Archive for May 2012

Molinari Translated

Evenings on Saint Lazarus Street by Gustave de Molinari, who Rothbard called the first anarcho-capitalist, is being translated for the Online Library of Liberty.  You can find an online preliminary draft here.  (Thanks to Roderick Long.)

Hayek’s Law or Rothbard’s Wisdom : A Revisit

In Michael Pollaro’s otherwise excellent Mises Daily, “The Bernanke Bust” Michael writes, “To Austrians, all [emphasis original] economic “booms” founded on monetary largesse always [emphasis original] end in economic busts, roughly equal in size and intensity to the preceding booms[emphasis mine].” Such a phrasing often leads to a misrepresentation of Austrina Business Cycle Theory which is often used by critics to discredit it. Over 10 years ago in a Forbes article, “L is for Layoffs”, Peter Brimelow and Edwin S. Rubenstein made such a misrepresentation.  Brimelow and Rubenstein classified their statement as “Hayek’s Law”. These authors argued that Austrian business cycle theory implies that a long period of credit expansion will be followed by a long recession or period of stagnation.

In 2001 I attempted to clarify this aspect of Austrian Business Cycle Theory (ABCT), in a Mises Daily, “Hayek’s Law or Rothbard’s Wisdom”   I wrote then:

The authors’ [Brimelow and Rubenstein] source for Hayek’s Law is Mark Skousen, who is quoted as saying, “Hayek’s Law states that the economy takes a long time to recover after an unsustainable boom (1995-99). The excesses of the previous boom create an investment structure that cannot be easily dismantled and transferred to new uses.”

What exactly do Hayek and other Austrian business cycle theorists, particularly Murray Rothbard, have to say about the relationship between the boom and the length of the bust? Actually, correctly interpreted, nothing.

Hayek argues,

The chief conclusion I want to demonstrate is that the longer the inflation [the increase in the effective quantity of money] lasts, the larger will be the number of workers whose jobs depend on a continuation of the inflation, often even on a continuing acceleration of the rate of inflation—not because they would not have found employment without the inflation, but because they were drawn by the inflation into temporarily attractive jobs, which after a slowing down or cessation of the inflation will again disappear. (Hayek, Unemployment and Monetary Policy: Government as Generator of the “Business Cycle,” p. 13)

Rothbard comes to a similar conclusion when he states, “The longer the inflationary distortions continue, the more severe the recession-adjustment must become.” [Rothbard’s America’s Great Depression, p. xxvii] Notice that both of these are statements about the severity of the maladjustments, not statements about the length of the recession/depression [and subsequent recovery]. It is an inappropriate jump in logic to go from the conclusion that the greater the length of the period of artificial credit expansion the greater the degree of malinvestment and, thus, the greater the necessary reallocation of resources, to a prediction about the length of the adjustment period.

The restructuring of the economy requires a realignment of relative prices and wages. The crisis and the period of recession are the “necessary corrective process by which the market liquidates the unsound investments of the boom and redirects resources from capital goods to consumer goods industries,” says Rothbard  (p. 12).  How long this adjustment takes, however, is more a historical problem than a theoretical one.

As Rothbard (p. 14) explains, “Since factors must shift from the higher to the lower orders of production, there is inevitable ‘frictional’ unemployment in a depression, but it need not be greater than unemployment attending any other large shift in production” (emphasis mine). The adjustment can be quick and the unemployment temporary if markets are allowed to work during the necessary period of liquidation and restructuring.

What, then, causes or leads to a prolonged depression? Here again, Rothbard (p. 14) provides a clear answer: “Unemployment will progress beyond the “frictional” stage and become really severe and lasting only if wage rates are kept artificially high and are prevented from falling. If wages are kept above the free-market level that clears the demand for and supply of labor, laborers will remain permanently unemployed.”

In the current slow (worst recovery since the Great Depression?) what is needed for a speedier recovery and one which does not sow the seeds for the next bust? (For a more in depth discussion see Capital in Disequilibrium: Understanding the “Great Recession” and the Potential for Recovery). Recovery, like growth and development, requires forward-looking planning. Austrian capital theory implies that a significant portion of current economic activity is directed not to current, but to future consumption. Planning and calculation include decisions on reinvestment to maintain current levels of production into the future as well as new investment for expansion and new enterprises, all of which are future oriented. Recovery, like sustained growth, requires an environment that facilitates the planning and development of projects which create current jobs, most of which will be directed toward future consumption.

It is true that ABCT emphasizes impediments to adjustment caused by the non-homogeneous nature and varying specificity of many capital goods and some human capital. These impediments plus any capital consumption generated by the cycle are unique to each crisis.

Where some proponents (and critics) of ABCT go wrong is to use these capital structure impediments to recovery to imply (or to have been interpreted as implying by critics) that  longer credit expansion induced booms and the correspondingly greater degree of distortion on the market makes necessary a longer and more severe correction/recession/recovery period. While malinvestments caused by credit creation cause losses and impede reallocation, there is no necessary connection between the length of the boom, the degree of misal­locations, and the actual severity of the recession and the length of the recovery process. One also has to take into consideration whether markets are being allowed to work and if the “regime” is not only certain, but stable, predictable with a policy environment conducive to entrepreneurship and prudent risk taking. Policies that impede competition and impose excessive tax burdens—or that in any way simply add to costs, reduce expected returns, or increase the uncertainty of business activity—are seen as the most important factors in forestalling recovery and turning economic corrections into stagnation, stagflation or depression.” Historically, policies and actions that threaten property rights create “regime uncertainty.” Garden variety recessions become depressions (or sustained periods of stagnation or stagflation) only if markets are prevented from correcting by bad policy and not just regime or policy uncertainty, but more explicitly by threats of “regime worsening”; threats of higher taxes, burdensome regulations, enhanced labor market rigidities or other policies that threaten property rights and reduce expected rates of return on investment – the key to recovery and potential sustained growth.


Suggested Reading:

Marcus Nunes at Historinhas provides interesting data on recovery from 4 boom-bust periods in U. S. history which provide some support to the above argument in his commentary “Three panics and a nonevent”

Nunes, an advocate of nominal GDP targeting concludes, “I don´t know why Austrians decry the 1873 contraction a myth. From their perspective they should be searching for reasons why it didn´t happen despite all the malinvestments that, according to them, are a root cause of all the other ‘Panics’.

In 1873 and in 1893 there was no Central Bank. In 1929 and 2008 the Fed was there to minimize the effects of such ‘panics’. Apparently, Central Bank or not, it surely doesn´t help to let nominal spending crash! And Bernanke should note that in the 1870s and 1880s the economy performed robustly in spite of a drawn out fall in prices, an ingredient of his worst nightmares!”


Relative to the more recent crisis, John Taylor at Economics One provides some evidence that policy uncertainty has increased and is a primary influence on the slow pace of the current recovery.

From  More Evidence on What Is Holding the Economy Back

“Of course something is now interfering with the usual economic response, because our current recovery is certainly not springing back to normal. I have argued that economic policy is holding the economy back, and I think recent research by Ellen McGrattan and Ed Prescott (on increased regulations) and by Scott Baker, Nick Bloom, and Steve Davis (on policy uncertainty) supports this view. Their work is part of a forthcoming book (Government Policy and the Delayed Economic Recovery) edited by Lee Ohanian, Ian Wright and me.”

“The Competition of Crooks”: An Interview with Hans-Hermann Hoppe

“That the whole democratic house of cards has not yet completely collapsed speaks volumes about the still tremendous creative power of capitalism, even in the face of ever-increasing governmental strangulation. And this fact also allows us to conjecture about what economic ‘miracles’ would be possible if we had unimpeded capitalism liberated from such parasitism.”

Read the interview here.

Available: QJAE vol. 15, no. 1 (Salerno, Ravier, Topan, Bragues, McCaffrey, Kuehn)

Volume 15, no. 1 of the Quarterly Journal of Austrian Economics was made available online this week. Articles are:

Joseph T. Salerno, “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,”

Adrian Ravier and Peter Lewin, “The Subprime Crisis,”

Mihai Vladimir Topan, “A Note on Rothbardian Decision-Making Rents,”

George Bragues, “Neither Efficient Nor Animally Spirited, but Eventually Adjusting: The Stock Market According to L.A. Hahn,”

Matthew McCaffrey, “Five Erroneous Ways to Argue about Resource Economics,”

Daniel Kuehn, “A Critique of MacKenzie, not an Endorsement of Hoover: Reply to Vedder and Gallaway.”

The Quarterly Journal of Austrian Economics was nominally founded in 1998, but, in terms of its mission and guiding spirit, it is a continuation, in an expanded and improved form, of the first ten volumes of the semi-annual Review of Austrian Economics, whose founding editor was the late Murray N. Rothbard.

The mission now, as it was when it was adopted from Rothbard, is “to promote the development and extension of Austrian economics and to promote the analysis of contemporary issues in the mainstream of economics from an Austrian perspective.”

Submissions and Editorial Board

Lawyers Cash in at the ADA ATM

Banks have been scrambling to upgrade their ATM machines to comply with titles II and III of the Americans with Disabilities Act (ADA), requiring them to make all of their ATMs fully accessible to the visually impaired.  But many of the nation’s 405,000 ATMs are not in compliance and lawyers are gearing up the class action lawsuits.  American Banker reports that 17 banks in the Ohio, Western Pennsylvania area are snagged in such a suit,

leaving them open to potentially millions more in litigation costs. Bank defense attorneys say the Pennsylvania-Ohio legal cluster could replicate itself across the country, particularly as the ADA suits fall within the framework of successful class actions filed over wheelchair ramps and other physical design issues.

“When you take a look at the motivation for class actions, [class action shops] get attorney fees and settlement fees, and the banks pay for this,” says Mercedes Kelley Tunstall, of counsel, at Ballard Spahr.

The law firm of Carlson Lynch is representing Robert Jahoda who is the sole plaintiff in all of the suits, representing similarly “situated” people.

“I and my law firm have filed a number of lawsuits calculated to cause compliance with the requirements of this law,” Bruce Carlson, the lead attorney in the case, wrote in an email to American Banker.  “We expect that the lawsuits that we filed will achieve the objective of Congress in that they will cause compliance with a law that the industry has known about for an extended period of time.”

Yes of course, it’s all about compliance and making sure a visually impaired person can operate each and every ATM in the United States.  But compliance doesn’t come cheap.

After banks pay thousands to upgrade their machines or buy new ones for upwards of $50,000, it turns out they are not done complying with a judge’s order.  According to the American Banker,

The real consequence can be years of oversight meted out through consent decrees where the plaintiff’s law firm gets thousands of dollars in fees, including from third parties monitoring compliance, experts say.

“With ADA class actions, you will often see the settlement has ongoing compliance requirements with a third party coming in and checking that the bank remains remediated, and the plaintiff’s lawyer gets between $5,000 and $25,000 in annual fees for reviewing the results,” Tunstall says.

Trust but verify.

From Grexit to Gerexit

More monetary competition, this is the promising title of Markus Kerber’s new book, in which he makes the case for establishing currency competition to solve the current conflicts within the Eurozone. Kerber is a law professor at my alma mater and for this reason alone, of course, his book deserves attention. Moreover, he is the founder and president of Europolis, a think-tank based in Berlin and Paris that opposes the extension of the “pathological interventionism of the French state” over the entire European Union.

Read More→

Las Vegas: From Good Gamble to Expensive Drunk

The plane ride to Las Vegas for the Memorial Day weekend was like many I’ve been on.  There’s a certain energy to a Vegas flight unlike a flight to, say, Phoenix.  Passengers flying into Phoenix don’t feel the need to get blasted en route with Delta Airlines alcohol, timing their collective buzz just right so as to hit the ground partying once the plane has touched down.   The six girls occupying the row behind me just couldn’t imagine facing Vegas sober.

I did notice a game of blackjack being played a couple rows away, bringing back memories of flights to Vegas when the primary sin that Sin City offered was–gambling.  A decade ago, airline personnel would wish deplaning passengers “good luck.”  Now, the farewell wish is a generic “have a good time.”   The excited cabin chatter is not about sure-fire gambling systems anymore, but what nightclub is the hippest.

The business of post-meltdown Vegas is not offering a good gamble, as Benny Binion used to say, but providing the opportunity for an expensive drunk.  Back in the day, the Vegas business model called for giving most everything away, either for free or for cheap, because there is “a paddle for every butt.”  In other words, gaming revenue would take care of everything.

Not anymore, even the hotel pool is now a profit center.  While frugal depression babies who built Vegas by gambling away a bit of their precious savings thought the pool and the golf course were places to relax and wile away a few hours before hitting the tables or machines again,  the twenty-somethings that now storm Vegas are there for the party and the party starts in the afternoon by the pool, with a $20 or $30 cover charge to hear the DJ, see the sights, and get a little wet.  Don’t plan on swimming laps.  This is a live reality show.

David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, writes, “Pool season reflects LV’s ability to evolve.”  Some might see it as just the opposite.  Rather than playing $20 blackjack (or ‘21’ as it’s known in Las Vegas), the young Sin City visitor is shelling out hundreds for bottles of Grey Goose, buckets of ice, and some glasses.  For real mogul wannabes, a cabana can be rented for upwards of $10,000 a day, complete with a flat-screen TV and private wet bar.  Who knows what kind of afternoon hijinx can take place in such semi-privacy.

The new Vegas allows a person to blow lots of money before sundown and still get some fresh air.   The pool party craze is just a continuation of the expensive Las Vegas hotel nightclub business.  A couple members of our dinner party at Aria’s Julian Serrano  on Saturday night said they had tickets to get into Haze, a nightclub in the hotel.  They had paid $70 each for tickets that would only get them in the door.  The night before they had waited in line for two hours to get in, finally getting inside at two a.m. They were out until four but were ready to do it again.  They’d sleep when they returned to Orange County.

Another couple in our party was headed down the street to Surrender, located inside the Encore.  It was midnight and they were worried they’d be standing in line for an hour and a half to get in.
On the rare occasion I see midnight, standing in line is not something I have an interest in.  However, I should note that I’m on AARP’s mailing list.

Professor Schwartz points out that 23 percent of Vegas visitors claim not to gamble at all.  This might be right.  As Schwartz explains,

Once, the casino floor was the primary revenue center in the average casino resort. In 1984, gambling generated about 62 percent of all revenues for Nevada casinos. Today, that figure is 46 percent — and it’s less than 38 percent on the Strip.

So while Asian gamblers pack Macau and Singapore to–gamble–Las Vegas has morphed into a high-end spring break party. Six years of college isn’t enough.  Gamblers in Macau don’t drink alcohol while playing, while Vegas visitors can barely stop drinking long enough to read the cards and dots on the dice.

Instead of offering the opportunity to defy the overwhelming mathematical odds that games of chance present, Vegas is now a place to allow excess alcohol consumption provide the chance for life-changing mistakes to be made.  It’s the place to first hold a bachelor or bachelorette party, then a wedding, and eventually then cheat on a spouse.  After all, the Las Vegas Convention and Visitors Authority claims,  “what happens in Vegas, stays in Vegas.”

If it’s food that turns your crank, and you just can’t get enough to eat in Peoria, come to Vegas and eat to your heart’s content.  The “Buffett of Buffetts” allows you to belly up at seven different buffetts around town for less than $50 a day.

The visitor count to Vegas has returned to near all-time highs, but gaming revenue is not close to the boom years.  The average gambling spend in Clark County per visitor has fallen from a high of $277.27 in 2007 to $236.71 in 2010.  That’s a large percentage drop in a town that added thousands of hotel rooms–Palazzo, Encore, Cosmopolitan, CityCenter– during that same time period.

My Memorial Day weekend visit included an afternoon at the Palms Hotel attempting to predict the futures of certain thoroughbreds competing at Golden Gate and Hollywood Park. The Palms was once the hottest hotel in Las Vegas, popular with hip young visitors and value-seeking locals alike.  The Maloof family was thought rich beyond comprehension and George Maloof, particularly, was thought to have the golden touch.        .

Post crash, the family’s ownership in the hotel is down to two percent, after the Maloofs  restructured $400 million in debt giving ownership to investment firms TPG Capital and Leonard Green and Partners.  Those firms own 49 percent of the Palms, each, in exchange for assuming that $400 million debt (the family is still responsible for the reported $20 million debt at Palms Place condo towers).

TPG Partners owns a bit of the Boston Celtics, so the sports book cannot accept action on Celtics games.  However, while I was there, the race and sports book was not taking much action on anything despite it being a holiday weekend.  And while the Palms pool looked to be busy, there was no line to get in, and the casino was close to deserted.  Sadly, the Playboy Club is due to close in a few weeks, ending the partnership that produced so many photo-ops for Hugh Hefner and the Girls Next Door.

Ironically what’s kept Las Vegas afloat has been baccarat play.  Baccarat is favored by high-end gamblers–especially from Asia.   According to Professor Schwartz,  in 2003, as Las Vegas was emerging from the post 9/11 slowdown, baccarat revenue provided less than 4 percent of Nevada gaming win.  At the time, homeowners were drawing on their home equity lines to finance trips to Vegas.  However, last year, the baccarat percentage rose to its highest point ever, nearly 12 percent.

Schwartz writes,

In other words, more than $1 out of every $10 won by Nevada casinos was won at the baccarat tables in a handful of Strip casinos. With the thinning of the mass market (the state’s slot win crept up by only 1.48 percent in 2011), high-end play has become more important to the entire state, not just the few casinos that court it.

The mass market that used to feed Nevada’s gaming table and machines is still licking its economic wounds, while the slack has been picked up by baccarat players.  However, this can’t go on forever. The annual percentage gain in baccarat win has fallen from 27 percent in 2009, to 21 percent in 2010 and to 6 percent last year. “Baccarat has gotten Nevada through a rough patch, but it won’t keep growing at Macau rates,” writes Schwartz.

Wall Street keeps hoping for a Las Vegas rally, but the numbers are not promising.   UNLV’s Center for Gaming Research reports that for the Las Vegas Strip,

despite a strong fourth quarter 2011, [the LV Strip] has seen its growth decelerate since January. March’s 15% decline in gaming revenues didn’t entirely erase earlier gains—for the first quarter of 2012, the Strip is still well ahead of 1Q 2011—but it does raise the possibility that the recovery is not right around the corner.

Las Vegas is now a distant third behind Macau and Singapore in gaming revenue.  And while Singapore has only two casinos and is a fresh new market, Macau has a billion people that love to gamble living close by, Las Vegas is a like an aging cocktail waitress, protected by her union membership, but relegated to serving unruly drunks in her golden years for meager tips.  The present isn’t so great, and the future ain’t pretty.


Free Webinar this Friday: What Is Morality? The Ethics of Hazlitt with David Gordon

Sign up here.  We can only take 475 sign-ups, so please only reserve a slot if you really think you can attend the session.

The Myth of the Great Depression of 1873

In a comment at Coordination Problem, “Is This How the Myth of the Laissez Faire Herbert Hoover Was Invented?” Barkley Rosser challenges Austrians with the following, “As it is, I await somebody explaining the 1870s to us, still the second worst depression in US history, and one where there was pretty much complete wage and price flexibility as well as no Fed, although as Steve Horwitz points out, there was a lot of state regulation of banks.”

It might be useful to quote Rothbard in depth on the “myth of the ‘great depression’ of the 1870s.

Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.

And he continues:

It should be clear, then, that the “great depression” of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. …  Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era.

Rothbard. 2002. A History of Money and Banking in the United States: The Colonial Era to World War II. Pp. 154-55

Appears to be a very complete explanation.

At Last, a Memorable Commencement Speech

Even at Grove City College where commencement speeches are not filled with leftist banality, they often enough succumb to the banality of the occasion. But once in a while, a memorable one is delivered.

Walter Williams, who is a member of the college’s board of trustees, gave a positively Rothbardian talk last Saturday. He started out by telling the assembled that he would discuss “fundamental principles” necessary to “preserve the blessings of liberty.” “The first principle of a free society,” he said, “is that each person owns himself.” And “the direct implication of self-ownership is people must own those things they produce.” “The idea of self-ownership” he continued, “is what makes slavery, murder, rape, assault, extortion, theft, and the like immoral acts.” The market economy not only preserves these fundamental rights of property, but brings into being a prosperous middle class and permits the leisure and extended division of labor necessary for civilization. In the market, income is earned by serving others and can be used for genuine charity towards those in need.

Our social problems do not stem from the market, but from the state. “The great problems that confront our nation,’ he said, “have their roots in morality where we’ve asked government to commit immoral and unconstitutional acts.”

The charge he gave to our graduates was “to be moral yourself and to try to sell to our fellow man on the superiority of personal liberty and its main ingredient, limited government.”

If you have suffered through a commencement speech recently, console yourself with his speech.