Archive for April 2012 – Page 2

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→