Putting the Economics Back in Christmas

I applaud the online magazine Slate for its recurring series on ‘the dismal science,’ as they call it. Rather than boring discussions of the housing market or the NASDAQ index, economists such as Steven Landsburg and others tackle interesting issues. Don’t get me wrong, I just about always disagree with the columns. I was never puzzled as to why people walk up stairs but not escalators, I don’t think an increase in promiscuity will reduce the spread of HIV, and I’m still not convinced that a person should only give to one charity. Even so, the articles get me thinking, and that’s what’s important.
So the reader must understand that it is in this festive, jovial spirit that I proceed to devastate a recent Slate article, ‘The Sovereign versus the Idiot.’ It is a stocking stuffed full of fallacies and plenty a non sequitur for all the family to enjoy. When I read an article like this, I am honestly humbled by how lucky I was to stumble across the wisdom of the Austrian economists. But enough preamble! On to the article’s inauspicious opening:
Economists generally salute holiday gift-giving for its healthy effect on the macroeconomy. And indeed, gift spending boosts GNP to the tune of $100 billion a year in the United States.

This post was published at Mises Canada on DECEMBER 26, 2017.

We Give Up! Part 2: Consumers And Corporations Join The Debt Orgy

Late cycle behavior is everywhere these days. Governments have stopped worrying about deficits, and now the rest of us are apparently joining the orgy.
Corporations, for instance, are buying each other out – mostly with borrowed money – at a record pace:
December’s $361 Billion Deal Haul Is the Busiest in a Decade
(Bloomberg) – Just as most people are packing up for Christmas, dealmakers across the world are rushing to finish up a slew of transactions in industries ranging from consumer to telecom and health care to gambling. Companies have announced about $361 billion of mergers and acquisitions this month, making it the busiest December in at least 12 years, according to data compiled by Bloomberg. On Friday, the last work day before bankers and executives break for the holiday, GVC Holdings Plc of the U. K. agreed to buy bookmaker Ladbrokes Coral Group Plc for as much as 4 billion pounds ($5.4 billion), Deutsche Telekom AG said it will buy Liberty Global Plc’s Austrian unit and Roche Holding AG announced the $1.7 billion acquisition of U. S. biotech Ignyta Inc.

This post was published at DollarCollapse on DECEMBER 22, 2017.

What China Can Learn from America’s Great Depression

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.

This post was published at Ludwig von Mises Institute on 12/19/2017.

Austria’s Anti-Immigrant Freedom Party Enters Government; Wins Key Ministry Posts

Two months ago, in Europe’s latest shocking, anti-establishment outcome, Austria’s 31-year-old Sebastian Kurz became the world’s youngest leader after his conservative People’s Party won the Austrian National Council elections, making him Austria’s youngest Chancellor in history, while the establishment Social Democrat party suffered its “worst result since Hitler rule.”
***
And now, two months later, in a double whammy for Europe’s outraged liberal establishment, the anti-immigrant Freedom Party of Austria (FPO) – which finished third in October’s elections with 26% of the vote, less than a percent behind the Social Democrats, has joined a coalition government with Sebastian Kurz and his People’s Party (OVP). The agreement between the People’s Party and the Freedom Party, which is returning to government after more than a decade’s absence, was struck on Friday, the two parties’ leaders, Sebastian Kurz and Heinz-Christian Strache announced in a joint news conference.

This post was published at Zero Hedge on Dec 16, 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

This post was published at Ludwig von Mises Institute on 12/07/2017.

We’re Living in the Age of Capital Consumption

When capital is mentioned in the present-day political debate, the term is usually subject to a rather one-dimensional interpretation: Whether capital saved by citizens, the question of capital reserves held by pension funds, the start-up capital of young entrepreneurs or capital gains taxes on investments are discussed – in all these cases capital is equivalent to ‘money.’ Yet capital is distinct from money, it is a largely irreversible, definite structure, composed of heterogeneous elements which can be (loosely) described as goods, knowledge, context, human beings, talents and experience. Money is ‘only’ the simplifying aid that enables us to record the incredibly complex heterogeneous capital structure in a uniform manner. It serves as a basis for assessing the value of these diverse forms of capital.
Modern economics textbooks usually refer to capital with the letter ‘C’. This conceptual approach blurs the important fact that capital is not merely a single magnitude, an economic variable representing a magically self-replicating homogenous blob but a heterogeneous structure. Among the various economic schools of thought it is first and foremost the Austrian School of Economics, which stresses the heterogeneity of capital. Furthermore, Austrians have correctly recognized, that capital does not automatically grow or perpetuate itself. Capital must be actively created and maintained, through production, saving, and sensible investment.

This post was published at Ludwig von Mises Institute on Nov 18, 2017.

Is There Any Way Out of the ECB’s Trap?

The ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially riskly. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse.
Despite the massive injection of liquidity, he knows that he can not disguise political risks such as the secessionist coup in Catalonia. The Ibex reflects this, making it clear that the European Central Bank does not print prosperity, it only puts a floor to valuations.
The ECB wants a weak euro. But it is a game of juggling to pretend a weak euro and at the same time a strong economy. The European Union countries export mostly to themselves. Member countries sell more than two-thirds of their goods and services to other countries in the eurozone. Therefore, the more they export and their economies recover, the stronger the euro, and with it, the risk of losing competitiveness. The ECB has tried to break the euro strength with dovish messages, but it has not worked until political risk reappeared. With the German elections and the prospect of a weak coalition, the results of the Austrian elections and the situation in Spain, market operators have realized – at last – that the mirage of ‘this time is different ‘in the European Union was simply that, a mirage.

This post was published at Ludwig von Mises Institute on 11/09/2017.

The Quantity versus the Austrian Theory of Money

The Quantity Theory of Money (QTM) has been around since the time of Copernicus (the 1500s). In its original and most basic form it held that the general price level would change in direct proportion to the change in the supply of money, but to get around the problem that what was observed didn’t match this theory it was subsequently ‘enhanced’ by adding a fudge factor called ‘velocity’. From then on, rather than being solely a function of the money supply it was held that the general price level was determined by the money supply multiplied by the velocity of money in accordance with the famous Equation of Exchange (M*V = P*Q)**. However, adding a fudge factor that magically adjusts to be whatever it needs to be to make one side of a simplistic equation equal to the other side doesn’t help in understanding how the world actually works.
The great Austrian economists Carl Menger and Ludwig von Mises provided the first thorough theoretical refutation of the QTM, with Mises building on Menger’s foundation. The refutation is laid out in Mises’ Theory of Money and Credit, published in 1912.
According to the ‘Austrian school’, one of the most basic flaws in the QTM and in many other economic theories is the treatment of the economy as an amorphous blob that shifts one way or the other in response to stimuli provided by the government, the central bank, or a vague and unpredictable force called ‘animal spirits’. This is not a realistic starting point, because the real world comprises individuals who make decisions for a myriad of reasons and can only be understood by drilling down to what drives these individual actors.

This post was published at GoldSeek on Thursday, 9 November 2017.

Mainstream Economists Don’t Even Get Their Dimensions Right

There are many differences between Austrian economics and the neoclassical mainstream, but one of the most critical involves the difficult field of ‘capital & interest theory.’ (Here are three links of increasing difficulty to show the Austrian perspective on these issues: one, two, and three.) This area has been dubbed the ‘black hole of economics’ because it can devour researchers, but in the present post I can use a recent Paul Krugman blog entry to graphically illustrate the Austrian viewpoint. Specifically, Krugman’s diagram doesn’t even get the dimensions right!
Before diving in, I should acknowledge that this particular dispute has nothing to do with Keynesian policy recommendations. Rather, the problem in Krugman’s diagram is something that is taught in standard economics programs, whether Keynesian, Public Choice, or Chicago School.

This post was published at Ludwig von Mises Institute on November 3, 2017.

From Monetary Nationalism to Monetary Imperialism

[This is the 2013 F. A. Hayek Memorial Lecture presented at the Austrian Economics Research Conference, March 22, 2013.] This article has a twofold purpose. Its first goal is to pay tribute to Friedrich von Hayek as an outstanding monetary theorist. Its second objective is to further elaborate, on the ground of Hayek’s main findings, the deficiencies of the contemporary monetary order, namely by presenting the phenomenon of monetary imperialism. Against this background, the article also contains a re-interpretation of present-day monetary institutions and a critique of internationally sponsored economic stabilization policies.
The first section offers a presentation of Hayek’s early monetary thought, especially in the policy area of monetary nationalism. This presentation, even though a due tribute to Hayek, is delivered in full awareness of the fact that Hayek is not the Austrian economist par excellence. Indeed, a number of scholarly articles have demonstrated that, with respect to a few critical issues, Hayek’s economic and social thought is not fully reconcilable, not to say contradictory, with the praxeological method1 or libertarian ethics.2 The second section expands Hayek’s approach to monetary phenomena in order to show how monetary nationalism leads to monetary imperialism. In that respect, a special emphasis is put on the political nature of multiple paper monies and on the fractional reserve banking principle. Finally, within this analytical context, the third section appraises the recent increase in cooperation between governments, as observed since the policy response to the banking and public finance crises in Europe.
THE IMPERFECTIONS OF THE CONTEMPORARY MONETARY SYSTEM
In a series of five lectures delivered in 1937, and published under the title Monetary Nationalism and International Stability, Hayek offers an in-depth analysis of the main deficiencies of the present-day monetary system. In a nutshell, he identifies two factors that disrupt international economic relations: the fractional reserve commercial banks and the national central banks. The former are the primary source for the international transmission of the business cycles, while the attempts of the latter to correct the imbalances de facto amplify the resulting instability.

This post was published at Ludwig von Mises Institute on Oct 31, 2017.

Price Inflation Is Not the Worst Part of Easy Money Policy

There are many critics of the Fed’s recent money supply expansion, especially since 2008, whose chief criticism is that it will result in consumer price inflation. While proponents of the Austrian School agree that high consumer price inflation is one possible result of an expansionary monetary policy, we neither hold it as necessary nor as the worst consequence of money creation.
For the Austrian, who defines inflation as an expansion of the money supply, rising consumer prices only take place to the extent that this new money drives demand for more consumer goods. But as Mises pointed out, new money does not enter the economy neutrally; that is, it enters in specific ways and in accordance with specific mechanisms. This affects where the rising prices will show up first. And if it takes decades for the newly created money to reach consumers, then it will take decades for the consumer prices to rise.
Secondly, rising consumer prices are by no means the primary evil of monetary expansion. The primary evil of monetary expansion under our money and banking system is the harm done to the capital structure. The artificial suppression of interest rates that results from the expansion of the money supply has an eroding effect on the economy’s capital stock. When interest rates are suppressed below what they would have been without the monetary expansion, investments in unprofitable projects suddenly appear to be profitable. This is the basis for the Austrian Theory of the Business Cycle. Capital is allocated to projects that the economy cannot in actuality support and is therefore squandered.

This post was published at Ludwig von Mises Institute on Oct 31, 2017.

21/10/17: Prague Pages Brussels… Following Vienna

Just after Austria, the Czech Republic too has swung decisively in the direction of embracing populism as Populist billionaire’s Eurosceptic party wins big in Czech Republic.
As Radio Praha describes it: “The Czech Donald Trump or Silvio Berlusconi, maverick millionaire, political populist, mould breaker; these are all labels that have been tagged on to ANO leader Andrej Babi”.
Jakub Patocka for the Guardian: “Open racism has become a normal part of public discourse. Trust in democratic institutions and the European Union has been crumbling before our eyes. It is shocking how easily and quickly this has happened. Many Czechs are going to the polls with grim fears for the future. A broad coalition of democratic parties is not likely to have enough votes to control parliament. Apart from the far right, communists and a peculiar Czech version of the Pirate party are expected to do well.”

This post was published at True Economics on Sunday, October 22, 2017.

Low Interest Rates Subsidize Wealthy Households

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.
Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called ‘discretionary fiscal stimulus.’
While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

This post was published at Ludwig von Mises Institute on October 22, 2017.

Pat Buchanan Asks: “Is Liberalism A Dying Faith?”

Asked to name the defining attributes of the America we wish to become, many liberals would answer that we must realize our manifest destiny since 1776, by becoming more equal, more diverse and more democratic – and the model for mankind’s future.
Equality, diversity, democracy – this is the holy trinity of the post-Christian secular state at whose altars Liberal Man worships.
But the congregation worshiping these gods is shrinking.
And even Europe seems to be rejecting what America has on offer.
In a retreat from diversity, Catalonia just voted to separate from Spain. The Basque and Galician peoples of Spain are following the Catalan secession crisis with great interest.
The right-wing People’s Party and far-right Freedom Party just swept 60 percent of Austria’s vote, delivering the nation to 31-year-old Sebastian Kurz, whose anti-immigrant platform was plagiarized from the Freedom Party. Summarized it is: Austria for the Austrians!

This post was published at Zero Hedge on Oct 20, 2017.

Meet New Zealand’s New Prime Minister As Kiwi Tumbles

Labour leader, Jacinda Ardern, will be New Zealand’s next Prime Minister after winning the support of the New Zealand First Party to form a coalition government. Labour with NZ First and the Greens will have 63 of the 120 parliamentary seats versus the National Party with 56. At 37, Ardern joins a global wave (France, Austria) of young politicians being appointed to key leadership roles, and will be the country’s youngest Prime Minister and the third woman to hold the post. New Zealand’s Labour Party had not been in power for nine years, after three terms in power for the National Party.
Twenty-six days after the election, the leader of New Zealand First, Winston Peters, announced his party was backing Labour live in an eagerly -awaited television announcement.

This post was published at Zero Hedge on Oct 19, 2017.

Bill Blain: “This Time It Really Is Different! The Machines Have Taken Over And They Will Never Sell”

Submitted by Bill Blain of Mint Partners
Forget the Known Unknows, its the shocking surprises that are going to get us

‘Bubbles don’t grow out of thin air, they have a solid basis in reality. But, reality is distorted by misconception..’ And it’s a bad start to the week as my Bloomberg obliquely gave the finger by refusing to log me on.
Markets don’t care about my travails. They continue on their unstoppable upward trajectory. (Remember that word – trajectory, often parabolic. Look it up.) Lots of folks warning about complacency, but markets pay no heed. They prefer the global unlimited growth vibe..
Now, I know I sound like a broken record with my boring repeated warnings the market has gone overly frothy. I could counter with arguments about low volatility and short-tops painting a weakening technical picture. I could make arguments about how the short-term and long term business cycles all converge on weak indicators – I could even give you a lengthy discussion on how the Kondratieff ultra-long cycle says ‘run-away!’ I could refer to volume of money issues, or QE concerns. I could even point you to some astrological stuff…
Or I could point out what a worrying place the markets are. After reading through all the news this morning it strikes me we’re in thrall to a host of known unknowns.
If you want to worry, then pick your choice: it’s a delightful smorgasbord of things to go bump from the anniversary of the Hurricane and Crash of 87, the right-wing in Austria, noise about Tax reform in the US, Norte Korea, Kurds vs Iraq/Turkey, Catalunya vs Spain, UK vs Everyone, Trump vs the Universe, and everything in between. (In my own case, tomorrow is exactly a year since the unpleasantness with my primary pump – just doesn’t feel like it’s going to be a lucky week!).

This post was published at Zero Hedge on Oct 16, 2017.

In Historic Result, 31-Year-Old Wins Austrian Elections, Worst Result For Establishment Party Since Hitler Rule

In another stunning defeat for Europe’s establishment, as previewed earlier this morning Austria’s 31-year-old Sebastian Kurz is assured victory in the Austrian National Council elections, becoming Chancellor with his center-right People’s Party set to take roughly 30.2% of the vote – the best result in almost two decades – according to exit polls by Austrian broadcaster ORF, while just as shocking is that the anti-immigrant, nationalist Freedom Party appears set to top the Social Democrats in 2nd place with 26.8% of the vote: the two parties are expected to form a coalition government. If confirmed out by final results, that would be its strongest performance for the Freedom Party since the 26.9% it won in 1999 when the party was led by the charismatic Jorg Haider. Meanwhile, Chancellor Christian Kern’s Social Democrats are looking at another devastating – for Europe’s establishment – loss, sliding to 3rd spot with just 26.3% of the vote.
The full breakdown from the initial exit polls vs the last election results in 2013:
People’s Party (Foreign Minister Sebastian Kurz) 30.5% vs 24%
Freedom Party (Heinz-Christian Strache) 26.8% vs 20.5% Social Democrats (Chancellor Christian Kern) 26.2% vs 26.8% in 2013 Neos (Matthias Strolz) 5.3% vs 5% Greens (Ulrike Lunacek) 4.7% vs 12.4% Liste Pilz (Peter Pilz) 4.3% (didn’t run in 2013)

This post was published at Zero Hedge on Oct 15, 2017.

The Case for Privatizing Oceans and Rivers

Quarterly Journal of Austrian Economics 20, no. 1 (Spring 2017) [Water Capitalism: The Case for Privatizing Oceans, Rivers, Lakes, and Aquifers by Walter E. Block and Peter L. Nelson] This collaboration between Block (free-market economist) and Nelson (free-market engineer) offers a little bit of anarcho-free-market-everything with which to engage the interested reader. Block, as always, brings his combative spirit and formidable reasoning abilities. He is ready to take on all comers including, at one point in the book, his own co-author! Nelson’s interesting case-studies highlight particularly well what happens when property rights and market forces are suppressed – whether on land or on water.
The book is a fusion of two complementary tomes, a circumstance that can often make for choppy reading. At times, it is hard going. But the pilgrim who perseveres will in time be rewarded with many interesting insights, as well as a glimmer of what a consistent free-market water-rights regime would (or should) look like.
The first half of the book is a theoretical section of sorts, laying down the case for free-market economics in a property-rights context. This is followed by several interesting case studies that reinforce the theoretical discussion at the tract’s beginning. A marvelous list of provocative topics is covered (albeit briefly for most of the topics). These mostly pertain to water-rights issues, but often the range broadens and discussion strays into more generalized property issues (e.g. the shameful treatment of Cliven Bundy [re. p. 40]). Here also is where the authors re-state their free-market roots, adding a second crucial concept: the problem of ‘government failure’ which waxes in importance as the case studies are reached. These authors are not bamboozled by the sight of bureaucrats bringing gifts to the private sector, and they also understand about free lunches.

This post was published at Ludwig von Mises Institute on Oct 10, 2017.

Entrepreneurs Are the Key To Economic Development

Questions of economic development have long been long held a prominent position in economics. How did the most advanced economies get to where they are? What can less-advanced economies do to catch up with the leading pack?
After World War II, a whole sub-field of economics emerged to focus on these questions. Today, we call it development economics. Instead of simply explaining historical trends, this field’s main focus lies on discovering what would help less-developed countries achieve more economic growth and join the predominantly Western countries at the top of the economic ladder.
Compared to mainstream economics, development economics is quite a heterodox discipline in which many theoretical approaches are pursued. This can be both a curse and a blessing. On the one hand, it means that development economics is a field where ‘every economic fallacy ever refuted is still alive and well’ (to paraphrase economist GP Manish), but it also means that there is room for free-market approaches and different methodologies to make themselves heard.
As such, it is a field in which Austrian economists might fruitfully engage. To this author’s knowledge, however, such Austrian engagement has so far not been wide-spread. One reason for this might be that, ultimately, Austrian economics often boils down to ‘liberate markets’ and ‘protect private property rights.’ These are suggestions that are superficially similar to the neoliberal approach that has been popular since the 1980s and that have consequently been tarnished by neoliberalism’s mixed success in promoting economic development.

This post was published at Ludwig von Mises Institute on October 9, 2018.