownership of the US Treasury and the Federal Reserve Bank; make as best an estimate as possible of how many dollars – cash and deposit monies of various types – that are in existence within the US and world-wide; then divide that number of dollars by the amount of ounces of gold in the government's possession; and then use that as the basis of a new legal redemption rate.

These are at least two conceivable methods of compelling the government to stop, or limit, its abuse of the monetary printing press.

Daily Bell: Why hasn't there been more inflation in the past decade? Are the Fed's trillions trapped in banks? Why is the Fed paying banks interest to hold onto money if it wants money to circulate?

Richard Ebeling: When you ask why there has not been more inflation over the last ten years or so, I presume you mean some measured changes in the general level of prices. Monetary expansion during the last decade has been significant. Between 2003 and 2008, the Federal Reserve increased the money supply by around fifty percent. And since the crisis of 2008, the Federal Reserve has expanded the money supply by over another two trillion dollars.

One indication of this massive inflow of loanable funds into the banking system was that fact that through a good part of the period between 2003 and 2008, real interest rates – that is the cost of borrowing adjusted by some price inflation index – was either zero or negative. That is, in real buying terms, the banks were flooded with so much loanable funds that they were virtually giving away the money for free, at no real interest cost from the borrower's perspective.

No wonder that, when combined with the low or no credit standard mortgage policies fostered by such government institutions as Fannie Mae and Freddie Mac, the United States experienced a huge housing and investment boom that was going to have to eventually go bust. Then when the downturn began to hit with a vengeance in the autumn of 2008, the Federal Reserve and the US Treasury went into panic mode. The US government partly nationalized many of the leading banks in America by forcing tens of millions of dollars of capital infusion for a compulsory exchange of shares in those financial institutions. And the Federal Reserve proceeded to buy up more than a trillion dollars of US government securities and practically another trillion dollars in mortgage-backed securities.

Measured by the government's consumer price index, over the last year ten years prices in general have been rising annually in a range of 2.5 to 3.5 percent. Of course, this is very different from the changes in the prices of individual goods, whose prices partly rise because of underlying market-based changes in supply and demand, but also because of the uneven, or non-neutral, manner in which monetary expansions impact on different prices and groups of prices at different times and to different degrees during an on-going inflationary process.

There has not been more of a price inflationary impact during the last few years partly because of strongly downward pressures on many prices during the recessionary phase of the business cycle, when it is discovered the investments and resources (including labor) have been misallocated during upswing phase of the cycle. It is necessary to find new often-lower market-clearing price and wage levels in various sectors of the economy, including a reshuffling of labor and resources among different areas of the market for a proper and sustainable rebalancing of multitudes of supplies and demands.

So the normal market pressures of downward price and wage adjustments in the recession are partly counter-acted by a new monetary expansion that is delaying the necessary re-coordination of market activities. Thus, given these two pressures, prices do not fall as much as a post-recession adjustment may require and they do not rise as much or as fast as might otherwise occur due to the renewed monetary expansion.

At the same time, as you correctly ask, the Federal Reserve has been paying banks a relatively low rate of interest to keep large excessive reserves in their accounts at the Federal Reserve, rather than to fully lend those excessive reserves to private borrowers. And given the low market rates of interest that Federal Reserve policy has generated, even the low rate of interest on unlent excess reserves offered to banks by the Federal Reserve appears the relatively more profitable way to use their available funds.

Why has the Federal Reserve done this? They infused these two trillion dollars into the financial markets back in 2008-2010 because they feared that an economy-wide bank collapse was possible. They are afraid to reverse this monetary expansion because to do so would reduce potential bank-lending capacity and put upward pressure on interest rates at a time when the Federal Reserve wants to prevent the sluggish recovery from slowing down even more and also raise the cost of the US government's financing of its trillion dollar a year deficits. So, instead, they leave this excess bank lending power sloshing around in the system, while keeping it off the market and from causing significant new price inflationary pressures, by paying banks not to lend those vast sums.

Daily Bell: What do Austrian economists mean by "deflation" and why do they view it differently from many other economists?

Richard Ebeling: Most mainstream economists define "deflation" as a fall or decline in the general level of prices. And they usually associate price deflation with recession or depression and rising unemployment.

The Austrians ask: Why might prices in general be going down? This was a central theme in the Austrian theory of the business cycle as developed by Ludwig von Mises and Friedrich A. Hayek. Hayek, in particular, argued that in a growing economy experiencing productivity increases, cost-efficiencies and a greater output of goods offered on the market, it is almost inevitable, given people's demands for things, that of many these goods will be offered on the market at lower prices to attract enough consumer business for all that is supplied to be sold.

Hayek explained that falling prices due to greater supplies of lower-cost goods and services being offered on the market was a natural and healthy aspect of economic progress and rising standards of living. People's money wages may or may not be going up. But their standards of living are improving because every dollar in their pocket now buys more and better goods at lower selling prices.

Prices in general may fall due to a monetary contraction, if, for instance, the central bank were to reduce the quantity of money in circulation. Neither Mises nor Hayek endorsed or advocated an intentional policy of monetary deflation. They argued that just as a monetary expansion is uneven and non-neutral in its distorting affects on prices, wages, investment and production, so is a monetary contraction.

An intentional monetary contraction following an earlier monetary expansion does not correct or compensate for the distortions and imbalances caused during the inflationary period; it just can makes a bad situation worse. Or as Mises once said, if you have run over a man while driving forward, you do not improve his situation by running over him again in reverse.

Following the collapse of a boom, some, perhaps many, prices might have to readjust downward to find their now proper market-clearly levels given the reality of the post-boom supply and demand conditions. But this is an inescapable element of a necessary and sustainable market re-balancing, given the fact that during the inflationary period many prices may have been pushed up to now unsustainable levels.

There is one other situation in which an economy may find itself in a deflationary downward price and output spiral. The Austrian-oriented, free-market economist, W. H. Hutt, explained this in his books, The Keynesian Episode and The Rehabilitation of Say's Law.

If once a recession has set in, workers and other resource owners strongly resist reductions in wages and other resource prices to bring markets back into balance, they may face increasing unemployment because their downwardly rigid wage and resource price demands makes it increasingly unprofitable for businesses to employ as many of them as in during the boom.

Thus, some such workers and resource owners lose their jobs and sales. With falling incomes and revenues, these unemployed workers and resource owners decrease their demands for some of the goods they used to buy. This reduces the profitability of employing other workers in other parts of the market. If the workers and resource owners in these sectors of the economy also resist wage and resource price reductions to maintain their employability, some of them also lose their jobs and sales. And the process repeats itself, again and again, with a cumulative contraction of demands, jobs and output.

This may sound like a "Keynesian" story that the economy is spiraling down and down due to not enough "aggregate demand." But Hutt's point was that the problem is not a lack of "aggregate demand." Rather, it is a supply-side problem of rigid and out-of-balance prices and wages in many sectors of the economy that are preventing normal rebalancing and readjust of market price, wage and production relationships that would restore "full employment" and output levels through proper market guided re-coordination of supply and demand.

Daily Bell: Have you changed your mind about Austrian economics? Can you define Austrian economics for us?

Richard Ebeling: Well, I will start by saying that I am as persuaded by the Austrian economic approach now as I have ever been. Austrian economics originated with an economist named Carl Menger in the 1870s. Two of his leading early followers who developed his ideas and made them internationally famous were Eugen von Boehm-Bawerk and Friedrich von Wieser.

In the twentieth century, Ludwig von Mises and Friedrich A. Hayek most distinctly developed the Austrian approach. They were followed by such prominent Austrians as Ludwig M. Lachmann, Israel M. Kirzner and Murray N. Rothbard. And in the current generation of important Austrians there are Walter Block, Peter Boettke, Roger Garrison, Peter Klein, Peter Lewin, Robert Murphy, Gerald O'Driscoll, Mario Rizzo, Joseph T. Salerno and Lawrence H. White, to name just a few.

Austrians argue that economics is fundamentally a science and study of "human action." It attempts to trace out the logic and implications of man's intentional conduct in selecting among ends desired and applying perceived means to try to attain them. Austrians emphasize that all human action and the social and market interactions among men occur in a setting of imperfect knowledge, inescapable degrees of uncertainty and always through the passage of time.

They try to explain the market processes by which men discover mutual gains from trade. They emphasize that the networks of social institutions in which and through which men discover ways to coordinate their interdependent actions in complex systems of division of labor are not the creations of government edict or command; but are most often among those unintended consequences of multitudes of self-interested individual actions and interactions.

They have developed theories of market competition and the role of the entrepreneur as the individuals always alert to market opportunities, and whose actions tend to bring about coordination between market supplies and demands.

The Austrian analysis of markets, competition and prices, led them to devastating critiques of the unworkability of all forms of socialist central planning, the inherent contradictions and inconsistencies in virtually all forms of government intervention and regulation, and a theory of money and the business cycle that points the finger of responsibility for inflations and recessions at the doorstep of government monetary and fiscal policies.

Daily Bell: Is economics a mathematical science, as many non-Austrian economists have suggested?

Richard Ebeling: Austrians have argued that the method or tool of analysis should be based on the nature of the subject matter being studied. Since economics seems to deal with many quantitative relationships – price ratios, quantities demanded and quantities supplied at different prices; amounts of output produced and resources used, etc. – many economists have insisted that therefore economics is a quantitative science. And any science dealing with quantitative relationships is by necessity a mathematical science.

Austrians have never denied the importance or usefulness of mathematical methods in many theoretical and practical aspects of science. Indeed, many advancements in abstract and applied science might have never been made, or as easily, if not for the rigor and clarity of mathematical reasoning.

However, the Austrians argue that in the arena of human action and choice we are dealing with aspects of man that are not as easily reducible to mathematical formulation without "losing something in translation." That is, human intentionality; the subjective and intersubjective meanings that men give to their own and other's actions; the formation and content of expectations about the likely sequence of events and actions of others in the future; the creative processes of entrepreneurial alertness and innovation.

These and other aspects of human action and social and market interaction can only be grappled with by looking within the logic and workings of the human mind. And mind is not easily reduced to quantitative matter without destroying much of what a human science must be about.

Daily Bell: If we can change gears a bit, what's next for the world? Are we headed toward a global depression? Is US society collapsing?

Richard Ebeling: To answer these questions, we need to distinguish between possible long run trends from short run directions, though of course they are never totally separate from each other. First, we must realize that the world has been and is radically changing. For the first couple of decades following the Second World War the world was in a strange imbalance.

Europe and Japan were slowly rebuilding and recovering from the political and economic devastation of World War II. Soviet Russia, its Eastern Europe "satellites," Communist China and a number of other socialist regimes had straightjacketed their peoples in the iron grip of totalitarianism and rigid central planning. Newly independent countries in Asia and Africa were enthralled with visions of progress through socialism and dictatorship.

The United States was the only major country in the world that had not experienced invasion, foreign occupation and the destruction of land war and bombing. Its economy had remained intact, its system still relied upon a relatively large amount of private enterprise and there was a reasonable degree of rule of law.

Thus, America seemed to dominate the world economically, as well as politically and militarily.

But especially over the last 30 to 40 years the world has been rebalancing itself. European Union Gross Domestic Product is greater than that of the US Soviet-style central planning is a thing of the past, and Eastern European countries have been rejoining Western society. Countries long referred to as "third world" underdevelopment nations have been rapidly escaping from mass poverty, most visibly in places like China and India.

It is not impossible that if these long-run trends were to continue, by the end of the twenty-first century and the beginning of the twenty-second century mankind may have achieved something that for all of recorded history was an unimaginable dream: the end to human poverty. There would still be those more well off materially and those less well off. But starvation and want for the most basic necessities of life could be a thing of the past. If this actually happens it will be one of the most momentous events in all of mankind's existence on this planet.

But in the short-run we are suffering from a spider's web of inconsistent and contradictory interventionist and welfare statist policies that are threatening to ruin the economies of Europe, America and other parts of the world. The current fiscal crises are merely symptoms for this deeper political and cultural disease that has infected so much of the industrial world.

We suffer from an embedded anti-capitalist mentality that is the residue of our Marxian past. It has fostered an entitlement psychology and created huge coalitions of special interest groups who have come to live off the redistributive and subsidizing largess of paternalist government – and who cannot image life without these government guarantees and protections from the ordinary affairs and uncertainties of life.

Whether these policies will drag down what remains of Western Civilization, or instead out of this ideological and political dead end Western man will rediscover the ideas that made "the West" great – individual freedom; respect for property and commerce; restraints on the powers of the State, that made government a rights-protecting servant rather than the overbearing and arbitrary master over the citizenry – will determine what the remainder of this century will be like for ourselves and many others around the world.

That will depend upon the degree to which friends of freedom succeed in explaining the case for liberty to our fellow men. In our ability to devise political and policy strategies to reverse the interventionist-welfare states that are strangling humanity, especially in the West. This will require us to persuade others about the morality of capitalism and the sanctity of the individual human being, who should not be viewed and treated as a sacrificial pawn in the hands of governments.

In other words, the future is up to us and our willingness to take up the challenge of confidently and consistently being voices for and defenders of human liberty.

Daily Bell: Thank you for sitting down with us.