The reason some things are never solved is that they cannot be solved with perceived reality of the time. The great Austrian economist and philosopher, Frederick August von Hayek (1899-1992), argued that the knowledge needed to make rational collective decisions is dispersed throughout society and cannot be fully known by any single individual or central authority. Markets solve this problem by taking into account the information and knowledge required to make a collective choice on the efficient allocation of resources. (Note: this is an abstract of a longer paper where the evidence for the various assertions in this abstract are presented.)
Economist and mathematician, Kenneth Arrow (1921-2017), is known for his impossibility theorem and paradox that proves no consistent and stable choice is possible, based solely on individuals’ personal preferences, without either a dictator or unanimous consent. The former he ruled out as violating one of his own normative restrictions on social choice, no dictator; the second he ruled out as impractical in voting because it would give everyone a veto and stymie most social decisions by creating stalemate. Arrow’s apparent “paradox” reduces to the previous problem raised by Hayek: because of the dispersed knowledge problem, no single person or oligarchy of like-minded individuals could possibly know the unanimous social choice everyone would agree to except by everyone together discovering it through participation in free markets.
And finally, German theoretical physicist, Werner Heisenberg (1901-1976), is known for his uncertainty principle which states that it’s impossible to know a particle’s position and momentum simultaneously.
These three Nobel laureates came from diverse fields of study, yet all understood the limits of knowledge. Most economists and political thinkers spend their time and effort trying to solve a problem that cannot be solved within widely accepted but impossible political constraints:
· First, stable and useful money cannot coexist with income and capital gains tax systems as efforts to reconcile them breed near impossible complexity, distortion and inefficiency, risking systemic collapse.
· Second, free markets, especially free trade, are incompatible with central-bank, debt-backed, fiat money, exacerbating the distortions and threatening potential collapse. These propositions are rooted in historical economic thought and echoed in modern literature.
The first proposition holds that income and capital gains taxes (really taxes on saving and wealth creation) undermine stable money, in part, by in effect making the purchasing power of each monetary unit different for each person depending upon their tax rate. (High-rate taxpayers need to acquire more money to have the same purchasing power as low-rate taxpayers.) Classical economist David Ricardo warned in 1817 that taxes on capital reduce productive investment, stifling growth and necessitating government borrowing or currency debasement. Austrian economist Ludwig von Mises echoed this in Human Action (1949), arguing that heavy taxation distorts market signals and erodes sound money as governments inflate fiat currencies to cover deficits. Recent studies highlight how fiat money’s unlimited supply, untethered from gold since 1971, enables tax-driven spending, fueling special-interest scrambling for government goodies, producing supra-optimal government spending, inflation and inefficiencies. The U.S. tax code’s 70,000+ pages exemplify this, distorting incentives and destabilizing money’s value.
The second proposition contends that free markets and free trade falter under central-bank fiat money, especially one that serves as the world’s reserve currency, which distorts prices and trade balances. Adam Smith, in The Wealth of Nations (1776), championed free trade with stable money, warning that debt-backed paper currencies enable mercantilist distortions. The abandonment of the international gold standard and adoption of politically managed currencies subtly reintroduced mercantilism, a predatory regime under which trade creates winners and losers rather than gains for everyone. Economist Joseph Stiglitz (2016) critiques fiat-driven imbalances, noting that the U.S. dollar’s reserve status incentivizes foreign nations to hoard dollar assets rather than import U.S. goods, manifesting in perpetual trade deficits. A 2024 IMF report underscores how dollar dominance exacerbates emerging market vulnerabilities as currency fluctuations distort trade and investment. The U.S. trade deficit – $1.2 trillion in 2024, the largest of 49 straight years of deficits since 1975, only 4 years after Nixon severed the dollar’s last link to gold (settlement of international transactions) – is a clear indication that unsound money turns gains from trade for everyone into predatory weaponization of trade that creates winners and losers. One could not ask for a clearer demonstration that a fiat world currency sustains trade imbalances Smith would decry.
Reflections on these propositions reveal deeper issues. Modern “free trade” is a misnomer, distorted by fiat money and the dollar’s reserve status. As Stiglitz notes, foreign surplus nations convert trade gains into U.S. financial assets, not goods, skewing global trade. This aligns with Ricardo’s warnings about currency manipulation disrupting comparative advantage. Similarly, “market failures” usually stem from government intervention, not an inherent deficiency of free markets. Milton Friedman, in Capitalism and Freedom (1962), argued that government spending and central-bank monetization distort price signals, undermining market efficiency. A 2019 Federal Reserve paper warns that printing money to fund deficits risks hyperinflation, echoing Friedman’s concerns about fiat money’s instability.
Critics might argue that fiat money and taxation enable economic stability, citing Keynesian views that government intervention mitigates recessions. Yet, the 2008 financial crisis, despite Federal Reserve interventions, exposed fiat money’s fragility as noted in a 2022 Corporate Finance Institute analysis. Keynesians overlook how central-bank policies, like quantitative easing, inflate asset bubbles, distorting markets further. The complexity of modern monetary systems—evident in the Fed’s $8 trillion balance sheet—contrasts with Smith’s and Ricardo’s preference for simplicity, supporting the collapse hypothesis.
Historical and modern economists converge on these critiques. Von Mises, Hayek and Friedman warned of fiat money’s inflationary impetus, while Stiglitz highlights trade distortions from dollar hegemony. A 2025 Brookings report critiques tariffs as misguided fixes for fiat-driven imbalances (credit bubbles), advocating macroeconomic rebalancing—implicitly endorsing the need for stable money.
These insights suggest that reconciling stable money and free markets with the current fiscal system – characterized by direct taxes on income (really wealth) – is unsolvable as complexity and distortion accumulate. The only real solution is to return to commodity-based money and taxation of consumption rather than income. This would restore self-correcting markets and enable real free trade –thus increasing long-term growth and general prosperity.
