Archive for September 2012

Mises’ 131st Birthday

Ludwig von Mises, the most important social philosopher in history, was born 131 years ago today. To learn about this heroic figure, check out Tom Woods’ excellent resource page on Mises.

Austrian and Neoclassical Concepts of Marginal Ulitity

A recent comment by Bryan Caplan provides a good opportunity to discuss differences between Austrian and neoclassical concepts of marginal utility. In response to Steve Horwitz, who claimed that the law of diminishing marginal utility and the downward-sloping demand curve can be known a prior, Bryan asks:

Mainstream micro textbooks often have counterintuitive examples with increasing marginal utility. Are you really saying that the premise of these problems is somehow logically impossible? Or are you using a heterodox conception of marginal utility?

As Chesterton said, heterodoxy is your doxy and orthodoxy is my doxy, but I think I know what he means. Indeed, the modern, neoclassical concept of marginal utility is quite different from the causal-realist version offered by Menger and developed by Menger, Böhm-Bawerk, Fetter, Rothbard, and others.

Both the Austrian and neoclassical approaches to demand begin with an ordinal preference ranking. But the understandings of marginal and total utility are completely different. For Menger, marginal utility applies only to discrete units of a homogenous stock of a good. The fourth apple is allocated to a lower-valued use than the third apple, and so on. The law of demand follows from the fact that additional units of a homogenous good are used to satisfy lower-ranked ends.Note that for the Austrians, the term “marginal” applies to the units, not the utilities. “Marginal utility” is the total utility of the marginal unit, not the marginal utility of a unit. There is no larger concept of “total utility,” of which marginal utility is a little slice. Note also that if an agent possesses a set of unique goods—one apple, a piece of candy, a dollar bill, an iPod, etc.—he can rank them ordinally, but cannot assign marginal utilities to specific goods, since there are no “supplies”—multiple, homogeneous units—of apples, candy, money, and iPods.

The neoclassical approach begins with consumers who rank not discrete units of goods, but n-tuples or “bundles” of all goods in existence. Bundle A represents one apple, one piece of candy, and one iPod. Bundle B represents two apples, one piece of candy, and one iPod. Bundle C includes one apple, two pieces of candy, and one iPod, and so on. For all possible bundles i and j (and the set of feasible bundles depends on assumptions about divisibility) the consumer is assumed to prefer i to j, to prefer j to i, or to prefer neither i nor j. Hence the concept of indifference: if Bundle D is neither preferred nor dis-preferred to Bundle E, then the consumer is indifferent between D and E (and, if we assume a continuous space of bundles, they lie on the same indifference curve).

In this model, prices are expressed as exchange ratios between elements of the bundles. Given an amount of “income,” which when combined with a given ratio of relative prices gives a set of bundles that the consumer can afford, we can identify which bundle or bundles yield the greatest benefit (i.e., no other bundle is both affordable and preferred to the optimal bundle). This notion of ranking bundles is necessary to decompose the effects of relative-price changes into the familiar substitution and income effects. The notion of a substitution effect assumes that relative-prices changes combined with Hicksian income transfers can be represented by a movement along an indifference curve.

Note that if the consumer is ranking bundles, not individual units of goods, and the bundles are heterogeneous, then Menger’s concept of marginal utility does not apply. The consumer attaches a total utility to each ranked good— i.e., to each bundle—but there are no marginal utilities of individual units of goods, because we have no ordinal rankings of individual goods, only bundles. Hicks of course abandoned the concept of marginal utility altogether in favor of the marginal rate of substitution (the rate at which the consumer would substitute i for good j or the slope of the indifference curve). But Mengerian analysis concerns preferences that can be demonstrated in action. Because indifference among ranked goods (bundles) cannot be demonstrated in action, there is no place for a marginal rate of substitution, and no such thing as a substitution effect that can be analyzed independently of an income effect.

In short, in causal-realist analysis we go from an ordinal preference ranking among homogenous goods (gallons of water, bushels of wheat, whatever) to the law of diminishing marginal utility to the individual’s downward-sloping demand curve to the downward-sloping market demand curve to the conclusion that an increase in the supply of a good on the market leads to a reduction in price and an increase in quantity demanded. The neoclassical approach starts with rankings of heterogeneous bundles of goods, leading to an indifference map in which marginal rates of substitution could be increasing, decreasing, constant, or undefined (as with L-shaped indifference curves) and a conditional law of demand in which a decrease in price may or may not lead to an increase in the quantity demanded, depending on the sign of the income effect and the relative magnitudes of the income and substitution effect.

For Mises, the law of diminishing marginal utility is not only knowable a priori but “apodictically certain,” not conjectural, historically contingent, or subject to validation in a clever (freaky?) laboratory experiment.

Mises Store Sale for LvM’s 131st Birthday

Can’t We (Economists) All Just Get Along?

You may find out the answer at a roundtable discussion that I was invited to participate in on ”Why Economists Disagree.” The event takes place at the Helix Center for Interdisciplinary Investigation of the New York Psychoanalytic Society & Institute on Saturday October 13. 2:30-4:30 at 247 E 82nd St., New York, NY 10028.  The  participants are widely arrayed across the political and methodological spectra and include eminent economists Robert Frank of Cornell, Graciela Chichilniskey of Columbia, and Jeffrey Miron of Harvard.  A special thanks goes to Dr. Robert Penzer, M.D., Associate Director of the Helix Center, for arranging this exciting event.

An International Bank? July 19, 1944

“The drive for a $10,000,000,000 International Bank for Reconstruction and Development illustrates once more the fetish of machinery that possesses the minds of the governmental delegates at Bretton Woods. Like the proposed $8,800,000,000 International Monetary Fund, it rests on the assumption that nothing will be done right unless a grandiose formal intergovernmental institution is set up to do it. It assumes that nothing will be run well unless Governments run it. One institution is to be piled upon another, even though their functions duplicate each other. Thus the proposed Fund is clearly a lending institution, by whatever name it may be called; its purpose is to bolster weak currencies by loans of strong currencies.”

–Henry Hazlitt, From Bretton Woods to World Inflation: A Study of Causes and Consequences

Garrison on Keynes, Hayek, and Wicksell

Roger Garrison reviews Tyler Beck Goodspeed’s Rethinking the Keynesian Revolution: Keynes, Hayek, and the Wicksell Connection (Oxford, 2012) for EH.Net. Writes Roger:

The most recent episodes of unsustainable booms (centered on digital technology in the 1990s and housing in the 2000s) have rekindled interest in the clash between Keynes and Hayek. Which one had it straight about business cycles? In Goodspeed’s view, “the Wicksell connection” – a phrase drawn from the title of a 1981 article by Axel Leijonhufvud – turns the Keynes-Hayek dissonance (as perceived during the 1930s by the principals – and by everyone else) into consonance. Owing to the Wicksell connection, there was, in the author’s view, “a fundamental convergence of Keynes’s and Hayek’s respective theories of money, capital, and the business cycle during the course of the 1930s” (emphasis in the original, p. 3). This claim stands in stark contrast to the more common understanding that by the end of that decade, Hayek’s views were buried under the Keynesian Avalanche (McCormick, 1992).

Read the whole thing here. (Bonus: My review of McCormick’s Hayek and the Keynesian Avalanche).

Would you rather be marooned on a desert island with an Austrian or a Keynesian?

(Thanks to Nielsio.)

And check out the rest of Tim Kelly’s awesome (and very libertarian) cartoons.

George Selgin to Paul Krugman: “I Am a Former Austrian and I Do Believe in Fractional Reserve Banking — Honest”

Well, not exactly his words, but this was the gist of George’s bizarre and irrelevant comment on Krugman’s column asking Austrians what their position is on money market mutual funds. In his haste to establish his mainstream bona fides to Krugman, however, George was blind to the fact that Krugman has been forced to recognize and address Austrian arguments precisely by those who George denigrates in his comment as “the anti-fractional reserve crowd among self-styled Austrians, taking its lead from Murray Rothbard.” But it was due to the prodigious efforts of the Rothbardians including and especially Ron Paul that we have begun to see a radical change of opinion among the public, the establishment media, finance professionals, and even some academic economists concerning the alleged beneficence of the Fed and the effectiveness of conventional macroeconomic policies. It was this challenge that worries Krugman and prompted his insipid column. He could care less about George’s support for fractional-reserve banking and would not bat an eye even if he knew that George supported QE1 and (maybe) QE2 and advocates an aggregative nominal income target for Fed monetary policy, albeit at a lower level than most contemporary macroeconomists are comfortable with.

One more point: Both Rothbard and Krugman would have had a good belly laugh together over George’s peculiar notion that, in the absence of a central bank and government deposit insurance, a fractional-reserve banking system would be stable and flourish on a free market.

The Resentment of the Intellectuals

“It is different with people whom special conditions of their occupation or their family affiliation bring into personal contact with the winners of the prizes which–as they believe–by rights should have been given to themselves. With them the feelings of frustrated ambition become especially poignant because they engender hatred of concrete living beings. They loathe capitalism because it has assigned to this other man the position they themselves would like to have. Such is the case with those people who are commonly called the intellectuals. Take for instance the physicians. Daily routine and experience make every doctor cognizant of the fact that there exists a hierarchy in which all medical men are graded according to their merits and achievements. It is the same with many lawyers and teachers, artists and actors, writers and journalists, architects and scientific research workers, engineers and chemists. They, too, feel frustrated because they are vexed by the ascendancy of their more successful colleagues.”

–Ludwig von Mises, The Anti-Capitalistic Mentality

A Question to Krugman — from an Austrian “Renegade” Professor

Paul Krugman’s jejune column querying Austrians on their view of money market mutual funds (MMMFs) — as if they have never thought or written about the subject — has been roundly skewered by Austrians here and here. But I have a question for Krugman: Why, Paul, would you be interested in the least about what Austrians think about anything?

To understand the significance of this question and the momentous implications of Krugman’s answer, we need to go back to Krugman’s typology of economists. This question is significant because, according to Krugman’s view in his book Peddling Prosperity (1994), “there are two different kinds of economists . . . professors and policy entrepreneurs,” and they are ”radically distinct species.”

The “professors” are academic economists. Like “ostriches and penguins” the professors are “slightly ridiculous.” They write papers that are densely packed with indecipherable mathematics and jargon, and “most of these papers are not worth reading.” In fact they are written not to be widely read but merely to impress the author’s colleagues with his cleverness. The ideas advanced in these papers are not original or definitive explanations of how the economy actually works, but rather “ingenious elaboration without fundamental innovation” — “old wine in new bottles, usually with fancier mathematical labels.” All of this Krugman freely concedes. Ah, but if one would only back up far enough and view the proceedings from a distance, he would see that the professors are engaged in an “enterprise that steadily adds to our knowledge.” The truth is that economics is a “primitive science,” akin to medical science at the end of the nineteenth century, when physicians knew basically how the body worked and not much more.  True these primitive medical scientists were able to  advise how to prevent some diseases and what quack procedures and medicines to avoid, but they could not cure very many diseases. So it is with economics professors today who know a lot about how the economy works. They can even definitively advise how to prevent hyperinflation and in most cases how to avoid depressions. But there is much that remains a mystery to these primitive practitioners of the dismal science. In particular, “they don’t know how to make a poor country rich or bring back the magic of economic growth when it seems to have gone away.”

Oh yeah, and one more thing about members of the professoriate: they mainly write for other professors and rarely make appearances on TV. When they do address the lay public they seldom make definitive pronouncements on policy issues. They are nothing if not humble in the face of their acute awareness of the limitations of knowledge imposed by the primitive state of their science.  (By the way this hardly sounds like Krugman the New York Times “Conscience of a Liberal” columnist so beloved of the Democratic left — but that is a story for another day.)

“Policy entrepreneurs,” according to Krugman, are a different breed altogether. They write books mainly for the public and appear on TV.  They strive to influence public opinion and economic policy. While many are journalists, financial pundits, and lawyers, some have PhDs in economics and jobs as economics professors, just not at the right kinds of academic institutions. For example, they may habitate at ”unorthodox environments like Harvard’s Kennedy School.” But the feature that essentially distinguishes a policy entrepreneur from a professor is the language that he speaks and the audience that he mainly addresses. When addressing the public, the former speaks plainly and offers “unambiguos diagnoses” where the latter is “uncertain.” The mind of the policy entrepreneur is unclouded by “existing economic theories,” while that of the professor is teeming with  inhibitions imposed by these theories against expressing anything with certitude. Krugman points to supply-siders Arthur Laffer and Robert Mundell on the right and Lester Thurow, Robert Reich and John Kenneth Galbraith on the left as epitomizing the academic qua “policy entrpreneur.”  He at one point refers to supply-side academics as “renegade professors.”

Now, in Krugman’s aforementioned column, it is clear that he regards Austrian economists as nothing more than the benighted “policy entrepreneurs” orchestrating Ron Paul’s campaign for sound money and a free market banking system. So to reiterate my question to Krugman in a slightly different form: Why would an eminent, Nobel laureate, Ivy League “professor” like youself care one whit about the views of putative “renegade professors” like the Austrians who reject modern macroeconomics root and branch and aggressively seek to disseminate this view to the public as well as to the rest of the economics profession?

However Krugman chooses to answer this question — and I hope that he does — it is clear that the “existing economic theories” that he so vehemently defended in the 1990s have failed abysmally in preventing or explaining the financial crisis. As a result Krugman and the rest of the establishment macroeconomic “professors” have been catapulted back in time to embrace the crude and discredited ultra-Keynesian policy of inflating our way back to prosperity. Indeed we renegade Austrian professors  have the only correct diagnosis and cure for the present economic stagnation — and I am certain of that.

Economic Blinders

Paul Krugman isn’t the only Princeton economist producing sloppy and ill-informed newspaper columns. Alan Blinder weighs in with a September 6 Wall Street Journal column on the “stark” [sic] differences between the economic programs of Obama and Romney-Ryan. Blinder starts out well enough:

The Rooseveltian consensus embodied three main elements: a modest social safety net to protect vulnerable Americans from some of the downsides of unfettered markets, Keynesian-style policies to shorten recessions, and a progressive tax-transfer system to mitigate income inequality (albeit only slightly).

The two political parties certainly had their differences between the 1930s and the 2000s, but the broad consensus often had bipartisan support. Thus Eisenhower built public infrastructure; Nixon declared himself a Keynesian and established the Environmental Protection Agency; both Reagan and Bush II acted like Keynesians; Bush I promised a “kinder, gentler nation” and Bush II expanded Medicare—unfortunately, without a way to pay for it.

One can quibble with his characterization of the modern welfare state as a “modest social safety net,” and sensible people understand that Keynesian-style policies create and prolong, not shorten, recessions. But it’s true that all establishment political figures since the 1930s, Democrat or Republican, embrace FDR and Keynes. Unfortunately, Blinder then goes off the rails: “But with Messrs. Romney and Ryan, it’s out with Franklin Roosevelt and in with Ayn Rand.”

This attempted bon mot illustrates the vapidity of American political and economic discourse. Paul Ryan says a few nice things about Ayn Rand, F. A. Hayek, and even Mises, and this makes him a devotee of “unfettered markets”! Blinder offers few specifics to illustrate Romney and Ryan’s deviations from the Rooseveltian consensus. He mentions the Ryan budget — that radical document proposing to slash federal spending from 22% of GDP to 20% of GDP, some $5 trillion of annual largesse, by 2040, which is practically tomorrow! A veritable John Galt, that Paul Ryan. And Blinder reminds us that Romney and Ryan have pledged to repeal Dodd-Frank, without which we would have a completely unfettered, unregulated, free-market banking sector. Get ready for dog-eat-dog! The list goes on — Romney and Ryan want the government to provide medicare vouchers, rather than pay medicare bills directly, which certainly sounds like a total free market in medicine to me.

Blinder ends on this unfortunate note: “President Obama stands with President Eisenhower’s emphasis on building infrastructure, with President Reagan’s willingness to raise taxes to reduce the deficit, and with President George H.W. Bush’s call for a kinder, gentler economic policy. Mitt Romney stands with Barry Goldwater and Herbert Hoover.” As Murray Rothbard famously pointed out (1, 2), and most serious historians now acknowledge, Hoover was Roosevelt before Roosevelt was cool. So indeed, Romney stands with Hoover — as does Obama — but not in the sense that Blinder means it.



JoAnn Rothbard

Today would have been the 84th birthday of JoAnn Rothbard.

Read about Joey and listen to her speak about her husband, Murray, who called her his “indispensable framework”.  (Thanks to Pat Barnett)

Video: Herbener on QE3 and Housing Market Stimulus

Watch here. (Thanks to Tom Woods.)

Krugman’s MMMF Question

Paul Krugman attacked Ron Paul, Paul Ryan, and “Honest Money” and also took a shot at Austrian economists on his blog today.  He called honest money a “Ron Paul dog whistle” and then went on to query Austrian economists on their position on Money Market Mutual Funds (MMMF). He doesn’t expect a serious answer.

How do the Austrians propose dealing with money market funds? I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.

But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.

So are such funds illegitimate?

In the Austrian view MMMF are not technically money and so deposit holders do not hold full reserves, but rather invest those deposits in short term commercial paper. MMMF can lose value and owners may get back less than they deposited without the deposit holder going bankrupt. Technically they are not instantly redeemable and are not a final means of payment.

According to Joseph Salerno:

Although MMMF share accounts at first glance look like MMDAs, they are clearly excludable from the TMS, because they are neither instantly redeemable, par value claims to cash, nor final means of payment in exchange. This requires a brief explanation of the nature of MMMFs.

Each MMMF share represents a claim to a pro rata share of a managed investment portfolio containing short-term financial assets, such as high-grade commercial paper, certificates of deposit, and U.S. Treasury notes. Although the value of a share is nominally fixed, usually, at one dollar, the total number of shares owned by an investor (abstracting from reinvested dividends) fluctuates according to market conditions affecting the overall value of the fund’s portfolio. Under extreme circumstances, such as a stratospheric rise in short-term interest rates or the bankruptcy of a corporation whose paper the fund has heavily invested in, the fund’s investors may well suffer a capital loss in the form of an actual reduction of the number of fixed-value shares they own. Unlike a check drawn on a demand deposit or MMDA, therefore, an MMMF draft does not simply represent a direct transfer of current claims to currency, but a dual order to the fund’s manager to sell a specified portion of the shareowner’s asset holdings and then to transfer the monetary proceeds to a third party named on the check. Note that the payment process is not finally completed until the payee receives money, typically in the form of a credit to his demand deposit.

No Paul, we do not want to ban MMMF.

This quote from Joseph Salerno is from the first item to appear on a Google search for “Austrian economics money market mutual fund”.

Overpopulation and Built-in Obsolescence

“The theory of ‘built-in’ obsolescence is fallacious. And, with the advent of the ecology movement and the neo-Malthusian Zero Population Growth adherents, it is more important than ever to lay the fallacy to rest. According to the overpopulationists, we have or are soon going to have too many people in relation to the earth’s resources. In the view of the environmentalists, we are presently wasting the resources we have. Built-in obsolescence is a tragic, totally unnecessary component of this waste.”

–Walter Block, Defending the Undefendable

What Is Bernanke Really Up To?

Bernanke says that the new announced round of money printing ( QE3 plus more Twist)) is intended to reduce unemployment. Does he believe that? It is possible that Bernanke really drinks his own Cool Aid, but I doubt it. Does  he think that stock market gains will boost confidence and somehow help employment indirectly? Perhaps. He has in the past  claimed credit for spiking the stock market, although he must know that the empirical evidence does not show a link to employment gains.

Why then this dramatic move only two months before a presidential election? Is it intended to spite Romney who said he would not reappoint Bernanke? I doubt that too.

The most likely explanation is that Bernanke is worried about the treasury auction market. He wants to be able to use his printed money at will to support it. The new printing and bond buying  program is open ended by date. It can continue indefinitely. Ostensibly the QE3 purchases will be mortgages. That will help the banks, will help treasuries indirectly, and the program can always shift into treasuries at any time. The next step will be to remove the monthly limit and then, presto, the Fed will be able to print and monetize debt at will.

This is also a good time to start the process because other major currencies are committing their own forms of hari-kari. At least for the moment global bond buyers won’t be exiting the dollar in favor of the Euro or Yen– or even the Swiss franc, since the Swiss authorities are madly printing money too.

At some point, however, Bernanke will go too far and spook the foreign buyers. Then his game will be up.


The Arab Recoil and the Cause of Foreign Non-Intervention

In a conversations in the comments of another post on September 7, I said:

“Obama too is guilty of warmongering, nationalism, and corporatism, just as the bailouts and other interventions that Romney and Ryan supported also contributed to regime uncertainty.

Obama is just slightly less disastrous on foreign policy grounds, and Romney is slightly less disastrous on economic grounds.

That being said, in the long run, the above impacts would likely be reversed.

Obama’s foreign meddling will sow the seeds of further conflict and global instability, and yet this failure will be blamed on his allegedly “soft” foreign policy, and thereby give peace a bad name.

Romney’s corporatist economic policies will sow the seeds of further crises and depression, and yet this failure will be blamed on his allegedly “free market” policy, and thereby give capitalism a bad name.”

The series of events that began just 4 day later showed how such “long-term” effects can occur even in the short term.  The current unrest in the Arab world is due largely to Obama’s recent meddling in Libya, Egypt, and elsewhere.  It is a violent recoiling of the U.S.-sponsored “Arab Spring”.  Yet it is being blamed by many (not just in the leadership of the Neocon right, but also for many swing voters, as evidenced by the fact that Obama’s lead over Romney has subsequently evaporated) as a result of a America’s recent failure to “lead”: in other words, not meddling enough.

Mises Takes Manhattan

UPDATE 2: Doug French speaking now. Tune in!

UPDATE: Walter Block speaking now. Tune in! will be live-streaming The Mises Circle in Manhattan tomorrow for free at our Ustream channel.

Here are the scheduled speakers (what a line-up!).  All times are Eastern time:

 Topic: Central Banking, Deposit Insurance, and Economic Decline

9:30 a.m.   David Stockman ”How Crony Capitalism Corrupts the Free Market”
10:00 a.m.  Walter Block “Fractional Reserve Banking”
10:45 a.m.  Douglas French “TAG: Unlimited Insurance,
Unlimited Risk”
11:15 a.m.   Peter Klein “Inner Workings of the Fed”
1:15 p.m.    Joseph Salerno “The Fed, the FDIC, and Other
Problems”   West Lounge, First Floor
1:45 p.m.    Tom Woods ”The State and Its Competitors”
2:30 p.m.    Peter Schiff ”The Real Fiscal Cliff: How to Spot
the Ledge”
3:00 p.m.    Lew Rockwell “War and the Fed”

New Evidence Supporting an Austrian Business Cycle Interpretation of 1995-2012

The Wall Street Journal, in a front page article, Household Income Sinks to ’95 Level ,   summarizing a Census Bureau report released Wednesday, reports, “The income of the typical U.S. family has fallen to levels last seen in 1995, a long and pernicious slide that likely means it will be a generation before Americans regain the peak income levels reached at the close of the ’90s”.  While one should always be careful using median income figures, the data is consistent with and can be best understood when combined with a capital-structure macro model of the economy. A caveat, given that the  peak of the 90s was at the close of the first artificial boom, it most likely overstates sustainable income based on ‘real’ capital available.

A first thing to notice is the timing of the apparent rise and decline in median household income  beginning in the mid 1990s.

Recent analysis (Garrison, Interest-Rate Targeting During the Great Moderation, and

Natural Rates of Interest and Sustainable Growth; and Cochran,  Hayek and the 21st Century Boom-Bust and Recession-Recovery) using an Austrian, capital-structure based macro-economic model argues the U. S. suffered back to back boom bust cycles, the bust and the more recent and more devastating boom-bust accompanied by the housing bubble. These economy-wide boom-busts coincide with the two booms and busts in household income during the same period.

Frank Shostak, author of today’s excellent analysis of the Fiscal Clift (, has long argued that a key, but often overlooked feature of a policy driven boom-bust is capital consumption and hence wealth destruction. Two recent articles in the QJAE strongly reinforce this point; Ravier’s  Rethinking Capital-Based Macroeconomics and Salerno’s A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis.

Ravier (369) argues:

On the other hand, and this is the most relevant aspect, due to the mal-investment process during the stimulus phase we also face a situation in which the potential productive capacity of the economy and thus the real wages potentially earned once the economy returns to normal levels of employment is reduced as a consequence of the partial destruction of capital [Bold emphasis mine]. Many authors, including for example Huerta de Soto (1998, pp. 413-415), focus attention on the “partial destruction of capital” that inevitably occurs because there is a category of resources which are lost when investment projects are abandoned. Stimulus significantly increases the volume of resources that ultimately fall in the “sunk cost” category: at the end of the stimulus phase, some resources have already been committed to investment projects but are not yet productive; when the stimulus phase ends and it turns out that these projects are not going to be completed, these resources are “sunk” costs and not re-assignable to new projects.

Salerno (29-36) provides several pages of discussion relative to the wealth destruction which followed the most recent bust and non-recovery. Figures 9-11 and 14 are most relevant. A summary (36):

After reaching a high of $15.5 trillion in 2007, the index collapsed and fell to a low of $8 trillion in early 2009. As I write this, the Wilshire 5000 has been fluctuating around $12 trillion, a level it first reached in 1999. This implies that there has been no net capital accumulation in the U.S. economy since 1999. The capital that has been accumulated since then has either been consumed or wasted in misdirected investments. But it may happen that even the current level of wealth and income is based on false calculations, because the Fed has used every tool at its disposal and has even forged new ones in order to prop up housing and financial asset prices. The weak and tenuous recovery that the U.S. is now experiencing may well be a reflection of the depth of capital consumption and impoverishment that the U.S. economy has suffered as a result of the inflation-targeting policy of the past two decades [emphasis mine].

This new data just reinforces Salerno’s argument

Monetary policy and government is, not only per Hayek ( 1979, Unemployment and Monetary Policy: Government as Generator of    the “Business Cycle”. San Francisco, CA: Cato Institute.), the “generator of the “Business Cycle, but boom-bust cycles have lasting impacts on households well beyond the recession itself. Another strong piece of evidence that monetary reform – denationalization of money is imperative for a vibrant economy based on sustainable growth.


Production Theory and Man, Economy, and State

“One of Rothbard’s greatest accomplishments in production theory was the development of a capital and interest theory that integrated the temporal production-structure analysis of Knut Wicksell and Hayek with the pure-time-preference theory expounded by Frank A. Fetter and Ludwig von Mises. Although the roots of both of these strands of thought can be traced back to Böhm-Bawerk’s work, his exposition was confused and raised seemingly insoluble contradictions between the two. They were subsequently developed separately until Rothbard revealed their inherent logical connection.”

–Joseph T. Salerno, Introduction to Man, Economy, and State with Power and Market