Archive for August 2012

Ron Paul: “I don’t like politics at all… What I’m talking about is an ideological revolution”

Ron Paul interviewed today on Bloomberg:

Reporter: “As you are reflecting back on your campaign, are you unhappy with your party?”

Ron Paul: “Well, it’s not my party.  I don’t like politics at all…  As far as being pleased I am super pleased with what’s working… I am super-energized and optimistic about what’s happening, because the ideas are changing.  What I’m talking about is an ideological revolution.”

That’s what the Real Ron Paul Revolution is all about.

CNBC’s Carney on the Chimera of Price Stability

CNBC’s John Carney schools Krugman and other critics of the gold standard on the Austrian rejection of the chimera of price stability (the Monetarist half of the Fed’s “dual mandate”), citing Rothbard, Salerno, and Herbener (emphasis added):

In a piece for the Atlantic, Matthew O’Brien attempts to demonstrate “Why the Gold Standard Is the World’s Worst Economic Idea, in 2 Charts.” O’Brien’s charts demonstrate that prices were not particularly stable from the years from 1919 to 1933, a period in which he argues we were on a gold standard. (…)

Paul Krugman and a host of others have picked up the idea.

“Matthew O’Brien makes one obvious point: anyone who believes that the gold standard era was marked by price stability, or for that matter any kind of stability, just hasn’t looked at the evidence,” Krugman writes.

What makes this so odd is that “price stability” is not a central claim of real-life advocates of the gold standard. The so-called Austrian school of economics, the most prominent economics school advocating the gold standard, is actually quite notable for its criticism of the very idea of “price stability.”

In his landmark 1963 study of the Great Depression, the late Murray Rothbard argued that the quest for price stability had been one of the reasons that economists of the 1920s failed to notice the monetary inflation that was occurring.

“Far less controversial is the fact that more and more economists came to consider a stable price level as the major goal of monetary policy. The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the Great Depression caught them completely unaware,” Rothbard wrote in “America’s Great Depression.”

Rothbard is the person most responsible for keeping the idea of the gold standard alive during its years of neglect and disrespect by mainstream economists. If he didn’t think the case for gold turned on price stability, it’s safe to say that you aren’t scoring points against the gold standard by pointing to O’Brien’s charts.

It’s not as if this is just ancient history. As recently as this past May, prominent gold standard advocate and Grove City College economist Jeffrey Herbener testified to the House Subcommittee on Domestic Monetary Policy and Technology that “There is no social benefit from keeping the price level stable.”

The other thing that is very odd here is O’Brien using the 1920s as evidence for what happens under a gold standard. Rothbard’s book on the depression very specifically argued that the 1920s was a time of massive monetary growth unbacked by gold. It was this nearly invisible monetary inflation, Rothbard argued, that eventually led to the boom-bust cycle that resulted in the Great Depression.

You can read Rothbard’s book at the Mises Institute’s website here.

Joseph T. Salerno, another prominent Austrian, explained the Austrian view of the 1920s in this 1999 article for The Freeman.

Indeed, we find that from the inception of the monetary inflation in mid-1921 to its termination at the end of 1928, “uncontrolled reserves” decreased by $1.430 billion while controlled reserves increased by $2.217 billion. Since member bank reserves totaled $1.604 billion at the beginning of this period, this means that controlled reserves shot up by 138 percent or 18.4 percent per year during this seven-and-one-half year period, while uncontrolled reserves fell by 89 percent or 11.9 percent per year. Thus Rothbard correctly concluded that the 1920s were an inflationary decade and that it was indeed the intention of the Federal Reserve System that it be so.

(…)

…if you are going to attempt an intellectual assault on the gold standard, you can’t just point to price instability in the 1920s. The Austrians have been here before you—and they understand the period much better. And, more importantly, the value of a gold standard does not hinge on price stability in the first place.

Two Days of Truth Telling

Join me along with a great lineup — including Peter Schiff, David Stockman, and Lew Rockwell — at the Mises Institute’s Mises Circle in Manhattan on September 14. Details here (and Facebook page here). I’ll also be speaking that night at the Fifth Annual Ron Paul Freedom Dinner (limit 100).

The next day, September 15, an event featuring several Mises Institute scholars from the Circle event (Lew, Joe Salerno, and Walter Block) will take place at Columbia University: “A Prelude to The Prince: Thoughts on Power and the State from an Austro-Libertarian Perspective,” 501 Northwest Corner Building, 2:00pm. And finally, also on the 15th, I myself will be speaking near Spartanburg, South Carolina.

Period of Production, Duration of Serviceableness, and Period of Provision

“The concepts of period of production [i.e., time-period AB] and duration of serviceableness [of the consumers' good, i.e., time-period BC] are present in all human action. There is also a third time-period that enters into action. Each person has a general time-horizon, stretching from the present into the future, for which he plans various types of action. Whereas period of production and duration of serviceableness refer to specific consumers’ goods and differ with each consumers’ good, the period of provision (the time-horizon) is the length of future time for which each actor plans to satisfy his wants. The period of provision, therefore, includes planned action for a considerable variety of consumers’ goods, each with its own period of production and duration. This period of provision differs from actor to actor in accordance with his choice. Some people live from day to day, taking no heed of later periods of time; others plan not only for the duration of their own lives, but for their children as well.”

–Murray N. Rothbard. Man, Economy, and State with Power and Market

Was Mises Bankrolled by the Financial Elite?

I know I am spending too much time on these crazy LaRouchian claims — see my post on the argument that Austrian economics benefits the plutocrats, and therefore has been promoted by them. You will hear it mentioned that the Rockefeller Foundation funded Ludwig von Mises, and that this proves Austrian economics is supported by the elites, even though (1) the elites went to a lot of trouble to establish the world’s central banks, which the Austrian School opposes, and (2) if the elites are that powerful, why is the Austrian School so little known after all their alleged efforts to promote it?

I asked Mises biographer Guido Hülsmann to comment on this. Here’s his reply:

The crucial evidence against this interpretation is twofold:

(a) The RF stopped funding Mises when he needed it most, and did not help him get a prestigious position in a US university, which they did for all true hacks. If he was truly in their pocket this was a very stupid thing to do.

(b) AFTER he was off RF money, Mises continued to profess and develop exactly the same views that he had already professed and developed BEFORE he got to meet any RF people. That’s not the behaviour of an intellectual prostitute. You would rather expect him to change his tune to the likings of his sponsors.

This leaves only one viable interpretation: The RF started funding Mises because he was already a major representative of Viennese intellectual life. Mises was part of the European intellectual establishment before he received financial support from US financial aristocracy. Like all new private research institutions, the RF first tried to hop into bed with the already existing scientific establishment to prop up its own reputation. Only in a second step did the RF (and similar organisations) try to steer the scientific agenda according to its own political and philosophical prejudices. When they proceeded from Step One to Step Two, there was no more place for Mises precisely because his views were unacceptable to RF.

Wenzel: “The Mises Institute: Making an Impact”

Robert Wenzel writes:

Although he has some libertarian tendencies, Steve Forbes has to be classified as establishmentarian versus libertarian, which makes his latest book all the more interesting.

In his new book, Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t, written with co-author Elizabeth Ames, not only are Ludwig von Mises and Friedrich Hayek quoted but the Mises Institute is mentioned in the acknowledgements. And, get this, Mises Institute affiliated scholars Robert Higgs, Bill Anderson and Thomas DiLorenzo are all quoted in the book, by referencing papers they wrote for MI.

Reply to Aziz on Methodology

John Aziz has posted “A Critique of the Methodology of Mises & Rothbard.”

He objects to Mises’ statement that:

Our statements and propositions are not derived from experience. They are not subject to verification or falsification on the ground of experience and facts.

by averring:

This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience.

Here Aziz conflates “derived from” with “result from”. Propositions certainly result from thinking; and thinking may be characterized as an experience.  But propositions are derived from that which purportedly validates them.

Nobody says, “X is true because I had the experience of thinking Y.”  Instead, they simply say “X is true, because of Y.”  Y, in this case, may be certain premises (as in the case of math and economics), or it may be experience (as in the case of the natural sciences), or a combination of both (as in the case of economic history).  But even when Y is itself experience, it is Y that X is derived from, not the “experience of thinking about the experience”.

For example, a student may experience reading a geometry textbook, and as a result of that experience, he may be able to state the Pythagorean Theorem.  That does not mean the Pythagorean Theorem was derived from experience.  It was derived through the experience of thinking, but it was not derived from the experience of thinking.  Rather it was derived from the premises from which it logically follows.

Aziz then objects to the Austrian rejection of data in economics:

If, as I often do, I produce a deductive hypothesis — for instance, that the end of Bretton Woods might produce soaring income inequality — it is essential that I refer to data to show whether or not my hypothesis is accurate. If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct.(…)

This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence.

Of course, while Austrians do reject the use of data in deriving or testing economic laws (that is, in economic theory), they fully embrace data as necessary in studying economic history.  So Aziz’s implied contention that Austrians would not use data to forecast the effect of ending Bretton Woods is entirely off-target.

Aziz then belatedly recognizes this crucial distinction when he says:

Praxeologists claim that praxeology does not make predictions about the future, and that any predictions made by praxeologists are not praxeological predictions, but instead are being made in a praxeologist’s capacity as an economic historian.

Even though this crucial distinction obliterates his case against Austrian methodology, Aziz claims it is “moot” because:

all predictions about the future are deductive. Unless predictions are being made using an alien framework (e.g. a neoclassical or Keynesian model) what else is the praxeologist using but the verbal and deductive methodology of praxeology?

This statement shows that Aziz has very little familiarity with Austrian methodology in the realm of history and forecasting. If he’s interested in learning about it, he might want to read Mises’ Theory and History, particularly the parts discussing “thymology” and “the specific understanding.”

Murray Rothbard on Recovering from Economic Depressions

“It should be clear that any governmental interference with the depression process can only prolong it, thus making things worse from almost everyone’s point of view. Since the depression process is the recovery process, any halting or slowing down of the process impedes the advent of recovery. The depression readjustments must work themselves out before recovery can be complete. The more these readjustments are delayed, the longer the depression will have to last, and the longer complete recovery is postponed.”

–Murray N. Rothbard, Man, Economy, and State with Power and Market

Schumpeter, Equilibrium, and Growth

The following passage, from Art Diamond’s EH.Net review of Joseph A. Schumpeter: A Theory of Social and Economic Evolution by Esben Sloth Andersen, caught my eye.

Since Schumpeter was the premier advocate of economic dynamism, I have long wondered if his praise for Walras was sincere or ironic.  Andersen painstakingly shows that Schumpeter believed the economy moved from Walrasian circular flow to disequilibrium and then eventually back to a new Walrasian circular flow.  So Schumpeter sincerely believed that the development of an equilibrium economics based on Walras was a necessary complement to the evolutionary economics that Schumpeter himself developed.

It reminded me of Murray Rothbard’s neglected 1987 article, “Breaking Out of the Walrasian Box: The Cases of Schumpeter and Hansen” (Review of Austrian Economics, vol. 1, pp. 97-108). Rothbard offers exactly this interpretation of Schumpeter:

As a Walrasian, Schumpeter believed that general equilibrium is an overriding reality; and yet, since change, entrepreneurship, profits, and losses clearly exist in the real world, Schumpeter set himself the problem of integrating a theoretical explanation of such change into the Walrasian system. It was a formidable problem indeed, since Schumpeter, unlike the Austrians, could not dismiss general equilibrium as a long-run tendency that is never reached in the real world. For Schumpeter, general equilibrium had to be the overriding reality: the realistic starting point as well as the end point of his attempt to explain economic change.

In Schumpeter’s version of general equilibrium (unlike Mises’s evenly rotating economy), interest rates and gross savings are zero. Without any funds to maintain (let alone accumulate) capital, what can bring about economic change? The innovating entrepreneur, financed by bank credit expansion, as deus ex machina. Notes Rothbard:

To admire Schumpeter, as many economists have done, for his alleged realistic insight into economic history in seeing technological innovation as the source of development and the business cycle, is to miss the point entirely. For this conclusion is not an empirical insight on Schumpeter’s part; it is logically the only way that he can escape from the Walrasian (or neo-Walrasian) box of his own making; it is the only way for any economic change to take place in his system.

The idea that only inflationary bank credit can finance Schumpeterian innovation, emphasized by Rothbard, is almost entirely ignored in the vast neo-Schumpeterian literature. As Guido Hülsmann points out in Mises: Last Knight of Liberalism (pp. 173-74), Böhm-Bawerk immediately recognized this odd general-equilibrium construction as a fatal flaw in Schumpeter’s theory of economic development, writing that “Schumpeter commits a fateful mistake, which despite all the qualifications that he makes is a true mercantilistic mistake of superficial reasoning: When it comes to determining the possible scope of productive credit, he accords the essential role to money and means of payment, rather than to the economy’s supplies of real goods.”

What Goes Around, Comes Around

This is rich.  Brazilizan central bank employees have gone on strike to press for a 23 percent wage increase to compensate for inflation that has taken place since June 2008.  HT to Mark Thornton.