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Some Confusions of Language in Economic Thought

August 7, 2018

SOME CONFUSIONS OF LANGUAGE IN ECONOMIC THOUGHT

Fifty years ago, in 1968, Austrian (and Austrian school) economist Friedrich A. Hayek published a monograph called The Confusion of Language in Political Thought [4]. Hayek argued that the words we use and the meanings we give to them greatly influence how we think about the political system and the wider social order in which we live. This is no less so, I would suggest, in the language and the meanings of words used in economics.

Hayek’s focus was on the misunderstanding created by the false notion that society is the product of design. He emphasized that many, if not most, of the institutions of the social order are not the result of human design, but are the cumulative results of multitudes of people interacting over many generations.

Social Order Without Political Design

This is a theme in social analysis that has been a part of Austrian economics since the founding of the Austrian school by Carl Menger. He explained that markets and money, language and much of the legal system, social customs and cultural traditions, and polite manners are all the evolved outcomes of a vast number of individuals, each pursing their own personal self-interest for the most part. Their interactions and associations with each other slowly form into behavioral patterns, informal rules, and interactive procedures by which and through which human beings come to arrange and adapt their conduct with one another in a wide variety of social settings.

It is not that human beings do not consciously guide their actions according to a plan. Indeed, all meaningful human action is pursuit of a chosen set of ends with selected means the use of which is believed most likely to bring about the desired ends.

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The Myth That Central Banks Assure Economic Stability

June 7, 2018

THE MYTH THAT CENTRAL BANKS ASSURE ECONOMIC STABILITY

The world has been plagued with periodic bouts of the economic rollercoaster of booms and busts, inflations and recessions, especially during the last one hundred years. The main culprits responsible for these destabilizing and disruptive episodes have been governments and their central banks. They have monopolized the control of their respective nation’s monetary and banking systems, and mismanaged them. There is really nowhere else to point other than in their direction.

Yet, to listen to some prominent and respected writers on these matters, government has been the stabilizer and free markets have been the disturber of economic order. A recent instance of this line of reasoning is a short article by Robert Skidelsky on “Why Reinvent the Monetary Wheel?” Dr. Skidelsky is the noted author of a three-volume biography of John Maynard Keynes and a leading voice on public policy issues in Great Britain.

Skidelsky: Central Banking Equals Stable Prices and Markets

He argues against those who wish to denationalize and privatize money and the monetary system. That is, he criticizes those who want to take control of money and monetary affairs out of the hands of the government, and, instead, put money and the monetary order back into the competitive, private market. He opposes those who wish to separate money from the State.

Skidelsky sees the proponents of Bitcoin and other “cryptocurrences” as “quacks and cranks.” He says that behind any privatization of the monetary system reflected in these potential forms of electronic money may be seen “the more sordid motives” of “Friedrich Hayek’s dream of a free market in money.”

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The Relevance of Hayek’s Triangle Today

June 1, 2018

THE RELEVANCE OF HAYEK’S TRIANGLE TODAY

Most of us are aware of the inflationary pressures in the major economies, that so far are proving somewhat latent in the non-financial sector. But some central banks are on the alert as well, notably the Federal Reserve Board, which has taken the lead in trying to normalise interest rates. Others, such as the European Central Bank, the Bank of Japan and the Bank of England are yet to be convinced that price inflation is a potential problem.

Virtually no one in the central banks, government treasury departments, or independent analysts see the real inflationary danger. There is a lone exception perhaps in Dr Zhang Weiying, the top economist at Beijing University and formally in charge of China’s economic policy, who quoted Hayek’s business cycle theory to point out the dangers of excessive deficits.[i] Whether he is listened to by his colleagues, we shall doubtless find out in due course. Otherwise, a sudden acceleration of price inflation will come as a complete surprise to our financially sophisticated markets.

This article explains why the danger lies in the structure of production, which in the West at least is seriously out of whack. The follies of post-crisis central bank monetary reflation are likely to drive us rapidly into the next credit crisis as a consequence. To understand why this is so requires us to revisit the 1930s writings of an Austrian-born economist, who was tasked by the London School of Economics with explaining to advanced students the disruption to the production process from changes in consumer demand.

Friedrich von Hayek was famously reported as the economic guru of both Margaret Thatcher and Ronald Reagan. This distinction owes its origin to his market-based approach to economics, which was in stark contrast with the statist approach that was predominant in political circles at that time, and still is today. It was simple shorthand for the media writing for a mass audience.

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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.

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