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According to Mises,

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.^[1]

What is today called inflation is the general rise in prices, which is in fact only the outcome of inflation. Consequently, anything that contributes to price rises is now called inflationary and therefore must be guarded against. Thus, a fall in unemployment or a rise in economic activity are all seen as potential inflationary triggers and therefore must be restrained by central bank policies.

Some other triggers such as rises in commodity prices or workers’ wages also regarded as potential threats and therefore must be always under the watchful eye of the central bank policy makers.

If inflation is indeed just a general rise in prices, then why is it regarded as bad news? What kind of damage does it do?

Mainstream economists maintain that general price increases cause speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.

Despite all these assertions regarding the side effects of what they define as inflation, mainstream economics does not tell us how all these bad side effects are caused.

…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…

Are Economic Crises Inherent to Market Economies?

December 12, 2017

ARE ECONOMIC CRISES INHERENT TO MARKET ECONOMIES?

It is interesting to note that Marx, in his analysis of the capitalist economic system, basically concentrates on the study of the imbalances and maladjustments which occur in the market.

This accounts for the fact that Marxist theory is primarily a theory of market disequilibrium and that occasionally it even coincides remarkably with the dynamic analysis of market processes which was developed by economists of the Austrian School, and particularly by Mises and Hayek themselves. One of the more curious points on which a certain agreement exists relates precisely to the theory of the crises and recessions which systematically ravage the capitalist system. Thus it is interesting to observe that certain authors of the Marxist tradition, such as the Ukrainian Mijail Ivanovich Tugan-Baranovsky (1865–1919), reached the conclusion that economic crises originate from a tendency toward a lack of proportion among the different branches of production, a lack Tugan-Baranovsky believed inherent in the capitalist system.1 According to Baranovsky, crises occur because

the distribution of production ceases to be proportional: the machines, tools, tiles and wood used in construction are requested less than before, given that new companies are less numerous. However the producers of the means of production cannot withdraw their capital from their companies, and in addition, the importance of the capital involved in the form of buildings, machines, etc., obliges producers to continue producing (if not, the idle capital would not bear interest). Thus there is excessive production of the means of production.2

Clearly part of the underlying economic reasoning behind this analysis bears a strong resemblance to that behind the Austrian theory of the business cycle. In fact Hayek himself mentions Tugan-Baranovsky as one of the forerunners of the theory of the cycle he presents in Prices and Production.3

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

Which is Worse: A Busted Pipeline or a Politician with a Case of the Do-Somethings?

September 22, 2016

Which is Worse: A Busted Pipeline or a Politician with a Case of the Do-Somethings?

Economists have a grumbling and cynical stereotype. This might be because even the most basic economic principles are ignored by those who should know better and vehemently denied by those who don’t.

Case in point: a restricted supply of gasoline is expected across the Eastern United States because of a busted pipeline, and state governors enact price ceilings to keep the price of gasoline artificially low.

In Alabama, Governor Bentley forbade “unconscionable prices for the sale of any commodity” in his State of Emergency proclamation.

Governor Deal did the same in Georgia. The Georgia Consumer Protection Bureau even has a Price Gouging Form, for citizens to tattle on other citizens for providing a good that is in more limited supply than usual. The website says, “Businesses may not sell motor fuel products, including gasoline, at prices higher than the prices at which those same products were offered before the declaration of the State of Emergency.”

Even first-year economics students know that when the price of a good is set arbitrarily low by government decree, the quantity demanded is greater than the quantity supplied. In other words, a shortage emerges.

The Function of Market Prices

Market prices are the result of an agreement between buyers and sellers of a good. All of the information deemed relevant by those buying and selling is incorporated into their preferences for the good. Sellers want higher prices and buyers want lower prices, but both are constrained. Buyers must outbid other buyers if they want it enough and sellers must underbid other sellers to attract buyers.

If the total stock of some good increases, buyers are only willing to pay lower prices and sellers, too, are willing to accept lower prices. This is because of the law of diminishing marginal utility. Additional units of a good must necessarily go toward the satisfaction of less urgent ends.

…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…

The Fed Can’t Save Us

April 6, 2016

The Fed Can’t Save Us

In December, the Fed hiked its target for the federal funds rate, which is the interest rate banks charge each other for overnight loans of reserves. Since 2008 the Fed’s target for the Fed Funds Rate had been a range of 0 percent – 0.25 percent (or what is referred to as zero to 25 “basis points”). But last month they moved that target range up to 0.25 – 0.50 percent. Ending a seven-year period of effectively zero percent interest rates.

From our vantage point, we already see carnage in the financial markets, with the worst opening week in US history. This of course lines up neatly with standard Austrian business cycle theory, which says that the central bank can give an appearance of prosperity for a while with cheap credit, but that this only sets the economy up for a crash once rates begin rising.

However, there is something new in the present cycle. The Fed is trying to raise rates while simultaneously maintaining its bloated balance sheet. It is attempting to pull off a magic trick whereby it can keep all of the “benefits” of its earlier rounds of monetary expansion (i.e., “quantitative easing” or “QE”) while removing the artificial stimulus of ultra-low interest rates. As we’ll see, this attempt will not end well, for the Fed officials or for the rest of us. In the meantime, Ben Bernanke will look on with concern, writing the occasional blog post and perhaps giving a speech about poor Janet Yellen’s tough predicament.

Austrian Business Cycle Theory

One of the seminal contributions of Ludwig von Mises was what he called the circulation credit theory of the trade cycle. In our times, we simply call it Austrian business cycle theory, sometimes abbreviated as ABCT. The Misesian theory was subsequently elaborated by Friedrich Hayek, and it was partly for this work that Hayek won the Nobel Prize in 1974.

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

The Charter is a Reactionary Document

October 20, 2015

The Charter is a Reactionary Document

The Canadian Charter of Rights and Freedoms is sacrosanct in many circles, particularly among those who consider themselves “liberal.” Yet there is nothing “liberal’ in the classic, traditional sense of a code of laws claiming to be the supreme law of the land.

The history of liberalism denounces the idea that an individual’s rights come from a piece of paper created by the state. The whole point of liberalism is to be as anti-state as humanly possible. Thanks to the great work of Ludwig von Mises and Murray Rothbard, it’s now conceivable how obvious anarchy is.

The history of Britain, Canada and the United States are extraordinary because these countries have been based on customary traditions and a unifying thread of common-law. It is only when governments started codifying common-law into legislation that problems arose and thus prompted governments to act further – to remedy a problem they themselves created.

In Canada, the Charter of Rights and Freedoms was that remedy, but it was, and still is, the incorrect treatment.

Liberty and peaceful social order lay in the decentralized, heterogeneous law-making of precedent-setting common law (or any law based on voluntary human action).

That is, law that arises from actual conflicts will settle conflicts. Common-law arose from real conflicts and were non-political ways of resolving these conflicts.

Code law, on the other hand, is self-defeating.

Canadians assume that before the Charter, they had no rights or freedoms, but this simply isn’t true.

Canadians lived in a – relatively – free and prosperous society long before 1982. There were problems with the practice of parliamentary sovereignty, but prior to the state’s appropriation of basic rights and freedoms via the Charter, Canadians were by default free.

It was in the British liberty tradition that Prime Minister Wilfrid Laurier declared, “Canada is free and freedom is its nationality.”

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

No More ‘Free Trade’ Treaties: It’s Time For Genuine Free Trade

October 18, 2015

No More ‘Free Trade’ Treaties: It’s Time For Genuine Free Trade

This article, by Ferghane Azihari and Louis Rouanet, originated here: https://mises.org/library/no-more-free-trade-treaties-its-time-genuine-free-trade

It is erroneous to believe that free traders have been historically in favor of free trade agreements between governments. Paradoxically, the opposite is true. Curiously, many laissez-faire advocates fall into the government-made trap by supporting “free-trade” treaties. However, as Vilfredo Pareto stated in the article “Traités de commerce of the Nouveau Dictionnaire d’Economie Politique” (1901):

If we accept free trade, treatises of commerce have no reason to exist as a goal. There is no need to have them since what they are meant to fix does not exist anymore, each nation letting come and go freely any commodity at its borders. This was the doctrine of J.B. Say and of all the French economic school until Michel Chevalier. It is the exact model Léon Say recently adopted. It was also the doctrine of the English economic school until Cobden. Cobden, by taking the responsibility of the 1860 treaty between France and England, moved closer to the revival of the odious policy of the treaties of reciprocity, and came close to forgetting the doctrine of political economy for which he had been, in the first part of his life, the intransigent advocate.1

In 1859, the French liberal economist Michel Chevalier went to see Richard Cobden to propose a free trade treaty between France and England. For sure, this treaty, enacted in 1860, was a temporary success for free traders. What is less known however, is that at first, Cobden, in accordance with the free trade doctrine, refused to negotiate or sign any “free trade” treaty. His argument was that free trade should be unilateral, that it consists not in treaties but in complete freedom in international trade, regardless of where products come from.

– See more at: http://www.cobdencentre.org/2015/10/no-more-free-trade-treaties-its-time-for-genuine-free-trade/#sthash.6G4lReoA.dpuf

Greece illustrates 150 years of socialist failure in Europe

June 25, 2015

Greece illustrates 150 years of socialist failure in Europe

Greece cannot pay its debts…ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won’t be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.

The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supranational socialist organization. Oh, they don’t call what has evolved from this dream “socialism”, but it is socialism nonetheless.

Socialism will not work, whether in one country, a multi-state region such as Europe, or the entire world. Ludwig von Mises explained that socialism is not an alternative economic system. It is a program for consumption. It tells us nothing about economic production. Since each man’s production must be distributed to all of mankind, there is no economic incentive to produce anything, although there may be the incentive of coercion and threats of violence.

…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 Futility of Our Global Monetary Experiment

June 15, 2015

The Futility of Our Global Monetary Experiment

Jeff Deist: The Fed recently announced just this past week that it would not use specific dates for targeting higher Fed funds rate this year and you almost get the sense that poor Janet Yellen is at the end of this Greenspan-Bernanke experiment and there’s not much left for her to do. I mean, what’s our sense of Yellen and her position?

David Stockman: Yeah, I agree with that. I think in some ways they’re petrified as to where they ended up or they should be. After all, we’re in an experiment of monumental proportions.

Let’s just assess where we are. If they don’t raise the interest rate in June — and I think all the signals now are pretty clear they’re going to find another reason to delay — that will mean seventy-eight straight months of zero rates in the money market. As I always say, the money-market price, that is the Federal Funds Rate or Overnight Money or a short term treasury bill, is the most important price in all of capitalism because that determines the cost of carry, the cost of speculation and gambling.

When you conduct a monetary policy that says to the speculators, to the gamblers, “come and get it,” you are guaranteed free money to carry your positions, whether you’re buying German Bonds or you’re buying the S&P 500 Stock Index or the whole array of yielding or price gaining assets that are available in the financial market. This monetary policy also sends the message that you can leverage and carry those positions for free and roll it day after day without worry because the central bank has pegged your cost and production, and in a sense has pledged on its solemn honor that it will not change without many months of warning. And that’s what this whole thing is about — changing the language and so forth. I think you have created a massive distortion in the very heart of capitalism in the financial system.

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

The Government and the Currency

June 12, 2015

The Government and the Currency

[Human Action (1949)] Reprinted from Mises.org

Media of exchange and money are market phenomena. What makes a thing a medium of exchange or money is the conduct of parties to market transactions. An occasion for dealing with monetary problems appears to the authorities in the same way in which they concern themselves with all other objects exchanged, namely, when they are called upon to decide whether or not the failure of one of the parties to an act of exchange to comply with his contractual obligations justifies compulsion on the part of the government apparatus of violent oppression. If both parties discharge their mutual obligations instantly and synchronously, as a rule no conflicts arise which would induce one of the parties to apply to the judiciary. But if one or both parties’ obligations are temporally deferred, it may happen that the courts are called to decide how the terms of the contract are to be complied with. If payment of a sum of money is involved, this implies the task of determining what meaning is to be attached to the monetary terms used in the contract.

Thus it devolves upon the laws of the country and upon the courts to define what the parties to the contract had in mind when speaking of a sum of money and to establish how the obligation to pay such a sum is to be settled in accordance with the terms agreed upon. They have to determine what is and what is not legal tender. In attending to this task the laws and the courts do not create money. A thing becomes money only by virtue of the fact that those exchanging commodities and services commonly use it as a medium of exchange.

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

Gold Verses Fractional Reserves Part 2

June 4, 2015

Gold Verses Fractional Reserves Part 2

The Harmful Consequences

We have now to examine the harm that the system does whether or not the pressure to reduce the reserve requirements is continuously successful.

Let us begin with a situation in, say, Ruritania, which has a fractional-reserve gold standard and a central bank, but in which business activity has not been fully satisfactory. The central bank then either lowers the discount rate or creates more member-bank reserves by buying government securities or it does both. As a result, business is encouraged to increase its borrowing and to launch on new enterprises, and the banks are now able to extend the new credit demanded.

As a consequence of the increased supply of money and credit, prices in Ruritania rise, and so do employment and money incomes. As a further result, Ruritanians buy more goods from abroad. As another result, Ruritania becomes a better place to sell to and a poorer place to buy from. It therefore develops an adverse balance of trade or payments. If neighboring countries are also on a gold basis, and inflating less than Ruritania, the exchange rate for the rurita declines, and Ruritania is obliged to export more gold. This reduces its reserves and forces it to contract its currency and credit. More immediately, it obliges Ruritania to increase its interest rates to attract funds instead of losing them. But this rise in interest rates makes many projects unprofitable that previously looked profitable, shrinks the volume of credit, lowers demand and prices, and brings on a recession or a financial crisis.

If neighboring countries are also inflating, or expanding the volume of their money and credit at as fast a rate, a crisis in Ruritania may be postponed; but the crisis and the necessary readjustment are all the more violent when they finally occur.

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

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1. Quantitative Models Totally Miss the Nature of Human Action

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Austrian Business Cycle Theory

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