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The boom-and-bust business cycle is a natural result of free-market capitalism, but rather of government intervention.

Looking to the next few years, will America and the world continue to ride a wave of economic growth, improved living standards, and technological changes that raise the quality of life? Or will this turn out to be, at least partly, an artificial economic boom that ends in another economic bust?

Reading the economic tea leaves is never an easy task. But the Austrian theory of the business cycle offers clues of what may be in store. In 1928, the famous Austrian economist Ludwig von Mises published a monograph called Monetary Stabilization and Cyclical Policy. It was an extension of his earlier work, The Theory of Money and Credit (1912).

Many things have happened, of course, over the last nine decades—the Great Depression, the Second World War, the Cold War, the end of the Soviet Union, roller coasters of inflations and recessions, replacement of gold with paper monies, the dramatic expansion of the welfare state, and an era of government debt fed by deficit spending to cover the costs of political largesse.

Then, as today, many governments were busy manipulating the supply of money and credit.

Yet, the laws of economics have not been overturned. As a result, like causes still bring about like effects. Minimum wage laws still price some workers out of the labor market whose value added to the employer is less than what the government dictates he must be paid. Rent controls and restrictive zoning laws create housing shortages when government interferes with market-based pricing.

Mises’ Monetary and Business Cycle Analysis Still Relevant Today

This is no less the case in the area of money and banking. When Mises published Monetary Stabilization and Cyclical Policy in 1928, most of the major countries of the world where still on some version of the gold standard.

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

The Deflation/Inflation Debate

April 20, 2018

THE DEFLATION/INFLATION DEBATE

“Naïve inflationism demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money.” ― Ludwig von mises, The Theory of Money and Credit

It is hardly surprising that with equity indices stalling, the financial community is increasingly worried that the long, steady bull market is coming to an end. Naturally, this makes investors look for reasons to worry, and it turns out that there are indeed many things to worry about.

In fact, there are always things to worry about. Ever since the Lehman crisis, the Four Horsemen of the Apocalypse have been casting long shadows across the financial stage. But as financial assets have continued to rise in value over the last nine years, bearish fund managers, spooked by systemic risks of one sort or another and the perennial threat of a renewed slump, have been forced to discard their ursine views.

As often as not, it is not much more than a question of emphasis. There is always good news and bad news. As an investor, you semi-consciously choose what to believe.

There are causes for concern, of that there is no doubt. Mostly, they arise from the consequences of earlier state interventions on the money side. Governments are slowly strangling private sector production with increasingly rapacious demands on taxpayers and have been resorting to the printing press to finance the shortfalls. In reality, there is a finite limit to government spending, because it impoverishes the tax base. Yet governments, with very few exceptions, seek to conceal this truism by increasing spending and budget deficits even more. In this, President Trump is not alone.

Bankruptcy is the end result. And don’t believe the old saw about how governments can’t go bust. They can, and they do by destroying their currencies, as von Mises implied in the quote above.

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

Mises the Man and His Monetary Policy Ideas Based on His “Lost Papers”

April 3, 2018

MISES THE MAN AND HIS MONETARY POLICY IDEAS BASED ON HIS “LOST PAPERS”

One day in 1927 Austrian economist, Ludwig von Mises, stood at the window of his office at the Vienna Chamber of Commerce, and looked out over the Ringstrasse (the main grand boulevard that encircles the center of Vienna). He said to his young friend and former student, Fritz Machlup, “Maybe grass will grow there, because our civilization will end.” He also wondered what would become of many of the Austrian School economists in Austria. He suggested to Machlup that, clearly, they would have to immigrate, perhaps, to Argentina, where they might find work in a Buenos Aires nightclub. Friedrich A. Hayek could be employed as the headwaiter, Mises said, while Machlup, no doubt, would be the nightclub’s resident gigolo. But what about Mises? He would have to look for work as the doorman, for what else, Mises asked, would he be qualified to do?

It is worth recalling that in the mid-1920s, Mises had warned of the rise of “national socialism” in Germany, with many Germans, he said, “setting their hopes on the coming of the ‘strong man’ – the tyrant who will think for them and care for them.” He also predicted that if a national socialist regime did come to power in Germany and was determined to reassert German dominance over Europe, it would likely have only one important ally with whom to initially conspire in this new struggle – Soviet Russia. Thus, years before Adolph Hitler came to power, Mises anticipated the Nazi-Soviet Pact to divide up Eastern Europe that set in motion the start of the Second World War in 1939.

Ten years after Mises’s playful 1927 prediction to Fritz Machlup, reality was not that far from what he said. By 1938, many of the Austrian economists had, indeed, emigrated and left their native country.

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

This Was Mises’s Main Case for Peace

January 30, 2018

This Was Mises’s Main Case for Peace

War only destroys. Peace, on the other hand, creates.

War is absolutely devastating. There is no dancing around that fact. Not only is it responsible for the loss of countless human lives, it also leaves an immeasurable amount of physical and emotional destruction in its wake.

The market has taught us that incentives work.

Opponents of war may decry war until they are blue in the face, begging those in power to consider its human costs. But these cries almost always fall upon deaf ears, as history has tragically demonstrated.

When it comes to politicians and war, the ends always justify the means, even when those means are human lives. And while human life is sacred, this truth alone has never been enough to convince global leaders to seek an agenda of peace rather than one of destruction.

But the market has taught us that incentives work. So instead of relying on a method that has not done much to deter war over the centuries, why not try an argument that plays to the interests of those in power?

As Mises explains in Liberalism, the most impactful argument against war comes in the form of a basic economic principle from which we each benefit: the division of labor.

He writes:

How harmful war is to the development of human civilization becomes clearly apparent once one understands the advantages derived from the division of labor. The division of labor turns the self-sufficient individual into the ζῷον πολιτικόν (social animal) dependent on his fellow men, the social animal of which Aristotle spoke.”

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

America’s Great Depression and Austrian Business Cycle Theory

January 10, 2018

AMERICA’S GREAT DEPRESSION AND AUSTRIAN BUSINESS CYCLE THEORY

When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the “Austrian” approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.

To many of the economists in the early 1960s, Rothbard’s “Austrian” approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach that focused on a highly “aggregate” analysis of economic changes and fluctuations on general output and employment as a whole. There was also the widely held presumption that governments could easily maintain economy-wide growth and stability through the use of a variety of monetary and fiscal policy tools.

Mises, Hayek and the Austrian Theory of Money and the Business Cycle

However, in the early and middle years of the 1930s, the Austrian explanation of the Great Depression was at the forefront of the theoretical and policy debates of the time. Ludwig von Mises (1881-1973), first developed this “Austrian” theory of the causes of inflations and depressions in his book, The Theory of Money and Credit (1912; 2nd revised ed., 1924) and then in his monograph, Monetary Stabilization and Cyclical Policy (1928).

But its international recognition and role in the business cycle debates and controversies in the 1930s were particularly due to Friedrich A. Hayek’s (1899-1992) version of the theory as presented in his works, Prices and Production (1932) Monetary Theory and the Trade Cycle (1933), and Profits, Interest and Investment (1939). A professor of economics at the London School of Economics throughout the 1930s and 1940s, Hayek was, at the time, considered by many to be the main competitor against John Maynard Keynes’s “New Economics” that emerged out of Keynes’s 1936 book, The General Theory of Employment, Interest and Money.

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

Neoliberalism Was Never about Free Markets

October 14, 2017

From the beginning, it was about watering down classical liberalism.

One of the most accusatory and negative words currently in use in various politically “progressive” circles is that of “neoliberalism.” To be called a “neoliberal” is to stand condemned of being against “the poor,” an apologist for the “the rich” and a proponent of economic policies leading to greater income inequality.

The term is also used to condemn all those who consider the market economy to be the central institution of human society as being against “community,” shared caring, and concern for anything beyond supply and demand. A neoliberal, say critics, is one who reduces everything to market-based dollars and cents and disregards the “humane” side of mankind.

The opponents of neoliberalism, so defined, claim that its proponents are rabid, “extremist” advocates of laissez-faire, that is, a market economy unrestrained by government regulations or redistributive fiscal policies. It calls for the return of the worst features of the “bad old days” before socialism and the interventionist-welfare state attempted to abolish or rein in unbridled “anti-social” capitalism.

The Birth of Neoliberalism: Walter Lippmann and a Paris Conference

He warned of the complementary danger from “creeping collectivism” in the form of the regulatory and interventionist policies.

The historical fact is that these descriptions have little or nothing to do with the origin of neoliberalism, or what it meant to those who formulated it and its policy agenda. It all dates from about eighty years ago, with the publication in 1937 of a book by the American journalist and author, Walter Lippmann (1889-1974), entitled, An Inquiry into the Principles of the Good Society, and an international conference held in Paris, France in August of 1938 organized by the French philosopher and classical liberal economist, Louis Rougier, centered around the themes in Lippmann’s book. A transcript of the conference proceedings was published later in 1938 (in French) under the title, Colloquium Walter Lippmann.

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

Why Small States Are Better

October 7, 2017

Why Small States Are Better

Andreas Marquart and Philipp Bagus (see their mises.org author pageshere and here) were recently interviewed about their new book by the Austrian Economics Center. Unfortunately for English-language readers, the book is only available in German. Nevertheless, the interview offers some valuable insights.

Mr. Marquart, Mr. Bagus, you have released your new book „Wir schaffen das – alleine!” (“We can do it – alone!”) this spring. The subtitle says: “Why small states are just better.” To begin: Why are small states generally better than larger ones?

Andreas Marquart (AM): In small states the government is closer to its citizens and by that better observable and controllable by the populace. Small states are more flexible and are better at reacting and adapting to challenges. Furthermore, there is a tendency that small states are more peaceful, because they can’t produce all goods and services by themselves and are thereby dependent on undisturbed trade.

How far can the principle of small states go? You are for example open to the idea of Bavaria seceding from Germany, or Upper Bavaria then from the rest of Bavaria. Ludwig von Mises stopped at the communal level, thinking that the secession of individuals would be unrealistic. You as well? Is there a point when your rule – the more decentralized the better – is not true anymore?

Philipp Bagus (PB): In principle not. We don’t want to arrogate, however, to know the optimal size and to say that this state is too small and that one too big. The optimal size would be determined in competition through the right of secession. If an apartment tower or street secedes from its municipality and then concludes that there are problems which were previously done better, then the secession could be revoked and the two entities reunited.

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

Ludwig Von Miss on Collectivist Fallacies and Interventionist Follies

September 25, 2017

LUDWIG VON MISES ON COLLECTIVIST FALLACIES AND INTERVENTIONIST FOLLIES

For more than a century the world has been caught in the grip of social engineers and political paternalists determined to either radically remake society from top to bottom in collectivist directions, or to use various government regulatory and redistributive policies to try to modify existing society into desired “social justice” forms and shapes. Both are based on false conceptions of man and society.

One of the leading voices challenging the social engineers and the interventionist-welfare statists in the twentieth century was the Austrian economist, Ludwig von Mises. In such important works as Socialism (1922), Liberalism: The Classical Tradition (1927), Critique of Interventionism(1929), Planning for Freedom (1952), and in his monumental treatise, Human Action (1949; 1966), Mises demonstrated the economic unworkability and negative unintended consequences resulting from attempts to impose systems of socialist central planning on society, as well as the social quagmire brought about by introducing piecemeal regulations and interventions into the market economy.

But it was in his often-neglected work, Theory and History: An Interpretation of Social and Economic Evolution, that Ludwig von Mises systematically challenged the underlying philosophical premises behind many of the socialist and interventionist presumptions of the last one hundred years. This year marks the sixtieth anniversary of the publication of Theory and History in 1957, and it seems, therefore, worthwhile to appreciate Mises’s arguments and their continuing relevance for our own time.

The Illusive Search for Meaning and Purpose in Life

The world is a confusing and uncertain place. While we may live in communities and societies the values, traditions, customs and routines of daily life of which we have grown up in and tend to take for granted, and which provide us with degrees of orienting certainty and predictability in our everyday affairs, they still fail to answer a variety of “big questions.”

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

Does the Central Bank Determine Interest Rates?

September 22, 2017

DOES THE CENTRAL BANK DETERMINE INTEREST RATES?

According to mainstream thinking, the central bank is the key factor in determining interest rates.

By setting short-term interest rates, the central bank, it is argued, through expectations about the future course of its interest rate policy can influence the entire interest rate structure.

Thus according to the popular way of thinking, the long-term rate is an average of current and expected short-term interest rates. If today’s one year rate is 4% and next year’s one-year rate expected to be 5%, then the two-year rate today should be 4.5% (4+5)/2=4.5%.

Conversely, if today’s one year rate is 4% and next year’s one-year rate expected to be 3%, then the two-year rate today should be 3.5% (4+3)/2=3.5%.

Note that interest rates in this way of thinking are established by the central bank whilst individuals in all this have almost nothing to do and just form mechanically expectations about the future interest rate policy of the central Bank.

Individuals here are passively responding to the possible interest rate policy of the central bank. However, does it make much sense?

We suggest that the key in interest rates determination is people’s time preferences. What is it all about?

People assign higher valuation to present goods versus future goods

As a rule, people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods.

This stems from the fact that a lender or an investor gives up some benefits at present. Hence, the essence of the phenomenon of interest is the cost that a lender or an investor endures.

On this Mises wrote,

That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called cost. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.^[1]

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

Ludwig von Mises’ Century of Validation

April 30, 2017

Ludwig von Mises’ Century of Validation

Seeing the Light

It has been said that “the definition of insanity is doing the same thing over and over again and expecting different results.” No one quite knows who first uttered this remark; it has been attributed to Albert Einstein, Mark Twain, Benjamin Franklin, and has even been said to be an Ancient Chinese Proverb. What is known is that this cliché has been repeated over and over again so often that its mere mention substantiates its own definition.

Several of the ladies and gentlemen above wanted to let us know that they’re merely eccentric, and if they want to do things all over again and again and again, we should let them…

Nonetheless, we repeat it again because it’s particularly fitting to today’s deliberations. Here we begin with a look back to the past in search of edification. For the miscalculations of the past continue to dictate the insanity of the present.

Many years ago, a bright minded and well intentioned Italian pursued a devious undertaking. His efforts aimed to conceive a pure theory of a socialist economy. His objective was to take the sordid teachings of Marx and pencil out the mechanics of how a centrally planned economy could bring a life of security and abundance for all. What follows is an approximation of how the dirty deed went down.

In 1908, Italian economist Enrico Barone suffered an abstraction. One late night he skipped a bite of his meatballs and marinara, and gazed into the outer frontiers of deep space. Looking around, he couldn’t believe his eyes. For in this far corner of absolute darkness, he saw something truly amazing. Out in the distant reaches of nothingness, peering into a black hole, he saw not the dark. Rather, he thought he saw the light.

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

What Should Be the Correct Money Supply Growth Rate?

April 14, 2017

WHAT SHOULD BE THE CORRECT MONEY SUPPLY GROWTH RATE?

Most economists believe that a growing economy requires a growing money stock, on grounds that growth gives rise to a greater demand for money, which must be accommodated.

Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.

Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the right, or the optimum, growth rate of the money supply.

Some economists who are the followers of Milton Friedman – also known as monetarists – want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period of time it will usher in an era of economic stability.

The idea that money must grow in order to sustain economic growth gives the impression that money somehow sustains economic activity.

According to Rothbard,

Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing[1].

Money’s main job is simply to fulfill the role of the medium of exchange. Money doesn’t sustain or fund real economic activity. The means of sustenance, or funding, is provided by saved real goods and services. By fulfilling its role as a medium of exchange, money just facilitates the flow of goods and services between producers and consumers.

Historically, many different goods have been used as the medium of exchange. On this, Mises observed that, over time,

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

Why This Market Needs To Crash

March 25, 2017

bofotolux/Shutterstock

Why This Market Needs To Crash

And likely will

Like an old vinyl record with a well-worn groove, the needle skipping merrily back to the same track over and over again, we repeat: Today’s markets are dangerously overpriced.

Being market fundamentalists who don’t believe it’s possible to simply print prosperity out of thin air, we’ve been deeply skeptical of the financial markets ever since the central banks began their highly interventionist policies. Since 2009, they have unleashed over $12 Trillion in new money into the world, concentrating wealth into the hands of an elite few, while blowing asset price bubbles everywhere in the process (see our recent report The Mother Of All Financial Bubbles).

Our consistent view is that price bubbles always burst. Which is why we predict the world’s financial markets will implode spectacularly from today’s heights — destroying jobs, dreams, hopes, economies and political careers alike.

When this happens, it will frighten the central bankers enough (or merely embarrass them enough, being the egotists that they are) that they will respond with even more aggressive money printing — and that will then cause the entire money system to blow up. Ka-Poom! First inwards in a compressed ball of deflation, then exploding outwards in a final hyperinflationary fireball (see our recent report When This All Blows Up…).

It really cannot end any other way. Money is not wealth; it is merely a claim on wealth. Debt is a claim on future money. The only way to have faith in our current monetary policies is if one believes that we can always grow our debts at roughly twice the rate of GDP — forever. That is, compound the claims at twice the rate of income year after year from here on out.

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

There is no such thing as a negative interest rate

September 10, 2016

There is no such thing as a negative interest rate

We Austrian economists are used to having terms corrupted, misused and redefined by statists and others who love and advocate strong central control of money and power. The term “inflation” is a prime example. We Austrians refer to “inflation” as creating new fiat money–as in inflation of the money supply. This is in sharp contrast to what we commonly hear in the mainstream media and from all Keynesian influenced economists, who use the term to describe a general increase in prices. Now nearly everyone thinks of inflation in this sense, so much so that we Austrians must always be careful to say “inflation of the money supply” whenever we use the term “inflation”.

Those of us of a libertarian political persuasion, which includes many (but not all) Austrian economists, likewise bristle at how modern statists have hijacked and corrupted the term “liberal”. Liberal is a term that is derived from the word “liberty”. Ludwig von Mises even penned a book titled “Liberalism“. Naturally, it contains not one reference to what today’s so-called liberals advocate; i.e., erosion of property rights and statist intervention in almost all aspects of life.

However, now we Austrian economists are faced with a term that is new. It is NOT a term that has had a prior meaning and has been corrupted and re-defined.. It is a new, made up and wholly fabricated term– “Negative Interest Rate”.

Interest is founded on time preference

The rate of interest is founded on an innate trait of the human condition. All other things being equal, humans desire goods and services earlier rather than later. Austrian economists refer to this human trait as “time preference”. Those who desire things sooner rather than later are said to have a high time preference. Likewise, those who desire things later rather than sooner are said to have a low time preference.

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

5 Reasons Why Austrian Economics Is Better than the Mainstream

August 16, 2016

5 Reasons Why Austrian Economics Is Better than the Mainstream

Noah Smith has acknowledged the failings of mainstream macroeconomics, but he says that none of the “outside ideas” offer a better replacement. He failed to mention the Austrian school, but we can still show how the Austrian tradition parries his criticisms with ease.

1. Quantitative Models Totally Miss the Nature of Human Action

Smith dismisses all outside approaches that do not produce quantitative forecasts, even though the best, newest, and high-powered quantitative macroeconomic models have failed recently.

The quantitative approach, however, totally misses the nature of human action, the fundamental starting point for economics. All economics boils down to individuals making choices, the outcome of which is dependent on individuals’ preferences.

Unfortunately, you can’t even do basic math with people’s preferences for two reasons: preferences are subjective, and preferences are ordinal. You can’t measure or compare something you can’t observe, and you can’t do math with ordinal figures. Adding 2nd place to 3rd place doesn’t get you 5th place or 1st place. It gets you nowhere, which is exactly where mainstream macro is today.

2. The Micro/Macro Separation is Baseless

Smith dedicated his article to problems with macro theories, but Austrians understand that there is no meaningful distinction between micro- and macroeconomics. The only difference is one of scale and focus, but the fundamentals of economics are the same no matter if you are looking at individual consumers and firms, or the effects of credit expansion and inflation.

Mainstream economists find their way into smaller and smaller categories. Now, there is “health economics” and “development economics” and “energy economics.” There is also a major divide between those who do macro and everybody else, to the point that neither side really understands what the other is doing.

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

Economics Is Like A Religion – Just Faith In Theory

March 15, 2016

Economics Is Like A Religion – Just Faith In Theory

Everyone is missing the serious problem that ultra-low interest rates have created for retirees.

Pension funds are still assuming that future returns will be in the 7½–8% range. And as people get older and have no practical way to go back to work, pension funds that are forced to reduce payments in 10 or 15 years (and some even sooner) will destroy the lifestyles of many.

So what made Europe and Japan agree that negative rates-with all their known and unknown consequences—are a solution to our current economic malaise?

I have been trying to explain this by comparing economic theories to a religion.

Everyone understands that there is an element of faith in their own religious views, and I am going to suggest that a similar act of faith is required if one believes in academic economics.

Economics and religion are actually quite similar. They are belief systems that try to optimize outcomes. For the religious, that outcome is getting to heaven, and for economists, it is achieving robust economic growth-heaven on earth.

I fully recognize that I’m treading on delicate ground here, with the potential to offend pretty much everyone. My intention is to not to belittle either religion or economics, but to help you understand why central bankers take the actions they do.

The No. 1 Commandment of a Central Bank

Central bankers are always-and everywhere-opposed to inflation. It’s as if they are taken into a back room and given gene therapy. Actually, this visceral aversion is also imparted during academic training in the elite schools from which central bankers are chosen.

This is our heritage; it’s learning derived not only from the Great Depression but also from all of the other deflationary crashes in our history (not just in the US but globally).

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

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