Archive for April 2012

Paul vs. Paul: the Video

Check out Ron Paul’s great comeback at 4:04.  Krugman accused Paul of wanting to go back a hundred years in monetary policy.  Paul pointed out that Krugman’s inflationism is going back over a thousand years to go the ruinous currency debasement of ancient times.  (In Human Action, Mises argued that such debasement led to the fall of the Roman Empire.)

Paul vs. Paul

Happening now.

Death Panels in Britain?

A majority of British doctors polled call for denying medical care to smokers and the obese.

GovernmentIn the United States, we don’t have a British health care system. Yet. But the majority of private health care spending here occurs through a health insurance cartel. In a free market, there would be no such thing as health insurance.  Since health outcomes are explained by individual choice, they are not random and are therefore not insurable.  Nonetheless, in a system in which mandated health insurance companies are ostensibly in competition with each other, we would expect to see some companies competing for the business of customers who make unhealthy lifestyle choices alongside other companies that choose to reject such customers.  In this latter case, incentives would then exist, via market forces, to encourage people to eschew unhealthy lifestyles–incentives that do not exist in the present, hyper-monopolized and corporatist health care system present in the United States today.

Along with price controls and inflation of the money supply, this is one of the key reasons why the health care costs in the U.S. are escalating.  And yet, the officially acceptable solutions to problems resulting from years of interventionism in health markets are in the direction of more intervention.  Thus we see a specific case of many in which intervention leads to unintended consequences leading to broader intervention, as explained by Ludwig von Mises in the 1920s in his classic Liberalism.  I would add that the interventionists fully realize there will be unintended consequences but they ignore them since, in the long run, they play in their favor.

Mises understood this too.  ”There is no other choice,” he wrote later.  ”[G]overnment either abstains from limited interference with the market forces, or it assumes total control over production and distribution. Either capitalism or socialism; there is no middle of the road.” The World War II-era regulations that established the modern health insurance industry, Medicare and Medicaid in the 1960s, BushCare in the last decade, and ObamaCare today, all prove this point.

Stopping Business in the Big Apple

Today’s New York Times is a treasure trove of stories of government standing in the way of commerce.  Anyone visiting the Big Apple knows hotel lodging costs an arm and a leg.  Some enterprising property owners in the city and outer boroughs have stepped in to fill consumer demand and make some money in the process.  And with the aid of internet search engines and websites devoted to helping travelers find cheap rooms, demand has been brisk.

Turns out this sort of private contract is illegal.  A new law made it unlawful to rent out apartments in residential buildings for under 30 days.

Elizabeth Harris reports,

Armed with a new state law, the city has spent the past year cracking down on the growing industry of short-term rentals; since the law took effect last May, nearly 1,900 notices of violation have been issued at hundreds of residential buildings.

“The issue of illegal hotels is one that’s been a mounting problem in the city over the last several years,” said John Feinblatt, chief policy adviser to the mayor, pointing to a tenfold increase in complaints about them since 2006, to about 1,000 last year.

Upon inspection, this sort of rogue hoteliary has been going on citywide, “many of them were hiding in plain sight.”

Evidently, overnight lodgers are considered a problem in the city that never sleeps.

Vinessa Milando has operated a Bed & Breakfast on East 58th Street for 14 years. She was visited by inspectors and subsequently, “received notices of violations stating that the building had an incorrect certificate of occupancy and inadequate fire safety measures for rooms to be rented on a short-term basis. She was fined nearly $10,000, and a judge ruled in the city’s favor.”

Meanwhile it’s a game of inches for Mohammad Sikder who is trying to secure a permit to operate a newsstand across from the Port Authority Bus Terminal on Eighth Avenue.  Mr. Sikder has been turned down eight times.  Twice for a spot in Times square, once for a spot in the East Village and five times on Eighth Avenue site.

Sikder’s site plan was turned down twice with the city claiming the plans were not accurate.  The city requires that a newsstand allow clearance of 9 feet 6 inches on the sidewalk.  After Sikder submitted two more requests, the city contended each time that clearance would only be 9 feet 4 inches per his plan.

Sikder’s architect then hired a licensed surveyor who found that the clearance, in his expert measuring opinion, was indeed the required 9 feet 6 and re-submitted the plans. This time, the city did actually give an inch, but turned down the request because the pathway was too narrow by a single inch.

Times reporter Cara Buckley, an admitted amateur measurer, found that the pathway was indeed 9 feet 6.

Mere mortals would give up at this point.  After all, of the 76 applications for newsstand permits received last year, only nine were approved by NYC bureaucrats.  And this is just the first step in the approval process.  As Buckley describes,

The application process for would-be vendors is dizzying. Applicants must notify nearby buildings and submit site plans and pay $269 to the Department of Consumer Affairs, which forwards the application to the local Community Board and the Transportation Department, which measures whether there is enough space and gauges congestion.

If the Transportation Department approves, the application goes to the Design Commission or to the Landmark Preservation Committee, either of which can turn the applicant down. If the application survives all of that, the vendor pays $30,000 — usually financed through loans — to Cemusa, the company hired by the city to replace all newsstands. However they do not own or rent the kiosks; they have a license to do business there for two years at a time.

But the cabby who supports a family of six that live in a one-bedroom apartment, is made of stronger stuff.  He has applied again.

Turning Rich Natural Resources Into Scarcity, Part 2

There is word of more capital destruction in South America.  It’s hard to keep up with the Chavzes, but down Argentina way, President Cristina Kirchner announced that her government is seizing a majority stake in oil company YPF SA, owned by Repsol YPF of Spain, the largest oil company in the world.  The New York Times reports from Rio De Janeiro,

The expropriation would reassert state control over an important pillar of Argentina’s economy, but it has already increased diplomatic tensions with Spain and the European Union. Mrs. Kirchner quickly ousted Sebastián Eskenazi as YPF’s chief executive, naming two top aides, Julio de Vido and Axel Kicillof, to run the company.

Argentina’s government founded the company in the 1920s and it was then privatized in the 1990s.  She says the taking of YPF is a “recovery of sovereignty and control.” She said the move would allow Argentina to raise production, after the country recently became an energy importer.

The people of Argentina are all about the seizing.  Because of price caps and other regulatory uncertainty, supply is not keeping up with demand.  The government has pressured YPF to increase production and threatened to revoke its oil field concessions, but the price caps make increased production uneconomic.

However, Kirchner’s deputy economy minister, Axel Kicillof, told the Senate, “It’s a common practice of the producer [or] exporter that he holds back production, the treasure, because they have a chance to obtain a higher price,”

Kicillof has a doctorate in economics from the University of Buenos Aires, where he won a faculty prize in 2006 for his thesis on John Maynard Keynes’s famous work, “The General Theory of Employment, Interest and Money.”

So it’s not surprising that in his testimony to the Senate, he included,  ”When there’s a crisis, the worst thing that can be done is to say the state is the problem. The state is the solution. When there is recession and economic crisis, the state becomes a key actor to revitalize demand and investment.”

There’s already too much government mucking things up in Argentina, but the 40-year-old minister, described as  ”Attractive, good dad, geek and brain behind the expropriation of YPF,” provides the thinking behind  Kirchner’s imposition of new restrictions on foreign-currency transactions and tightening of import controls. In her prior term, she nationalized private pension funds and the flagship airline.  “We’re giving YPF to the same kids who bankrupted Aerolineas,” quips Congressman Omar de Marchi.

YPF thinks it’s only fair that the government pay $10 billion for the majority stake, but Mr. Kicillof, according to the Wall Street Journal, “scoffed at that figure, saying compensation determines on what a federal tribunal decides after it evaluates YPF, including possible environmental damage. ‘Let’s see what we will find when we open the black box,’ he said.”

So what are the prospects for investment in Argentina?

“I worry less about Apache’s operations in Egypt than in Argentina,” said Fadel Gheit, a senior oil analyst at Oppenheimer & Company in New York.  “The oil industry in Argentina is just getting ready to take off, but this may be a way to kill it in its infancy.”

“You have to be clever to do business in Argentina,” Federico MacDougall, an economist at the University of Belgrano in Buenos Aires told the NYT. “It was hard to do business in Argentina before. Now it is even harder.”

Capital goes where it’s treated best.  When the capital leaves, the people are left to starve.

Want to Hear the Sound of a Fallacy Being Exploded?

Then tune in to the Peter Schiff Show this morning, with me as guest host. I’ll be joined by Mises Institute Senior Fellow Jeffrey Herbener. We’ll be unpacking this piece of wisdom:

Demand creates jobs. How do we increase demand? We provide assistance where needed to create economic activity where the private sector won’t. We INVEST it in our infrastructure instead of throwing it away in tax cuts. We provide assistance to those in need. Food stamps and Unemployment Compensation, which I am sure you oppose, are two of the best economic stimulants and are backed up by real data. Every dollar spent on food stamps generates about $1.51 in economic activity. Tax cuts are one of the worst returns, creating a net loss in return.

Listen live for free (no subscription necessary) at The show runs from 10am-12pm ET.

Austrian Insights on ‘Full’ Employment

A commentator on my recent daily article, “Not Enough Inflation,” asked,

“John (and I really hope you answer this question),

Why is no one dismissing the “concept” of full-employment as utter nonsense? Doesn’t that give Krugman and his ilk a route to deceive people while sounding economically profound? I see the use of full employment as a goal to justify Keynesian prescriptions all over the place and yet no Austrian seems to be dismissing it from the discussion space.


My response:

Employment in free economy, like growth, is the result of voluntary choices and associations. It, as argued by Rothbard on growth, is thus not an ethic. Hayek provides a key Austrian insight on the source of unemployment, it is caused by the “existence of discrepancies between the distribution of the demand among the different goods and services and the allocation of labor and other resources among the production of those outputs” (Hayek 1979, 25); a microeconomic problem requiring adjustments in relative prices. (The work also provides a strong critique of Keynesian explanations of unemployment.) Rothbard’s Great Depression and Vedder and Galloway document how it is interventions, impediments to the necessary relative price adjustments that prolong unemployment – turn garden variety recessions into prolonged crisis. Higgs’s regime uncertainty or even regime worsening is most relevant today.

Steve Horwitz has some great insights on jobs:

“More important, though, is that both Krugman and politicians from both parties are much too concerned about job creation when they should be concerned about value creation. Creating jobs is easy; it’s creating value that’s hard. We could create millions of jobs quite easily by destroying every piece of machinery on U.S. farms. The question is whether we are actually better off by creating those jobs—and the answer is a definite no. We want labor-saving, job-destroying technology because it creates value by enabling us to produce things at lower cost and thereby free up labor for more urgent uses.”

See Creating Jobs versus Creating Value (

Hayek, Friedrich A.  1979. Unemployment and Monetary Policy: Government as Generator of the “Business Cycle”. San Francisco, CA: Cato Institute. Available on request.

A Ringing Endorsement for the Mises Academy

Charles Burris writes:

Once again the great David Gordon has performed a heroic service by conducting his magnificent Mises Academy course, “The Betrayal of the American Right and the Rise of the Neoconservatives.” Tonight was the final lecture of this highly illuminating series of six presentations. I certainly learned much new insight concerning the fascinating history of American conservative thought of the past one hundred years from this intrepid guide and raconteur. Few persons have Dr. Gordon’s charming wit and encyclopedic knowledge regarding the “Old Right,” the Buckleyite National Review “New Right,” and the “Neoconservatives.” If you have not considered taking an online course with the Mises Academy, I highly recommend you do so.

Even though the live lectures are over for the American Right course, you can still sign up to access the recordings and other materials by clicking here.  And Dr. Gordon recently began his history of thought course on the classical economists, which you can sign up for here.

Paying Off One Handout With Another

A year ago the Treasury Department bragged about an analysis that claimed the government’s massive bank bailout in response to the 2008 financial crisis (TARP) would actually end up turning a $24 million profit.

At the time, Treasury Secretary Timothy Geithner said that while the government’s overriding objective was to “break the back of the financial crisis and save American jobs,” it didn’t hurt that the TARP investments in U.S. banks “delivered a significant profit for taxpayers.”

But TARP watchdogs disagree.   A report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) estimates TARP’s losses at $60 billion.  “Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost),” and the SIG makes the point that nothing has really changed, no lessons have been learned, and this poses the possibility “of rushing out another massive bailout of the financial industry, i.e., TARP 2.0.”

The focus of the Wall Street Journal’s story on the TARP report is that 351 small banks still owe a total of $15 billion in TARP funds and these banks’ prospects for raising the money to payoff the government is dim.   This is significant because the cost of TARP money increases from 5% to 9% after five years.

However, many of the small banks that did manage to pay back the TARP capital, did so with funds from the Small Business Lending Fund, a pool of $4 billion made available by the Small Business Jobs Act of 2010.  Of course this Department of Treasury program was created to stimulate small business lending.  But the pricing of funds, looks like just an opportunity for the banks to buy time with the hopes that the capital markets will eventually be friendlier.  In other words another bail out.  According to the Treasury website,

The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding).

Treasury received 935 applications for SBLF money and funded 332 institutions.  Of those 332 institutions, 137 banks used the SBLF funds to pay back the TARP money they owed.  There were a few relatively large institutions that used the SBLF exit strategy.  For instance, Western Alliance Bancorporation, a nearly $7 billion bank holding company traded on the NYSE, paid off $140 million in TARP plus a little more for warrants with complete funding from SBLF.

The SBLF program was closed on September 27 of last year and at that time 390 banks still owed TARP.  Of those 390, 178 had applied for SBLF but were turned down.  Many of these banks were turned down because they were delinquent on their TARP payments.

The report concluded that SBLF “culled a large number of the healthier community banks from TARP, leaving less-healthy banks in TARP that had less capital, had missed dividends, or, in many cases, were subject to enforcement actions by their regulators.”

Of the remaining 351 banks in TARP, a full 46% or 163 of them were delinquent on their payments to the Treasury.  Of the 163, the vast majority, 116, had missed five or more payments.

So the “healthy” banks were able to secure a new bail out from Uncle Sam, to pay off the old bail out money, while the unhealthy banks, many that can’t pay the 5% coupons, will be expected to pay 9%.

SIGTARP knows these banks can’t make it without more government help and has recommended that possibly Treasury should renegotiate the TARP terms or that a clear TARP exit path be developed (presumably like SBLF).

Only a Treasury Secretary could call this a successful, profitable operation.

Audio of the Mises Lecture That Inspired Ron Paul

In End the Fed, Ron Paul writes:

Early on, I had heard Ludwig von Mises lecture at the University of Houston.  This was probably in 1972, a year before his death.  At that time I was extremely busy with my medical practice but saw a very small newspaper notice that Mises would be lecturing at the university on a weekday.  I knew there was only one other physician in the town of Lake Jackson, Dr. Henry May, who would care about such an unusual event.  I called him to see if he cared to travel the fifty miles to hear Mises.  We arranged our office schedules and made the trip.

Mises, at the time, was elderly but sharp. His subject was socialism, and his lecture explained why socialism always fails due to the absence of a free market pricing structure for capital goods.  He was on his last lecture tour of the United States, and Houston may well have been his last stop.  (Mises died on October 10, 1973, at ninety-two years of age.)

Not to our surprise, the university did not give him a prestigious reception.  The lecture was held in a modest-sized classroom, but the place was overflowing.  Popularizing Austrian economics at the time was in its very early stages, but it was obvious even then that there was a starvation for truth in economics. The early 1970s were truly hectic, and since gold prices were soaring and the dollar was dropping more and more, people were searching for solutions.  Today, of course, the problems are so much worse and the need for answers even more urgent.

To say the least, my trip to Houston to hear Mises in person was an inspiration. I suspect that when the definitive history of the twentieth century is written, Mises will be considered on of the greatest economists, if not the greatest, of the century.

This very 1972 Houston lecture on socialism  has been rediscovered at the Ludwig von Mises Institute.  The recording was generously donated by Professor Jeffrey Calvert, who also attended.

This one may require headphones; the audio is not ideal.  But it is definitely worth the effort it may take to listen to what really is a historical gem: a recording of the last knight of liberalism, at the end of his “intellectual lion in winter” phase, inspiring the man who has inspired a movement for liberty.

Turning Rich Natural Resources Into Scarcity

In the modern world, a country’s natural resources have very little to do whether goods are on the nation’s shelves for people to buy.  Singapore isn’t rich in resources, neither is Hong Kong, but both have vibrant market economies and shoppers can find whatever their collective heart’s desire on the shelves of stores in these two cities.

On the other hand, there is Venezuela, a country rich in resources.  It is one the world’s top oil producers at the same time gas prices are soaring.  The rich soil and temperate climate allow for productive agriculture and the country is rich in gold and other minerals.

One could only imagine that high tides would be lifting all boats, but yet the cupboards are bare.  There are shortages of staples like milk, meat and toilet paper.  In the country’s largest city, Caracas, residents must arrange their calendars around the once-a-week deliveries made to government-subsidized stores.

This is not a matter of rich or poor, the shortages affect everyone.  William Neuman describes for The New York Times,

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

Money printing has created chronic price inflation in Venezuela and last year the office rate was 27.6 percent.  According to Hugo Chávez’s socialist government, these price increases were caused by runaway capitalism.  So in response, Chávez instituted price controls, which like night turns to day, created shortages.

But, of course, goods would appear on the black market at higher prices, so Chávez’s government blames speculators for causing the shortages.

As the Times points out, there is no reason that shoppers shouldn’t be able to buy staples in a city and surrounding area of over four million people.

Venezuela was long one of the most prosperous countries in the region, with sophisticated manufacturing, vibrant agriculture and strong businesses, making it hard for many residents to accept such widespread scarcities.

Mr. Chávez and his ministers say “companies cause shortages on purpose, holding products off the market to push up prices. This month, the government required price cuts on fruit juice, toothpaste, disposable diapers and more than a dozen other products.”

El Presidente must believe that somehow suppliers make money by not supplying.

“We are not asking them to lose money, just that they make money in a rational way, that they don’t rob the people,” Mr. Chávez said recently, presumably with a straight face.

Clearly Chávez’s prices are too low for companies to make money so they either curtail production or stop all together.  And, as the Times mentions, “some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.”

Chávez is up for election in the fall and he is threatening to nationalize companies that stop production.  And the Venezuelan media is also under fire with the government accusing them of frightening the public into hoarding. “Government advertisements urge consumers not to succumb to panic buying, using a proverbial admonition: Bread for today is hunger for tomorrow.”

Only three years ago, the country was a coffee exporter.  Now, Venezuelans can’t find it on the shelves.  The government price is too low, driving planters and roasters to stop production and not invest in new plantings or fertilizer.

It is incredible that in this day and age, a government could be so blind, stupid, and cruel toward its own people.  It’s one thing to teach this sort of nonsense at expensive universities, but another to put it in practice and ruin people’s lives.

Mises, Rothbard, and Hayek in the WSJ

In the Wall Street Journal editorial (“How the Fed Favors the 1%”) Doug French pointed out last week, the author, hedge fund CIO Mark Spitznagel, draws on Hume, Mises, Rothbard, and Hayek.  He doesn’t cite Richard Cantillon, although he might well have, as he is touching on “Cantillon effects” in the following passage:

David Hume, the 18th-century Scottish philosopher, pointed out that when money is inserted into the economy (from a government printing press or, as in Hume’s time, the importation of gold and silver), it is not distributed evenly but “confined to the coffers of a few persons, who immediately seek to employ it to advantage.”

In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke seems capable of) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.

As Mises protégé Murray Rothbard explained, monetary inflation is akin to counterfeiting, which necessitates that some benefit and others don’t. After all, if everyone counterfeited in proportion to their wealth, there would be no real economic benefit to anyone. Similarly, the expansion of credit is uneven in the economy, which results in wealth redistribution. To borrow a visual from another Mises student, Friedrich von Hayek, the Fed’s money creation does not flow evenly like water into a tank, but rather oozes like honey into a saucer, dolloping one area first and only then very slowly dribbling to the rest.

Classical Economics with David Gordon

Starting tomorrow: an online course with David Gordon exploring the ideas of the classical economists, using Rothbard’s magnificent history of economic thought.

Two lectures in Gent

Belgium is not only the host country to the central planners from the European Commission in Brussels. It is also the land of great charming historical commercial towns such as Bruges, Antwerp, and Gent. If you happen to be in the area: next Tuesday yours truly shall deliver two lectures for the Flemish liberal student association in Gent.  The first one will deal with the “Problems of a transition toward natural monies” and the second one present “The case against fiat money.”

Spitznagel tells it like it is in the WSJ

In a wonderful piece for the Wall Street Journal’s editorial page, hedge fund CIO Mark Spitznagel explains how the 1% receive the money first and benefit from the Federal Reserve’s policies.

The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.

Dictionary of Liberalism

In his magnificent Classical Liberalism and the Austrian School, Ralph Raico recently stressed that there never has been any such thing as “classical” liberalism. There was and is only liberalism, an intellectual movement centred around the notion that society is working by itself and does not need to be supported, or reigned in, by coercive government.

True, the word liberalism has also been adopted by various enemies of liberty and turned into the opposite of its traditional meaning. But this perversion of language is by and large limited to the Anglo-Saxon world. On the old Continent, despite recent efforts by social democrats and other statists to appropriate the labels of liberty and liberalism, the latter is still being used in its original meaning. And the liberal movement is thriving even in those countries where coercive government is omnipresent.

To wit, a 639-pages Dictionnaire du libéralisme has just been published in France by the prestigious Larousse publishers. Edited by Mathieu Laine, this compendium features 267 entries from “Action humaine” to “Voltaire” written by 63 authors from France and other countries. It is a landmark publication with a distinctly Austrian flavour.

Read More→

Deficient Demand or Structural Unemployment: Hayek, Keynes, and Phelps

Russ Roberts at Café Hayek highlights a 2011 paper by E. Phelps on Hayek-Keynes and the recent crisis and current slow recovery. Roberts quotes the end of Phelps’s paper which is strongly anti-Keynesian:

What now do we do? With some luck, the economy will “recover” through a return of investment activity to sustainable levels once some capital stocks, like houses, have been worked down. But it will not recover to a strong level of business activity unless something happens to boost innovation. The great question is how best to get innovators humming again through the breadth of the land. Hayek himself said little on innovation. But at least he had an applicable theory of how a healthy economy works.


The Keynesians, sad to say, show no understanding of how the economy works. They think they can lever employment up or
down by pushing buttons – as if the economy were hydraulic. They show no grasp of the concepts that would be necessary to restore us to prosperity and flourishing. In an old image that applies well to the posturing of today’s self-styled Keynesians, “the Emperor has no clothes.

Marcus Nunes at Historinhas argues Phelps gets it wrong – the current problem is deficient demand not structural.

Phelps: “The evidence: Inflation is running at about 2% again. The expected rate of inflation at 1.5% or so. Consequently, we do not have a “deficiency of demand” now!”

Nunes: “And then he comes peddling his 1994 book “Structural Slumps”:”

Phelps: “So what do we have? We have a structural slump! We are slowly coming out of a structural slump – thanks to structural forces, such as wealth decumulation and a build-up of untried ideas for innovation.

If the present slump is wholly or largely structural, Keynes’s theory of employment, since it’s monetary, does not apply to the slump”.

Nunes: “He [Phelps] gets it wrong. The Fed provided liquidity to banks, but did not increase the money supply in order to match the increased money demand. Therefore, the monetary-induced, not structural, slump.”

The current unemployment is structural in a Hayekian  sense – its root is significant misdirection of production.  Sustainable recovery will require liquidation of malinvestments  and a reallocation of resources into a pattern of production more closely in line with consumer preferences, including time preference, and resource availability  (see Cochran, John P. (2010), “Capital in Disequilibrium: Understanding the “Great Recession’ and Potential for Recovery,” Quarterly Journal of Austrian Economics, 13, no. 3, 42-63 and Hayek’s Critique of The General Theory: A New View of the Debate between Hayek and Keynes, by David Sanz Bas).

My conclusion relative to commentary by Phelps (“False Hopes for the Economy and False Fears,” Wall Street Journal, June 3, 2003), re the first recession of the century remain valid:

Without the credit created malinvestments, the U.S. economy, instead of returning to Phelps’s normalcy, would potentially be on a permanently higher growth path albeit not one as high as the one generated by the credit creation. The consequences of the malinvestments should thus be a legitimate concern, and if there are significant interferences to the necessary market adjustments; bankruptcies, liquidations, declines in wages and resource prices in markets where the resources are no longer needed, and relocation of capital goods and labor to areas consistent with the pattern of demand, these concerns should turn into legitimate fears.


But, not to end on too negative a note, we must agree with Professor Phelps, “We need to guard against European corporatism and old fashion cronyism. The real hope is that the enterprising spirit is so strong here that, even if the system is not tuned up for the best, there will continue to be enough upstart entrepreneurs and established ones that will hit upon ideas for new products and methods worth developing and trying to market.”


But whereas Phelps would “look forward to normal times, with their ups and downs,” with a greater understanding of ABCT and its greater acceptance by businessmen and policy makers, we could look forward to greater prosperity without the ups and downs associated with boom and bust.

Paradigm Shift

Did you know this is the semicentennial year not only for Rothbard’s Man, Economy, and State, but also for Thomas Kuhn’s Structure of Scientific Revolutions? David Kaiser offers some reflections at Nature.

At the heart of Kuhn’s account stood the tricky notion of the paradigm. British philosopher Margaret Masterman famously isolated 21 distinct ways in which Kuhn used the slippery term throughout his slim volume. Even Kuhn himself came to realize that he had saddled the word with too much baggage: in later essays, he separated his intended meanings into two clusters. One sense referred to a scientific community’s reigning theories and methods. The second meaning, which Kuhn argued was both more original and more important, referred to exemplars or model problems, the worked examples on which students and young scientists cut their teeth. As Kuhn appreciated from his own physics training, scientists learned by immersive apprenticeship; they had to hone what Hungarian chemist and philosopher of science Michael Polanyi had called “tacit knowledge” by working through large collections of exemplars rather than by memorizing explicit rules or theorems. More than most scholars of his era, Kuhn taught historians and philosophers to view science as practice rather than syllogism.

Kuhn did not, to my knowledge, say much about the social sciences, though in a later essay he described them in somewhat unflattering terms:

[T]here are many fields — I shall call them proto-sciences — in which practice does not generate testable conclusions but which nonetheless resemble ph9ilosophy and the arts rather than the established sciences in their developmental patters. I think, for example, of fields like chemistry and electricity before the mid-eighteenth century, of the study of heredity and phylogeny before the mid-nineteenth, or many of the social sciences today. In those fields, . . . though they satisfy [Popper's] demarcation criterion, incessant criticism and continual striving for a fresh start as primary forces, and need to be. No more than in philosophy and the arts, however, do they result in clear-cut progress.

Murray Rothbard took an explicitly Kuhnian approach to his history of economic thought, agreeing with Kuhn that there is no linear, upward progression and condemning what he called the “Whig theory” of intellectual history.

[Cross-posted at Organizations and Markets]

Rothbard in the Indian Supreme Court

In a Supreme Court of India case concerning that country’s tyrannical Right of Children to Free and Compulsory Education Act, the dissenting judge, S. H. Kapadia a judge cited Rothbard:

Mr. Murray N. Rothbard, an eminent educationist and Professor in Economics, in his Book “Education: Free and Compulsory” [1999, Ludwig von Mises Institute, Auburn, Alabama] cautioned that progressive education may destroy the independent thought in the child and a child has little chance to develop his systematic reasoning powers in the study of definite courses. The Book was written after evaluating the experiences of various countries, which have followed free and compulsory education for children for several years. Prohibition of holding back in a class may, according to the author, result that bright pupils are robbed of incentive or opportunity to study and the dull ones are encouraged to believe that success, in the form of grades, promotion etc., will come to them automatically. The author also questioned that since the State began to control education, its evident tendency has been more and more to act in such a manner so as to promote repression and hindrance of education, rather than the true development of the individual. Its tendency has been for compulsion, for enforced equality at the lowest level, for the watering down of the subject and even the abandonment of all formal teaching, for the inculcation of obedience to the State and to the “group,” rather than the development of self-independence, for the deprecation of intellectual subjects.

The opinion was delivered in New Delhi on April 12, 2012.  Rothbard’s influence continues to spread, and his name keeps popping up in the most interesting places!

Applying Capital-Based Macroeconomics: Interview with John P. Cochran

Austrian economist John Cochran was interviewed for “La Escuela Austriaca desde Adentro” (The Austrian School from Inside), Vol. III edited by Adrián Ravier, which is scheduled for publication later this year.  Here is that interview.

Dr. John P. Cochran is Emeritus Dean-School of Business and Emeritus Professor of Economics at Metropolitan State College of Denver. He served as Dean of the School of Business at Metro State College from January 2004 to June 2011. Prior to serving as dean, he was Chair and Professor of Economics at Metropolitan State College of Denver where is he taught economics beginning in 1981. He has been a visiting professor at the University of Colorado-Boulder and is a Senior Scholar of the Ludwig Von Mises Institute, the leading research and educational center of classical liberalism, libertarian political theory, and the Austrian school of economics. He received his PhD in economics from the University of Colorado-Boulder in 1985. He is the author with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research (Edwin Mellen Press 1999). He has published numerous scholarly articles on the refinement and development of the Mises/Hayek Austrian theory of the business cycle. In addition to his scholarly publications, Dr. Cochran has provided commentary on current economic conditions in the Daily Articles at and in the local media.

In recognition of his scholarly contributions, Dr. Cochran was awarded Metropolitan State College of Denver’s Golden Key National Honor Society Outstanding Researcher/Scholar Award for 2002 and in 2004 received Metro State’s Distinguished Service award. In 2010 he was recognized by the Colorado Council for Economic Education as a “Friend of Economic Education.” He was on the faculty at the first Young America Foundation seminar on economic education, The Reagan Ranch Program: Intellectual Giants, The Road to Freedom: A Friedrich Hayek Seminar, May 2003. In March 2003, Dr. Cochran delivered the Ludwig Von Mises Memorial Lecture at the Austrian Scholars Conference 9 at the Ludwig Von Mises Institute.


ADRIAN RAVIER: Thank you Professor Cochran for this opportunity to let us know a little more about yourself. Please, explain how you become interested in economics.


JOHN P. COCHRAN: I was first exposed to economics while an undergraduate engineering student at University of Arizona. Read More→