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.

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.

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. Are they are better off alone, however, they will stay seceded. In this competition it will then show how successful small states can be.

This post was published at Ludwig von Mises Institute on Andreas Marquart / Oct 4, 2017.

How We Talk About Economics and Why It Matters | Paul Rubin

The following video was published by misesmedia on Mar 14, 2017
The F. A. Hayek Memorial Lecture, sponsored by the Stephen Haag Estate. Paul H. Rubin is Samuel Candler Dobbs Professor of Economics at Emory University, Past President of the Southern Economic Association, and former Editor of ‘Managerial and Decision Economics’. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 11 March 2017. Includes introductory remarks by Joseph Salerno.

Asymmetric Information and Market Failure: A Market Process Perspective | Glenn Fox

The following video was published by misesmedia on Mar 13, 2017
The Ludwig von Mises Memorial Lecture, sponsored by Dr. John Brtland. Glenn Fox is an agricultural and natural resource economist. He has been a member of the Department of Food, Agricultural and Resource Economics at the University of Guelph since 1985. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 10 March 2017. Includes introductory remarks by Joseph T. Salerno.

Dr. Jeffrey Herbener: Demystifying the Fed

The following video was published by misesmedia on Oct 21, 2016
Even well-read fans of Austrian economics often have a hard time understanding and conceptualizing what the Fed really does. So we asked our good friend Dr. Jeffrey Herbener to join us and make sense of it all. We cover the basic blocking and tackling of central bank mechanics: how commercial bank reserves are created, the difference between the monetary base and the money supply, and how the Fed Funds rate impacts lending and the structure of production. We consider how Austrian business cycle theory describes the distortions created by artificially low interest rates, and how interest rates ought to operate as price signals. Finally, we discuss how early recipients of newly created money and credit benefit in ways that ordinary citizens don’t.

Beyond Politics | Edward Stringham

The following video was published by misesmedia on Oct 6, 2016
Hillary Clinton and Donald Trump both propose economic “plans,” but neither understands the gravity of our situation. Minimum wage increases, higher taxes on the rich, or new import tariffs won’t solve deep structural problems with the American economy: spending, debt, entitlements, and unchecked monetary expansion. Yet while the candidates posture, millions of Americans are now stuck in a new normal of decreasing wealth and decreasing opportunities.
What can be done to radically change the course of the US economy? What will it take to make DC stop spending and the Fed stop manipulating? Can the house of cards be rebuilt on a new foundation? And can Austrian economics provide real answers to our fiscal and monetary problems? Join us in Boston for the most engaging and provocative perspectives on the untold story of this election: The real state of the US economy.

Is Another Skyscraper Curse Coming? | Mark Thornton

The following video was published by misesmedia on Oct 5, 2016
Hillary Clinton and Donald Trump both propose economic “plans,” but neither understands the gravity of our situation. Minimum wage increases, higher taxes on the rich, or new import tariffs won’t solve deep structural problems with the American economy: spending, debt, entitlements, and unchecked monetary expansion. Yet while the candidates posture, millions of Americans are now stuck in a new normal of decreasing wealth and decreasing opportunities.
What can be done to radically change the course of the US economy? What will it take to make DC stop spending and the Fed stop manipulating? Can the house of cards be rebuilt on a new foundation? And can Austrian economics provide real answers to our fiscal and monetary problems? Join us in Boston for the most engaging and provocative perspectives on the untold story of this election: The real state of the US economy.

How We Lost Economics | Jeff Deist

The following video was published by misesmedia on Oct 5, 2016
Hillary Clinton and Donald Trump both propose economic “plans,” but neither understands the gravity of our situation. Minimum wage increases, higher taxes on the rich, or new import tariffs won’t solve deep structural problems with the American economy: spending, debt, entitlements, and unchecked monetary expansion. Yet while the candidates posture, millions of Americans are now stuck in a new normal of decreasing wealth and decreasing opportunities.
What can be done to radically change the course of the US economy? What will it take to make DC stop spending and the Fed stop manipulating? Can the house of cards be rebuilt on a new foundation? And can Austrian economics provide real answers to our fiscal and monetary problems? Join us in Boston for the most engaging and provocative perspectives on the untold story of this election: The real state of the US economy.

The Real Reason Brazil Can Still Be “the Country of the Future”

Writing this week for Bloomberg, Tyler Cowan made the case that Brazil is ‘still the country of the future.’ While I share Cowan’s optimism for the nation’s future, his focus on the country’s diversity, size, and vaguely federalized political structure overlooks the real story – that Austrian economics and libertarianism is winning the battle of ideas within the country.
As Reason recently highlighted in an excellent short documentary, Brazil is home to one of the fastest-growing and accomplished liberty movements in the world. Not only did organizations like the Mises Brasil, Students for Liberty Brazil and the Free Brasil Movement play a pivotal role in the suspension of president Dilma Rousseff but, as I love to point out, Ludwig von Mises is now the most searched economist in the country. More impressive still, as of last month, F. A. Hayek was searched more than John Maynard Keynes and Murray Rothbard was searched more than Milton Friedman. This is an incredible testament to the work of Mises Brasil, Instituto Rothbard and the other organizations within the country dedicated to spreading Austro-libertarian ideas.

This post was published at Ludwig von Mises Institute on Aug. 12, 2016.

Sascha Klocke and Louis Rouanet: Can Austrian Economics Save Europe?

The following video was published by misesmedia on Aug 5, 2016
Two of the Institute’s Fellows – a Frenchman and a German – join Jeff Deist for a freewheeling discussion of the political and economic situation in Europe. Can Austrian economics revive Europe’s liberal tradition, or will statist impulses thwart any hope for liberation from Brussels? And can the Mises Institute and its fellow travelers have an impact on academia on the continent? Sascha and Louis see hope for optimism, despite the bad news that seems to dominate European media.

Toga! Toga! Toga!

I’m watching the Trump phenomenon with some mix of horror and amusement, like I suspect most people are.
I will say up front that I am no fan of Trump. I sincerely wish Gary Johnson would become president, having been a Libertarian long before it was fashionable (and when the candidates were a lot less viable).
The weird thing about Trump is that the gold bug guys, by and large, are all-in for him, which is head-exploding. Trump, who never met a creditor he wouldn’t screw, who threatens to balloon the debt even further, to the point where it requires direct monetization, that is who the gold bugs want for president. Doesn’t sound like Austrian economics to me.
Anyway, as I’ve mentioned before in The 10th Man (and here in Forbes), Trump would be very bad for bonds. Government would get bigger, not smaller, and the increased supply would weigh on the bond market, driving interest rates higher.
But the problem is actually much worse than that. Both candidates for president have increasingly grandiose visions for the sorts of things government should do, and I don’t see any scenario in 2017 where the deficit doesn’t widen sharply.
And that’s not even taking into account the usual demographic math about how Social Security is bankrupt, etc.

This post was published at Mauldin Economics on JULY 21, 2016.

Our Disastrous Monetary System: A New Must-Read Book Explains

There is a long tradition in Austrian economics and libertarian thought of presenting ideas not only to academic peers and fellow intellectuals, but directly to the broader public. Hayek’s Road to Serfdom, and Rothbard’s What Has Government Done to Our Money?are prime examples. In the German speaking world it was Roland Baader, a student of Hayek’s at the University of Freiburg in the 1960s, who has from 1988 until his death in 2012, more than anyone else, popularized the ideas of the Austrian school of economics. Blind Robbery! How the Fed, Banks and Government Steal Our Money by Philipp Bagus and Andreas Marquart stands in that tradition. The German-language original has already been translated into Taiwanese, Korean, and Spanish, and it is now made accessible to a much wider audience in English.
The aim of the book is to shed light on a subject that far too many people spend too little time, if any at all, thinking about: the monetary system. Everybody knows about the importance of money, but what do we really know about the functioning of the monetary system? The authors invite the reader to think carefully and critically about central questions: What is money? How is it produced? And what effects does an excessive production of money have on the distribution of incomes and wealth, our ways of life, our culture, and the economic system as a whole?

This post was published at Ludwig von Mises Institute on July 20, 2016.

Thousands Flee as Venezuela Implodes

The new failure of radical socialism in Venezuela is exposed when one looks at the number of people who seek to leave the country. Many people have run desperately away from the regime imposed by Chvez and continued by Nicols Maduro.
One example of those who are fleeing their Venezuelan homes is a student I met in Spain named Willians. I first met Willians toward the end of 2011. He arrived late to the Austrian Economics Course we were attending at the Universidad Rey Juan Carlos, in Madrid. Having graduated from the Universidad de Carabobo in Venezuela, he was delayed in his arrival due to the amount of paperwork he had to do in order to get the necessary euros at the official exchange rate. Despite his efforts, the government – which heavily regulates currency exchanges – did not approve his request, and he had to cover all of his expenses at the black market foreign exchange rate.
He paid for that with his own savings and with the help of his sister.
In 2011, the official rate for the dollar was 4.3 bolvares, while it could be bought on the black market for around 9, more than twice the official price.

This post was published at Ludwig von Mises Institute on June 24, 2016.

Gold and Brexit

Going Up for the Wrong Reason Gold is soaring. It should – and a lot – but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost – one must minimize its use.
***
Moreover, insuring against Brexit might ironically be equivalent to insuring against a good event.
The market believes that Brexit will lead to wealth-destruction (based on its statist views, in which those running our institutions are omniscient, when they actually are quite naive, incompetent, and incapable of understanding the concept of complexity).
Austrian Economics knows (‘knows’ because Austrian Economics is the only real economics) that Brexit will actually aid wealth-creation, by reducing the impact of European bureaucracy on the UK.
Brexit will also enable more control over migration into the UK. While in an ideal world, I would want free movement of people, migration of people who refuse to assimilate will irrevocably harm Europe.
I recently spent a fair bit of time in Sweden, including visiting no-go areas of Malm. Media headlines don’t bother me, and I don’t see migrants as security risks. My problem is that they import exactly the same social values and culture of irrationality that they left behind.

This post was published at Acting-Man on June 20, 2016.

Spitznagel: Markets “just reflect whatever central planners want them to”

Mark Spitznagel, a hedge fund manager known for employing Austrian economics in his investment strategies, recently noted in an interview with The Financial Times that central bank policy have destroyed the value of markets: ‘Markets don’t have a purpose any more – they just reflect whatever central planners want them to.’
Given Spitznagel’s Austrian background, it’s likely the Spitznagel understands well how one of the market’s most essential services is found in the pricing mechanism. Without allowing free movement in prices, there’s no way of knowing what anything is actually worth. The distorted price signals lead to malinvestments.

This post was published at Ludwig von Mises Institute on May 17, 2016.