• Tag Archives Friedrich Hayek
  • 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.


  • Hayek on Good and Bad Unemployment Policies

    In 1944 Professor Hayek emphasised that sustainable employment de pends on an appropriate distribution of labour among the different lines of production. This distribution must change as circumstances change. Sustain able employment thus depends on appropriate changes in relative real wage-rates. If established producers – both unions and capitalists – prevent such relative changes from becoming effective, there follows an unnecessary rise in unemployment. Sustainable employment now depends on successfully tackling these established labour and capital monopolies. – Sudha R. Shenoy
    One of the obstacles to a successful employment policy is, paradoxically enough, that it is so comparatively easy quickly to reduce unemployment, or even almost to extinguish it, for the time being. There is always ready at hand a way of rapidly bringing large numbers of people back to the kind of employment they are used to, at no greater immediate cost than the printing and spending of a few extra millions. In countries with a disturbed monetary history this has long been known, but it has not made the remedy much more popular. In England the recent discovery of this drug has produced a somewhat intoxicating effect; and the present tendency to place exclusive reliance on its use is not without danger.
    Though monetary expansion can afford quick relief, it can produce a lasting cure only to a limited extent. Few people will deny that monetary policy can successfully counteract the deflationary spiral into which every minor decline of activity tends to degenerate. This does not mean, however, that it is desirable that we should normally strain the instrument of monetary expansion to create the maximum amount of employment which it can produce in the short run. The trouble with such a policy is that it would be almost certain to aggravate the more fundamental or structural causes of unemployment and leave us in the end in a position worse than that from which we started.

    This post was published at Ludwig von Mises Institute on 11/16/2017.


  • More Rigorous Populism Might Have Produced a Better Fed Chair

    As I noted in my reaction to reports of Jerome Powell’s nomination, Trump’s endorsement was a significant defeat for the growing movement among Hill Republicans to force the Fed to adopt ‘rules-based monetary policy.’ Since I’ve already written on why I think such reform plans would largely fail to achieve their desired ends, I’m not particularly bothered by the defeat – but I do think there is a lesson to be gained here on libertarian strategy.
    As Jeff Deist noted at the Mises Institute’s 35th Anniversary, along with some genuine disagreements regarding economics and political theory, Murray Rothbard and F. A. Hayek held very different opinions on the best strategy going forward to promote liberty. While both agreed, following Mises’s insights, that winning ‘hearts and minds’ was absolutely essential to a free society – government would not be limited by pursuing and tricking the populist into something it wasn’t prepare to adopt – they disagreed on the best way of accomplishing this task.
    While Rothbard favored a libertarian-populist strategy aimed at educating and energizing laypeople, Hayek thought it was best to influence academics and intellectuals, what he termed ‘second handlers of ideas.’ A more classically liberal intelligentsia would influence policymakers and from that good – or at least better – public policy would follow.
    While it may be a step too far to suggest that this approach can never lead to any form of substantial policy victory in Washington – and certainly no intellectual movement should be limited to a single strategy – Trump’s nomination of Powell I think does highlight one of the major flaws with Hayek’s strategy.

    This post was published at Ludwig von Mises Institute on November 6, 2017.


  • Tocqueville on the Welfare State

    In 1961, Robert Schuettinger, then a graduate student under F. A. Hayek at the University of Chicago, wrote an article: “Tocqueville and the Bland Leviathan.”
    It was published in the second issue of a new publication, New Individualist Review. This was a student publication: a quarterly small magazine. It was the best student publication I had ever seen. I still think so. I was a subscriber from the beginning. It was published for seven years.
    The Foundation for Economic Education has reprinted the essay here. I offer extracts.
    ****************************************************************
    [The power of government] covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power… does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, until each nation is reduced to nothing better than a flock of timid and hard-working animals, of which the government is the shepherd.’ – Alexis De Tocqueville
    Alexis De Tocqueville was an aristocrat who was at the same time the most perceptive critic and the truest friend that democracy ever had; he loved liberty, as he himself said, with “a holy passion,” and his greatest fear was that in the new Age of the Common Man the ideal of equality would become the means by which freedom would be extinguished.
    His two books, Democracy in America and The Old Regime and the French Revolution, earned for Tocqueville a lasting reputation primarily because he did not think that the historian’s role should be confined to relating facts or that the sociologist should be merely a statistician; he was interested in something more than in what the “scientific” historians called wie es gewesen (what actually happened). What he wanted to do was to understand why institutions grew up and why events came about. Describing America he regarded as much less important than the task of analyzing democracy. . . .

    This post was published at Gary North on November 02, 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.


  • Chapter 52: Ethics vs. Efficiency

    Christian Economics: Teacher’s Edition
    ‘And if you faithfully obey the voice of the Lord your God, being careful to do all his commandments that I command you today, the Lord your God will set you high above all the nations of the earth. And all these blessings shall come upon you and overtake you, if you obey the voice of the Lord your God. Blessed shall you be in the city, and blessed shall you be in the field. Blessed shall be the fruit of your womb and the fruit of your ground and the fruit of your cattle, the increase of your herds and the young of your flock. Blessed shall be your basket and your kneading bowl. Blessed shall you be when you come in, and blessed shall you be when you go out (Deuteronomy 28:1 – 6). The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy – or of designing an efficient economic system. – F. A. Hayek, ‘The Use of Knowledge in Society’ (1945).
    AnalysisEthics vs. efficiency: this debate occurs in every social system, every ethical system, and every economic system. It is the debate over the twin meanings of the word ‘right.’ The word has two meanings: one ethical, the other technical. So does the equivalent word, ‘good.’ Here are the two meanings:
    Ethics: ‘Do the right thing.’
    Efficiency: ‘Do the thing right.’
    Because of the common grace of God – and only because of it – people want to believe that the ethical system they were taught as children, and which they now teach to their children, is both accurate and reliable. They were taught that doing the right thing leads to greater wealth in the long run. They believe the words of Benjamin Franklin: ‘Honesty is the best policy.’ Franklin was on his way to becoming the richest non-slave-holding man in the North American British colonies when he wrote that in the mid-eighteenth century. The phrase had been around for well over a century.

    This post was published at Gary North on August 04, 2017.


  • Mises-Influenced MP Becomes Brexit Minister

    Steve Baker, a Conservative Member of Parliament, was announced today as junior Brexit minister under fellow libertarian David Davis. Baker, who has referenced Austrian scholars such as Ludwig von Mises, Jess Huerta de Soto and F. A. Hayek in the House of Commons, has long been a Eurosceptic and seen as a ‘hardliner’ in future negotiations with the EU. Along with his opposition to the EU, Baker has been a vocal opponent of the Bank of England’s policy of quantitive easing, and the IMF.
    In his own words:
    I am afraid that the contemporary mainstream of economics is missing some vital information…
    As I explained, as Mises set out, as Hayek followed in his steps and as others have predicted, we risk a final and total catastrophe for our currency system.
    To conclude, we are in danger of simply kicking a can down. … We are looking at further credit expansion, further monetisation of debts and further socialisation of risk. Throughout the western world, we are in danger of appearing as King Canute, trying to use politics to hold back the realities of social co-operation, which we usually describe as economics. The IMF is an institutional legacy from a monetary system that failed 40 years ago, and the successor to which is even now failing as well.

    This post was published at Ludwig von Mises Institute on June 14, 2017.


  • Why bad economic theories remain popular

    Ludwig von Mises and Friedrich Hayek, the most prominent ‘Austrian’ economists of the time, anticipated the 1929 stock market crash and correctly predicted the dire consequences of government attempts to artificially stimulate economic growth in the aftermath of the crash. John Maynard Keynes, on the other hand, was totally blindsided by the stock market crash and the economic disaster of the early 1930s. And yet, Keynes’s theories gained enormous popularity during the 1930s whereas the work of Mises and Hayek was largely ignored. Why was it so?
    Keynes became popular because he told the politically powerful what they wanted to hear. In particular, he provided power-hungry politicians with intellectual support for the schemes they not only already had in mind, but in many cases were already putting into practice. Despite being riddled with errors, Keynes’ theories also appealed to many economists because the implementation of these theories would confer a lot more influence upon the economics fraternity. The fact is that in a free economy there wouldn’t be much for an economist to do other than teach economics. He/she would certainly never have the opportunity to be involved in the ‘management’ of the economy.
    The points outlined in the above paragraph, along with Keynes’ charisma and salesmanship, explain why ‘Keynesian’ economic theories became dominant, but it doesn’t explain how they managed to stay dominant in the face of an ever-growing mountain of evidence indicating that they result in long-term economic decline.

    This post was published at GoldSeek on 26 May 2017.


  • Bob Murphy: Where Monetarism Goes Wrong

    The following video was published by misesmedia on May 12, 2017
    The great Austrian economist Friedrich Hayek celebrated a birthday earlier this week, while the prominent monetarist (and Fed historian) Allan Meltzer passed away the same day. Joining us to discuss monetarism is our friend Bob Murphy, who lays out the central tenets of the Chicago school and its godfather Milton Friedman. At its heart, Bob explains, monetarism is a cousin of Keynesianism – one advocates fiscal stimulus, the other monetary stimulus. Both go astray when it comes to money, and both fail to see the trees in the macro forest. Bob explains why in this great discussion of the differences between the Austrian and Chicago schools.


  • Danielle DiMartino Booth: Inside the Fed

    The following video was published by misesmedia on Apr 13, 2017
    Danielle DiMartino Booth is a former Dallas Fed staffer and author of the new book ‘Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America’. She joins Jeff Deist to talk about her years watching Ivy League PhDs make gross and fundamental errors in an almost comically cloistered environment.
    Have Fed economists even read Mises and Hayek? Do they recognize malinvestment as a byproduct of interest-rate setting? Do they know anything about their own institutional history, or at least enough to recognize how mission creep has turned the Fed into a central planning Politburo? And how will Janet Yellen deal with the inherent tension between raising interest rates and keeping the cost of US debt service in check?


  • “The End Of Truth” – Hayek Saw It All Coming Over 70 Years Ago

    The Road To Serfdom (authored by F. A. Hayek, first publ;ished in 1944)
    Excerpts from Chapter 11 – The End of Truth
    Annotated via Crossroad.to/heaven,
    “The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends.”[p.171]
    Berit’s comment: Ponder that statement. It helps explain the significance of universal service-learning. Like socialist youth in Nazi (National Socialism) and Communist countries, all must embrace the new ideology. Those who don’t — the intolerable dissenters — must be silenced.

    This post was published at Zero Hedge on Mar 29, 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.


  • Five Reasons for Central Banks: Are They Any Good?

    In a time when Federal Reserve reforms are discussed more openly than ever before, it seems appropriate to also think about the more fundamental question of whether central banks are needed in the first place. In 1936, Vera C. Smith (later Lutz) published her doctoral dissertation The Rationale of Central Banking written under Friedrich A. von Hayek at the London School of Economics. Smith reviewed the economic controversies around central banking from the nineteenth to the early twentieth century in France, Belgium, Germany, England, Scotland, and the United States.
    Smith made very clear that central banks are not the result of natural developments in the banking sector, but come into existence through government favors.
    So what are the justifications for central banks? Smith identified five main arguments for central banks from an economic point of view. Although Smith has written with a gold standard as the underlying monetary system in mind, it is interesting to look at these arguments with the benefit of hindsight more than 80 years later. Has any one of the arguments actually made a strong or even conclusive case for central banking?

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


  • Regime Uncertainty

    In a blog post last Friday I provided evidence that the extent to which a US president is ‘pro-business’ has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first – and likely only – 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.
    It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that ‘regime uncertainty’ is on the rise.
    ‘Regime uncertainty’ is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.
    As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in ‘The Road to Serfdom’. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

    This post was published at GoldSeek on 6 February 2017.


  • The serfs have rebelled – Europe next?

    Hayek’s The Road to Serfdom described how personal freedoms are progressively eroded by the state in the name of the common good. His warning is more associated with totalitarianism and dictatorships, than modern democracies, but the statist attitudes he warned about still apply today and lead to the same loss of personal freedom and increase of state control. In the main, the serfs are patient and tolerant of their masters, but in a democracy, the establishment behind the state risks being challenged. And that has happened twice this year, first with Brexit and now with Trump in America.
    We can be certain that the establishment in Britain and America will reinvent itself. Theresa May is not out to change the world, but is adapting to the new realities. Donald Trump is still mostly an unknown quantity, but the initial impression is one of appalling economic ignorance, dressed up as the new Reaganomics. He proposes substantial tax cuts and state-directed infrastructure spending ‘to make America great again’. But unless tax cuts and infrastructure commitments are made in lock-step with reductions in government spending, which seems extremely unlikely, the outcome will be to stimulate latent price inflation to a surprising degree.

    This post was published at GoldMoney on NOVEMBER 17, 2016.


  • The impoverishment of the masses

    Feudal and mercantilist economic systems were characterised by the lower orders of ordinary people being enslaved by, or subjected to, the commands of an elite.
    Beyond basic subsistence, serfs and slaves were not enabled to consume other goods, nor were they given the means to do so. Communism was hawked as handing power to the serfs, or workers, united in and by the state. But again, it meant that workers remained serfs, employed and commanded by a state set up in their name. Freedom from the bourgeoisie became subjugation by the state. Only capitalism, founded on free markets and freedom of choice for all, held the promise of freeing the masses from a life of drudgery and servitude.
    This was what the industrial revolution in Britain was about, particularly after the Corn Laws were repealed, and also the basis for the opportunities offered in America for refugees from European feudalism and mercantilism. And as the benefits of this freedom became enjoyed by those that were freed, so the abolition of slavery followed. A minimalist enlightened government based on democracy guaranteed property ownership and ensured that individuals’ rights were enforceable. These were the simple conditions of free markets, the conditions where the lowest consumer is the master of the mightiest producer, who endeavours to serve him. These are the conditions that led to a dramatic improvement in living standards for everyone in only a few decades, an improvement that had proved impossible in all the history of feudalism, mercantilism, and communism. It was the unique achievement of Anglo-Saxon laissez-faire.
    But empires strike back. Just as communism enslaved the workers in their own name, so democratic states in the name of capitalism find ways to bind their own electors. Freedoms taken for granted by the British and Americans were never fully adopted by more socialistic states, and even the Anglo-Saxons have been slowly compromised to the point where their democratic systems are now breaking down.
    Central to the loss of freedom, the road to serfdom as Hayek put it, is the creation of myths. The myth that the state acts on behalf its people, when it always acts to protect itself. The myth that the state knows better what its electors want than the electors themselves. The myth that only the state has the impartiality to right all wrongs. The reality is the exact opposite. The state intervenes to prevent people from deciding the matters that directly concern them. The middle classes have been taxed in the name of redistribution to the poor, and the poor themselves in turn have been relieved of the value of their earnings and savings by monetary debasement, always in the interest of the common good.

    This post was published at GoldMoney on SEPTEMBER 08, 2016.


  • 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.


  • 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.


  • The Anti-Globalization Brexplosion: “If You Ain’t Got Nuttin’, You Got Nuttin’ To Lose”

    Populism, nationalism, and xenophobia all contributed to the victory of the ‘Leave’ campaign in the United Kingdom’s recent referendum on membership in the European Union. But these forces float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.
    Since the birth of modern capitalism, these two frameworks of human activity have generally been at odds. While the market tends to expand geographically as its participants pursue economic benefits, the state seeks to keep orderly everybody and everything within the territory it controls. A merchant may recognize market opportunities in a foreign country, but he will run into the state – most immediately, that country’s immigration authorities – if he pursues them.
    How to reconcile the tension between the market and the state is the central concern of political economy today, just as it was for Adam Smith in the eighteenth century, Friedrich List and Karl Marx in the nineteenth century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the twentieth century.
    Let’s consider two hypothetical extremes in the state-market relationship.

    This post was published at Zero Hedge By Yoon Young-Kwan, originally posted Project Syndicate, Jul 1, 2016.