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I suppose I can date my interest in both libertarianism and Austrian Economics from the day I was born. The doctor grabbed me by my little feet, turned me upside down and spanked my tiny bottom.

I began to cry out. That is when I realized the fundamental axiom that, “man acts.” In addition, I appreciated that what the doctor had done was in violation of the “non-aggression” principle.

The rest is history. Well . . . maybe not quite.

For some reason, I had found history and current events interesting when I was in my early ‘teens in the 1960s. I had a part-time job at the Hollywood Public Library in Los Angeles when I was in high school. Part of responsibilities was to maintain the magazine collections on a balcony in the building. I would finish my work, and hide up in the balcony reading new and old political and news publications.

The Confusions of “Left” and “Right”

But I soon was confused. When I read “left-of-center” publications like The Nation or the New Republic, they always seemed to have the moral high ground, making the case for “social justice,” “fairness” and morality. On the other hand, when I read “right-of-center” publications like Human Events or National Review the argument was made that all that “bleeding heart” stuff just did not work. There was a “bottom line”: it cost too much, screwed things up, and socialism and communism seemed to kill a lot of people.

When I was about seventeen, and living in Hollywood, I met two men who introduced me to the works of Ayn Rand. I ran into them at a restaurant called “Hody’s” that was at the corner of Hollywood and Vine.

…click on the above link to read the rest of the article…

Mises.org: Keynes’s Critique of Econometrics is Surprisingly Good

May 6, 2016

MISES.ORG: KEYNES’S CRITIQUE OF ECONOMETRICS IS SURPRISINGLY GOOD

In a recent article we had a brief look at Ragnar Frisch’s (1895–1973) vision of econometric model building. As mentioned, Frisch was the first economist chosen over Mises to win the Nobel Prize in 1969. In fact, there was a second one in the same year. Frisch won the prize jointly with Dutchman Jan Tinbergen (1903–1994), who applied Frischian econometrics for the first time in large-scale macro models by the end of the 1930s.

In the first volume of his investigations into business cycles commissioned by the League of Nations, entitled Statistical Testing of Business Cycle Theories, published in 1939, Tinbergen exonerates the statistician and econometrician from his responsibility and explains:

The part which the statistician can play in this process of analysis must not be misunderstood. The theories which he submits to examination are handed over to him by the economist, and with the economist the responsibility for them must remain; for no statistical test can prove a theory to be correct.

While classical and Austrian economists would agree that an economic theory cannot be proven correct empirically, they would not as easily let the statistician off the hook. Indeed, the econometrician and statistician have some responsibility for the economic theories that come to be accepted, especially if one holds, as Tinbergen does, that those theories can be proven “incorrect, or at least incomplete, by showing that it does not cover a particular set of facts.”

This is an odd claim, since practically any theory is incomplete, but this does not mean that it is incorrect. Obviously there remains a twofold danger: A wrong theory might not be proven wrong, although it could be done in principle, and a true theory might be “proven wrong” mistakenly, because it is incomplete as it does not account for some particular set of facts. The econometrician would of course be responsible for these errors.

…click on the above link to read the rest of the article…

Why the Theory of Money Does Not Work

January 18, 2016

Why the Theory of Money Does Not Work

QUESTION: We see that the United States can borrow all it needs at minimal cost and we also see that we’re getting a big boost from falling energy/commodity prices, to levels we have not seen in some 15 years my “economic model” — which is not a computer model but is certainly scientific in nature — tells me that we will be humming along pretty nicely for quite a long while, minimum 5 years maybe much longer, given these two variables do you see anything on the horizon that will knock us off this “steady state” and quite favorable situation?

ANSWER: You concept of the economy is very limited and is too influenced by the concept of the quantity of money/Austrian School. This is one-dimensional. Taxes play a huge role and provides the source of DEFLATION. If I give you $100 and then tax you $90, just how much did I really give you? The middle class is shrinking and they claim the 1% are making too much. Is that really the problem? No. The problem is the 40% (government) is broke and consuming a steady increase in the proportion of everyone’s income. Government produces nothing. It lives off of what everyone else produces. The more it grows, the lower the real economic growth.

You are only looking at the total aggregate. You assume simply increasing the quantity of money will produce inflation. That theory has been proven wrong constantly throughout the course of history. You must look at the growth of government and the larger it grows the lower the economic growth. Look at the City of Detroit. When more than 50% of its taxes went to pensions, it could no longer function to maintain the cost of government to operate currently and collapsed as those who could be taxes migrated from the city.

…click on the above link to read the rest of the article…

Austrians get (some) mainstream credibility

January 16, 2016

Austrians get (some) mainstream credibility

Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain’s Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

The Adam Smith Institute’s paper is not so shy, and includes both “sound money” and “Austrian” in the title, though the first comment on the web version of the press release says talking about “Austrian” proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans’s paper.

The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers’ central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed’s new policy of raising interest rates was influenced by the BIS’s view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

…click on the above link to read the rest of the article…

Austrians Get (Some) Mainstream Credibility

January 16, 2016

AUSTRIANS GET (SOME) MAINSTREAM CREDIBILITY

Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain’s Adam Smith Institute publishes a paper by Anthony Evans [Editor’s note: Anthony is a Founding Fellow of The Cobden Centre] that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

…click on the above link to read the rest of the article…

Professor Fekete About Gold And The Debt Society

December 21, 2015

Professor Fekete About Gold And The Debt Society

Claudio Grass interviews Professor Antal E. Fekete

GLOBAL GOLD: “Prof. Fekete, it is a pleasure to have this opportunity to talk to you. You are a fierce critic of the current monetary system and a strong proponent of the gold standard, particularly the variety that combines with the Real Bills Doctrine (RBD) of Adam Smith which we shall get into later. We are very much interested to learn how this interest of yours started in the first place and what led you to believe in gold and Austrian Economics in general.”

Antal Fekete Professor Antal E. Fekete (see further below for biographical details) Photo credit: verlagjohannesmuller

AF: “I have been a lifelong student of gold money which led me to Austrian economics. However, I find that the writings by Austrian authors such as Hayek and Mises on gold somehow deviated from Carl Menger’s basic idea of marketability of goods in favor of the Quantity Theory of Money. For this reason, I find they did not address the nexus between gold and interest. I take pride in pioneering a new departure to develop a theory of interest based on the idea of marketability of goods (also known as hoardability) that puts this nexus right into the center. My own view is that gold and silver are the only monetary metals for reasons having to do with the fact that they are the most hoardable substances in existence. I also believe that if Menger had lived longer, he himself would have developed his theory of interest along the lines of indirect exchange of income and wealth that are an improved version of hoarding and dishoarding (direct exchange). As a matter of fact, here we are talking about the dual theory of the evolution of direct exchange (barter) into indirect exchange of goods and services (monetary economy).

…click on the above link to read the rest of the article…

Expectations and Business Cycles

December 16, 2015

Expectations and Business Cycles

According to the Austrian Business Cycle Theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

As a rule businessmen discover their error once the central bank—that was instrumental in the artificial lowering of interest rates—reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust.

From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest rate stance.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates.

Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates.

Correct expectations will undo or neutralise the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates.

Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena. According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.[1]

…click on the above link to read the rest of the article…

Advice to the Prime Minister/President

November 21, 2015

Advice to the Prime Minister/President

Your country faces a stagnating economy. Let us assume your Prime Minister (or President if that is who holds the executive power) seeks advice from two imaginary economists.

PM: You two economists have different views on what our economic policy should be. What is your advice?

FIRST ECONOMIST (Austrian school): Prime Minister, the reason we face a stagnant economy is your central bank perpetuated the credit cycle by suppressing interest rates when the economy turned down after the banking crisis and lending risk escalated. That has left us with a legacy of under-performing businesses, which should have been left to go bankrupt. Instead they are struggling under a burden of unrepayable debt. Capital is not being reallocated to the new enterprises of the future. The dynamism of free markets has been throttled.

The extra money and credit created by the banking system has not been applied to the real economy. Instead they are fuelling a financial boom in asset prices, which have become dangerously separated from production values.

Eventually, current monetary policy will lead to a fall in the purchasing power of the currency, and the central bank will be forced to raise interest rates to a level that will precipitate the next financial crisis, if the crisis has not already occurred by then. Overvalued assets become exposed to debt liquidation. It happens every time, and if you think the last crisis, which led to the Lehman collapse was bad, on current monetary policies the next one will be much worse, just as Lehman was much worse than the aftermath of the dot-com boom.

A monetary policy that relies on the transfer of wealth from savers to debtors always fails in the end, as certainly as death and taxes exist. It is also the real reason the bankers are getting wealthy while ordinary people become poorer.

…click on the above link to read the rest of the article…

Why Economics Matters

September 4, 2015

Why Economics Matters

This article is a selection from a June 19 presentation at a lunchtime meeting of the Grassroot Institute in Honolulu at the Pacific Club. The talk was part of the Mises Institute’s Private Seminar series for lay audiences. To schedule your own Private Seminar with a Mises Institute speaker, please contact Kristy Holmes at the Mises Institute.

First let me say that what we today call “Austrian economics” flows from the great legacy of classical economics, with the very important modification economists now call the “marginal revolution.” Austrian economics is also a term that describes a healthy and vibrant (though often oppositional) modern school of economic thought. It originated with intellectual giants like Carl Menger and Ludwig von Mises, names I’m sure many of you are familiar with. These economists were from Austria, hence the term.

There was a landmark conference at South Royalton, Vermont in 1974, attended by the likes of Murray Rothbard and Milton Friedman, that revitalized the Austrian movement and helped it regain prominence in the latter part of the twentieth century. Milton Friedman was in attendance, and that’s when he famously remarked that “There is only good economics and bad economics.”

And of course that’s true. Schools of thought should not be rigid, or dogmatic, or too narrowly defined. But classifying various economists and theories into groups or family trees does indeed help us make sense of economics. It helps us understand how we arrived at a time and place where Ben Bernanke, Paul Krugman, Thomas Piketty, and Christine Lagarde are viewed as modern mainstream thinkers rather than the radicals they are when compared to the whole history of the field.

Image courtesy of Peter Cresswell.

…click on the above link to read the rest of the article…

Yes, You Do Understand Economics

September 4, 2015

Yes, You Do Understand Economics

The following conversation between my good friend Michael McKay and a friend of his illustrates that we all understand and use economic principles every day. In fact we could not function without understanding these basic economic principles. Pat Barron

The other day I was having coffee with a new friend, a retired businessman who customized luxury cars in California. I mentioned I had recently retired from owning an investment firm and had many years of study of economics, especially Austrian Economics.

As so many people I have met before him, he said, “I really don’t understand economics and always have been confused by it.”
To which I surprised him with, “Of course you understand economics; it is the thought process you use every day to deal with three things: Scarcity, Property and Relationships.”

His eyes got big and he said, “Whoa! Say that again.”

“OK”, I said and continued, “Everything in human life is organized around how we decide about three things: Scarcity, Property and Relationships.

“First let’s talk about Scarcity which you’ve known about all of your life – you notice when something is missing or about to be missing; it is how you decide when it’s time go to the grocery store, do your laundry or whether you should drive your car faster so not to be late for an appointment.

“Every human being is an expert in the decision process of Scarcity. It is something we all naturally do whenever we act and choose – which, by the way, we are doing all the time, every day, all day long.”

I smiled, “I could go on and on. You want more?”

“Sure.”, he smiled back.

…click on the above link to read the rest of the article…

Are Austrian Criticisms of Mainstream Economics Still Relevant?

August 4, 2015

Are Austrian Criticisms of Mainstream Economics Still Relevant?

Occasionally, when Austrians try to distinguish their brand of doing economics from the mainstream, they get hit with accusations that they are attacking straw men; that no one believes what Austrians claim is the mainstream approach.

Is this true? Are Austrians attacking enemies that don’t exist anymore? I say no. While it might be true that many of the top economists may in general agree with broad Austrian methodological conclusions, the typical economist is much more likely to either (a) explicitly deny the Austrian criticisms, or (b) implicitly or casually invoke these fallacies during their analyses for reasons I shall explain below. Let’s look at the evidence.

Econometrics

The position often attributed to Austrians regarding econometrics is that Austrians reject the field completely. But this is not true. Austrians criticize econometrics only when it is either (1) trying to prove or disprove (or “falsify”) pure economic theory, (2) trying to establish universal magnitudes between economic phenomena, or (3) trying to forecast economic data. To Austrians, econometrics is only useful as a tool of history: it can tell us quantitative information about a specific period in the past, and that’s it. Econometric findings are not generalizable to all of the past, and cannot be projected to precisely predict the future.

The second case was one of the principle ambitions of the first econometricians. In Human Action, Mises refers to the University of Chicago economist Henry Schultz. Schultz (a founding member of the Econometric Society) had tried to determine “the” price elasticities of demand for a whole bunch of goods. In other words, he wanted to find out exactly how much the how many more potatoes would be sold if their price per kilogram went up $1. Mises correctly demonstrated why this whole endeavour was doomed to failure: all prices are historical, and are subject to change at any time. There are no constants in economics.

…click on the above link to read the rest of the article…

Cyclical Changes in Business Conditions

June 20, 2015

Cyclical Changes in Business Conditions

The Role of Interest Rates

In our economic system, times of good business commonly alternate more or less regularly with times of bad business. Decline follows economic upswing, upswing follows decline, and so on. The attention of economic theory has quite understandably been greatly stimulated by this problem of cyclical changes in business conditions. In the beginning, several hypotheses were set forth, which could not stand up under critical examination. However, a theory of cyclical fluctuations was finally developed which fulfilled the demands legitimately expected from a scientific solution to the problem. This is the circulation-credit theory, usually called the monetary theory of the trade cycle. This theory is generally recognized by science. All cyclical policy measures, which are taken seriously, proceed from the reasoning which lies at the root of this theory.

According to the circulation-credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy — expansion of bank credit by the issue or creation of additional fiduciary media (that is, banknotes and/or checking deposits not covered 100 percent by gold). On a market, which is not disturbed by the interference of such an “inflationist” banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as “natural” or “static” interest rates. If these interest rates were adhered to, then economic development would proceed without interruption — except for the influence of natural cataclysms or political acts such as war, revolution, and the like. The fact that economic development follows a wavy pattern must be attributed to the intervention of the banks through their interest rate policy.

…click on the above link to read the rest of the article…

Hidden In Fannie and Freddie

June 19, 2015

Hidden In Fannie and Freddie

With another financial crisis fast approaching the cause of the ‘08 crash hasn’t been settled. Austrians generally line up on the side of the all-powerful Fed having lowering interest rates below what the market would produce, sending capital into malinvestments: In this case, too many subdivisions of houses and other real estate. When the Fed hit the brakes in ‘06, raising its fed funds rate, housing peaked and the party was brought to an abrupt and painful end as the value of mortgage backed securities melted down.

I’ve given this talk plenty of times, most recently for The Nassau Institute in the Bahamas.

The visual of fed funds combined with Las Vegas land and housing prices on top of a busted subdivision aerial photo is worth a thousand words.

There is another part of the story touted by Austrians such as Tom Woods and Tom DiLorenzo that government required banks to provide mortgages to those who couldn’t afford them through the force of the Community Reinvestment Act (CRA). Predictably, these borrowers couldn’t or wouldn’t pay and their mortgages turned into toxic paper that led to Wall Street’s almost demise.

Because of my experience in the non-bailed-out part of the banking sector, I’ve always doubted the CRA-did-it thesis. CRA seemed easy for the little bank I worked for as we made a number of development and construction loans for entry-level housing and even received credit for a loan made on a building where X-rated movies and sex toys were sold. These loans were made for economic reasons with no thought to CRA.

But Peter Wallison’s book Hidden In Plain Sight has changed my mind. Wallison is no tin foil hat wearer, being the Arthur F. Burns Fellow at the American Enterprise Institute and serving as a member of the 2010 Financial Crisis Inquiry Commission (FCIC).

…click on the above link to read the rest of the article…

The problem isn’t overproduction; it’s malinvestment

May 7, 2015

The problem isn’t overproduction; it’s malinvestment

Mr. Max Ehrendfreund, writing in the Washington Post’s Wonkblog, believes that he has discovered something new: that the world is producing too much and doesn’t know what to do with it. His solution, of course, is to confiscate the overproduced products, such as oil and cotton, from its rightful owners and give it to the people who need it. This phony problem and its statist solution goes back at least as far at the 1930’s socialist calls for “production for use” vs. the hated capitalist concept of “production for profit“.

Mr. Ehrenfreund commiserates that a “surplus…challenges some basic principles of conventional economics…”. Ah, now we see why Mr. Ehrenfreund has a problem; he understands only “conventional economics”. Austrians have no such problem understanding why many commodities are currently in surplus. Our understanding of Austrian business cycle theory tells us that years of interest rate suppression by monetary authorities worldwide has disrupted the time structure of production; i.e., that artificially low interest rates have led entrepreneurs and their business partners to believe that sufficient resources exist for the profitable completion of longer term projects, such as increasing investment in oil and cotton production. Austrians do not contend that there cannot be a surplus of some goods. Of course, there can! But we know that a surplus of some goods means that there is a scarcity of others. Resources were “malinvested” in some projects instead of those more urgently desired by the public.

…click on the above link to read the rest of the article…

The War on Cash: Transparently Totalitarian

May 1, 2015

The War on Cash: Transparently Totalitarian

George Orwell once wrote “If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Not exactly a cheery thought, and one I don’t agree with.

While the forces pushing for centralization of power have been prevailing for decades, they haven’t won a total victory yet. Technologies that empower the individual and that tend toward decentralization—including the Internet, encryption, 3D printing, and cryptocurrencies—offer a powerful ray of hope, reasons to be optimistic about the future.

So the tug of war between the collectivists and the rest of us continues.

One thing that would tip the scales heavily in favor of the collectivists would be victory in the War on Cash. Their goal is to eliminate the use of hand-to-hand currency, so that governments can document, control, and tax everything.

It’s exactly like what Ron Paul said: “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

One way they are waging the War on Cash is to lower the threshold at which reporting a cash transaction is mandatory or at which paying in cash is simply illegal. In just the last few years…

Italy made cash transactions over €1,000 illegal;

Switzerland has proposed banning cash payments in excess of 100,000 francs;

Russia banned cash transactions over $10,000;

Spain banned cash transactions over €2,500;

Mexico made cash payments of more than 200,000 pesos illegal;

Uruguay banned cash transactions over $5,000; and

France made cash transactions over €1,000 illegal, down from the previous limit of €3,000.

I recently spoke about this with Dr. Joe Salerno, an Austrian economist with the Mises Institute. Joe is the best chronicler of the global War on Cash and is here to offer an Austrian rebuttal to the economic nonsense peddled by advocates of this war.

…click on the above link to read the rest of the article…

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