Archive for October 2012

War, What is it Good For? Certainly not Innovation.

So says Peter Klein.

The James M. Rodney Lecture, presented at the 2012 Mises Institute Supporters Summit: “The Truth About War: A Revisionist Approach”. Recorded at Callaway Gardens, Georgia, on 26 October 2012. Includes an introduction by Llewellyn H. Rockwell, Jr.

War History and America’s Court Intellectuals

Gary North on how Rockefeller-financed Federal spooks established the mainstream academic narrative on American involvement in the World Wars.  If you’re short on time, he gets down to brass tacks at 11:33.

The Carl Davis Lecture, presented at the 2012 Mises Institute Supporters Summit: “The Truth About War: A Revisionist Approach”. Recorded at Callaway Gardens, Georgia, on 26 October 2012. Includes an introduction by Llewellyn H. Rockwell, Jr.

Bastiat and “Full Employment”

Matthew Yglesias makes the same mistake as Brad DeLong, thinking that Bastiat’s argument against breaking windows applies only in conditions of “full employment.” Bastiat “doesn’t counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do . . . . [T]hat’s no excuse for people sitting around in 2012 to be pounding the table with an old book that’s non-responsive to modern issues professing to be baffled why people don’t find it more persuasive.”

Of course, Bastiat’s brilliant demonstration of hidden costs and the fallacy of spending one’s way into prosperity assumes nothing of the sort. But Yglesias, inadvertently, makes an important point, namely that Bastiat’s defenders should spend more time on “full employment,” a concept that isn’t even coherent, given that efficiency in resource employment makes sense only with regard to the subjective production plan of the entrepreneur (cf. Penrose, 1959Kirzner, 1966).

W. H. Hutt’s powerful and underappreciated critique of Keynes, The Theory of Idle Resources (1939) attacks this core Keynesian concept. As Hutt explains, all resources have alternative uses, and even “idleness” is a use, in the sense that the resource owner prefers to hold the resource for a future, as-yet-unavailable or unimagined use — a real option, if you like. Dragooning such resources into some random use, outside the price mechanism, serves no productive purpose. Even outside the mythical world of “full employment,” there are no free lunches. The modern Keynesian and monetarist approaches that impress Yglesias have yet to confront this basic problem.

See also Sheldon Richman.

The Folly of Anti-Gouging Laws: WSJ or Mises Daily?

HOLMAN W. JENKINS, JR. of the Wall Street Journal channels David M. Brown at Mises Daily:

Hug a Price Gouger

“The public doesn’t want to hear it, but the public also doesn’t like empty shelves.”

Sounding like Bastiat, Jenkins concludes, “Crackdowns on gouging are plausible only because the advantages of not prosecuting price gougers belong to the category of the unseen—the public can’t see the supplies that would be available but for price-gouging laws. A good statewide New Jersey gasoline panic might correct that myopia, at least for a while.”

Judge Napolitano’s Rip-Roaring Lecture on Natural Law and Just War Theory

The Louis E. Carabini Distinguished Lecture:  Reflections on the Loss of Liberty, at the 2012 Mises Institute Supporters Summit, on October 26.

My favorite moment is at 49:33:

“I guess I’ll reveal my anarchistic bona fides by saying that I agree with Lysander Spooner. As the country had the right to secede from Great Britain, we have the right to secede from the government!”

Available: QJAE vol. 15, no. 3 (Butos, Prusa and Ryska, Zahringer, Lindemans, Howden, Bylund, Kaza, Polleit)

Volume 15, no. 3 of the Quarterly Journal of Austrian Economics was made available online last week. Articles are:

William N. Butos, “Monetary Orders and Institutions: A Hayekian Perspective,”

Jan Pruša and Pavel Ryska, “Efficiency Wages and Involuntary Unemployment Revisited,”

Kenneth A. Zahringer, “Monetary Disequilibrium Theory and Business Cycles: An Austrian Critique,”

Jan Willem Lindemans, “Methodological Individualism and Cultural Evolution: Ontogenetic and Phylogenetic Approaches to Social Order,”

David Howden, Review of Thinking, Fast and Slow, by Daniel Kahneman

Per L. Bylund, Review of Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed., by Peter Lewin

Greg Kaza, Review of A History of the Federal Reserve, Vol. 2: Book 1 (1951-1969), Book 2 (1970-1986), by Allan Meltzer

Thorsten Polleit, Review of Institutions in Crisis: European Perspectives on the Recession, David Howden, ed.

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

Ron Paul: “Let me tell you, the work of the Mises Institute is crucial. This is important. This is more important than all political action.”

Ron Paul: “I’m delighted to be here for the 30th anniversary of the Mises Institute. I was delighted to help start this Institute with Lew Rockwell many years ago.  Let me tell you, the work of the Mises Institute is crucial. This is important. This is more important than all political action. We have to change people’s hearts and minds, and their understanding of free markets and individual liberty. That’s how we can change the world. I’m very optimistic about the spreading of this message, especially in this computer age.”

Also see The Real Ron Paul Revolution.

Causes of Slow and/or Unsustainable Recovery

Causes of Slow and/or Unsustainable Recovery

In a comment on Malinvestment and Regime Uncertainty, Dick Fox wrote:

“Professor, I am a little confused. The first part of your paper concentrates on the fact that policies have hindered investment, but then at the end of the paper you imply that artificially low interest rates are artificially directing spending to the early stages of production. It seems to me that your description of the impact of government policies attacking business are hindering investment more at the early stages of production. Are these forces working against one another?”

I’ll try to clarify some below:

Factors that contribute to slow recovery:

1. Boom-bust cycle creates malinvestments:

Microeconomic problem – resources need to be moved from where they are less intensely needed to where they are more intensely needed:  Solution is flexible prices with resource mobility.

Complications: Non-homogenous capital goods and labor services – some resources may not be easily transferable across stages of production of location.

Significant malinvestment and over consumption can cause capital destruction and/or waste – reducing production possibilities below what they might have been sans boom.

2. Reaction to bust could create “secondary deflation’ or secondary depression:

Hayek 1970s (See Hayek 1979) recommend preventing  the secondary deflation, however Salerno (2012 A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis) argues:

My third refinement of ABCT is to link the so-called “secondary deflation” to the pervasive malaise and waning of “animal spirits” among the mass of entrepreneurs that occurs when the recession reveals their cluster of miscalculations and errors and saps their confidence in their ability to identify and calculate profitable investments. I argue that the secondary deflation is not the result of an incidental monetary contraction that depresses some arbitrary price level; rather it is a reaction to and correction of the relative price distortion caused by the extreme overbidding of factor and asset prices during the euphoria of the boom. When allowed to run its course, this relative price adjustment inevitably re-establishes a natural interest rate sufficiently high to stimulate capitalists and entrepreneurs to dishoard cash and actively seek out investment opportunities. When stunted by “quantitative easing” and fiscal deficits driven by stimulus programs, the entrepreneurial malaise becomes chronic, and economic stagnation ensues.

These are issues of recovery from any boom-bust cycle and there is a third contributing factor to a slow recovery – a poor policy reaction to the crisis which creates:

3. Higgs’s Regime Uncertainity – Inappropriate policy reaction and/or rhetoric which creates uncertainty about the future of property rights and returns on investment. Hinders recovery even if relative prices are adjusting. Affects all stages, but probably more impact on earlier stages.

There is a second issue, related to your question on low interest is where  I should have been more clear about a shift of emphasis in the discussion. The shift is toward factors impeding a healthy recovery and sustained growth – a growth path consistent with tastes, preferences and resource availability.

  1. Regime uncertainty also operates here.
  2. Stimulus- both monetary and fiscal which misdirect production – see Especially Hayek 1979 and Ravier Rethinking Capital-Based Macroeconomics. Artificially low rates, may even in the face of regime uncertainty, marginally increase investment relative to what it would have been sans low rates, but while such spending may like fiscal stimulus, especially stimulus which has more impact on consumption and later stage investment (Garrison’s induced investment), appear to increase employment,but it will do so at the cost of increased instability and potentially higher employment later.

As described in Cochran (2011 Capital in Disequilibrium: Understanding the “Great Recession” and the Potential for Recovery): “Recovery must be driven by a revival of investment, but to return to real stability and sustained growth the new pattern of investment must be in line with resource availability and time preferences. According to Hayek (1979, p. 42), this is not likely to be achieved by “subsidi­zation of investment” or “artificially low interest rates.” Hayek (1939) argued that while such a policy may result in a temporary increase in production and employment, the ultimate result is a new period of boom and then bust.”


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

Encounter Magazine Online

Rafe reminds us that the entire archive of Encounter magazine is online. While Encounter, like the Congress on Cultural Freedom, was a CIA project, it still managed to publish a number of important and influential essays by Hayek, Popper, Polanyi, and other classical liberal scholars. (Use the search box.) A few highlights:

Weakness in Recent GDP Numbers

On target commentary on recent GDP numbers by Shawn Ritenour. As long as investment stays weak, job growth will be weak.

More detailed discussion is here.

For data on the relationship between real gross private domestic private investment and employment see below (HT to Danny Sanchez).


RGPDI and private non-farm employment

The Greatest Thinker You Have Read but Those Who Most Need to Haven’t

In case you missed it (I did the first time around so a HT Pete Boettke and Jeff Tucker): Art Carden at Forbes on “The Greatest Thinker You’ve Never Read: Ludwig von Mises.


One of the wonders of the modern world is that his major contributions are available to be perused or downloaded from the institute bearing his name [Ludwig von Mises Institute] or from the Liberty Fund. Today, anyone with access to an internet connection can access his works with little or no trouble. Anyone with a USB drive can carry his greatest works on a keychain….

Mises’s arguments, and the arguments of those who have followed him, do not merely undermine arguments for pure, global socialism. They also undermine arguments for interventionism more generally.

Unfortunately, the people who most need to read Mises probably won’t. In this light, I can close with nothing better than the sober warning Mises offers in the last few sentences of Human Action:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

Congratulations to Patrick Newman

This young Austrian is having quite a year.  In July he won LvMI’s 2012 Douglas E. French Prize, “for the student who emerges from the Mises University oral examinations with the best record, as chosen by the examining committee.”  And just last week, he won the Society for the Development of Austrian Economics’ 2012 Carl Menger Essay Contest for his “The Long Depression of 1873-1879: An Austrian Examination”.  Fantastic work, Patch!

Newman writes: ”Austrian business cycle theory explains the boom and bust that stretched across the time period analyzed. Following a run up in the credit expansion that occurred in the early 70s, a visible widening in both relative prices and production compared to the late 60s emerged that fostered multiple malinvestments, mostly concentrated in the railroads.(…) The bust also showed sypmtoms of an Austrian contraction, with the decline in output concentrated in industries that overexpanded during the boom.”

Newman concludes that ,”the late 1870s was not a period of stagnation and depression”.  In other words, the alleged “Long Depression”, as Rothbard also argued, is a myth.

Another economics student congratulated Newman for contributing “the kind of empirical work Austrians need.”  But the phrase “empirical work” is misleading, as it conveys an “empirical” approach to developing economics.  Newman himself rightly refers to his paper, not as “empirical work”, but as “history”. He stakes out a decidedly Misesian methodological position when he writes:

“It is absolutely imperative to remind the reader that the above study in no way confirms the validity of Austrian Business Cycle Theory.  Whether or not a theory is logically correct can only be found via rigorous theoretical testing and scrutiny. The goal of economic history is not to test various theorems but to show that they apply to a specific scenario. And this paper has hoped to provide just that.”

Looking forward to great things from this outstandingly bright Misesian.

Become a Member, Watch Live-Stream of Supporters Summit For Free

LvMI membership comes with any donation of $50 or more.  On your e-mailed receipt, you will receive the password for watching the live stream of the Supporters Summit this Friday/Saturday.

Here are the speakers that will be streamed live (what a line-up!). All times are Eastern time:

The Truth About War: A Revisionist Approach

Friday, October 26

1:00 p.m. Judge Andrew Napolitano Reflections on the Loss of Liberty
1:45 p.m. Gary North War Revisionism
2:20 p.m. Peter Klein Interstate Highways, Radar, Tang: Does War Promote Technological Innovation?
2:40 p.m. Walter Block War, Peace, and Statism
3:00 p.m. Tom Woods How Murray Rothbard Changed my Mind on War
3:35 p.m. Mark Thornton How Rhett Butler Lost the Civil War
3:55 p.m. Jeffrey Herbener Legacies of the Great War
4:15 p.m. Tom DiLorenzo The Myth of the Pro-War Constitutionalist
5:00 p.m. John Denson War, Revisionism, Fascism, and the CIA
5:20 p.m. Lew Rockwell 30 Years

Saturday, October 27

9:00 a.m. David Gordon Murray Rothbard and Revisionist History
9:20 a.m. Yuri Maltsev The Gang of Four: Hitler, Stalin, Roosevelt,and Churchill and the Destruction of Europe
10:00 a.m. Douglas French Waging War with the Printing Press
10:20 a.m. Joseph Salerno The Keynesian Architects of the U.S. Warfare State
10:40 a.m. Robert Higgs How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor

Video: Salerno in a Roundtable Economics Discussion

Joseph Salerno makes the Austrian case for drastic government spending and tax cuts:

Kirznerian Entrepreneurship?

In an Onion spoof of a typical TED talk, the speaker explains a profit opportunity he has costlessly discovered:

For more serious discussion of costless discovery, the metaphor of entrepreneurial opportunities, and alternative Austrian attempts to understand the entrepreneurial function, see this and this.

Using Legal Tender Laws Against the State?

The relentless war against cash payments waged by governments worldwide has perhaps gone furthest in Scandinavia.  The ostensible reason given by our rulers for suppressing cash is to keep society safe from  terrorists, tax evaders, money launderers, drug cartels and sundry other villains, real or imagined.  But the actual aim of the recent flood of  laws rendering cash transactions less convenient or limiting or even prohibiting  them is to force the public at large to make payments through the financial system in order to prop up the unstable  fractional-reserve banks and, more importantly, to expand the ability of governments to spy on and keep track of  their citizens’ most private financial dealings.  One ingenious friend from Norway has fought to protect his right to use cash  by invoking his  government’s own legal tender laws against it.  Here is his story in his own words:

About a month ago I had a doctor’s appointment at the city’s health services emergency ward (government institution).

When leaving, I asked to pay cash. I was told that the cashier’s desk was closed, that I would be invoiced, and that they generally did not accept cash. I reminded the nurse(?) on duty about legal tender.

When I got the invoice, I called accounting at the ward. I told the accountant that I wished to pay cash. I was told that was not possible. I asked if she knew about legal tender, referring to the specific legislation. She went completely defensive, as I clearly perceived it. She even claimed that legal issues with the no-cash arrangement had been dealt with. I said I would file a written complaint.

So I did. I called in a few days later to check if the complaint had been received, which she could confirm. Now the accountant was apparently more interested in discussing the issue.

Yesterday, I got the written response. I was given the opportunity to pay cash in this one case if I brought the exact amount. Moreover, no changes in the general arrangements would be made. Today, I made the payment in cash.

Why did they do this? I would suspect that they figured they had a weak legal case, that they were dealing with someone who apparently wasn’t going to give up, and that allowing it in this case would avoid having to deal with someone with a formal legal interest in challenging their anti-cash system, the alternatives being changing their system voluntarily and fighting an administrative complaint case — or even worse, a court case.

Of course, things would be much better if we weren’t forced to use this fiat money. However, it is reasonable to expect government institutions to comply with the government’s own legal tender regulations.

Central Banks: Reform or Abolish

Gerald P. O’Driscoll has an important new working paper at Cato, “Central Banks: Abolish or Reform.”

HT to Kurt Schuler at Free Banking.


We have two bad systems: the fiscal and the monetary. They are intertwined now as they were in the 18th and 19th centuries. They must be reformed, or together they will destroy the economic system that sustains them. They have become parasitical. The unsettled question is whether anything less than radical reform of both will work. Can central banks be constrained to a Bagehot‐like role, or must they be abolished? Can a “bad system” be made better, or do we need wholesale replacement? That is the question that monetary economists should be discussing.

For anearlier such discussion see:

A Not So Bright Idea

Everyone knows that Thomas Edison was the inventor of the light bulb, but few people are aware that he came up with an idea for a new monetary system. He was dissatisfied with the gold standard (under the National Banking Acts) and also with fiat paper standards. His system is described in a recent review of the book:

In his system, government would create numerous warehouses for commodities that would buy commodities through a one-year repurchase agreement and the issuance of a warehouse certificate. The inflow of cash to farmers via the repurchase agreement would cover 50 percent of the value of the commodities.  Commodities ought to be valued at a price based on a 25-year average instead of current market price. The repurchase agreement must be repaid in 12 monthly installments (i.e. farmers are required to repurchase some of their commodities every month over a twelve-month period at the warehouse price). The certificates would be tradable or could be pledged for a loan, and anybody with a certificate could go to the warehouse and claim ownership of some commodities that would be purchased with 50 percent cash and the handing of the certificate.

Edison’s idea was viewed with suspicion and largely ignored. However, it is a good example of the social engineering mentality that was also all too common among “progressive” American economists such as Irving Fisher.


Nobel Prize for “Market Design”

This year’s Nobel-ish prize in economics goes to Alvin Roth and Lloyd Shapley for research on “matching methods” and the resulting application to “market design.” Briefly, this work deals with allocating resources in the absence of money and prices. Shapley applied noncooperative game theory to study the properties of different matching rules, and Roth studied various allocation rules to encourage “efficient” matching of actors or traders without using prices.

A good nontechnical summary of Roth’s work appears in a 2009 Harvard Business Review article. I discussed some of the issues in a 2007 blog post. There I noted that while the very idea of “market design” appears oxymoronic to those steeped in Menger, Mises, and Hayek, most of the work by Roth and colleagues deals with regulated markets, and can hence be interpreted as research in regulatory reform. More generally, none of this work deals with “designing markets” in the broad sense, but rather with narrow, technical issues in administrative design. (E.g., who gets to propose the first trade? How many potential trades are considered in each round? Etc.) As one friend of mine remarked, “this is one of the most boring prizes yet. At best it is a prize for some no doubt useful ideas in some small contexts of effecting coordination, but the real coordinating marvel is the market.”

Note that the study of resource allocation without money and prices is part of praxeology, but not what Mises called catallactics, the study of market exchange with monetary calculation. Mises includes the economic analysis of socialism and war, and parts of Crusoe economics, as within the non-catallactic parts of praxeology, but there has been relatively little work by Austrians in this area. Some of my own research on resource allocation within the firm could fit, as does Mises’s analysis of bureaucracy.

Update: Is it economics? Two contrasting views. Steve Levitt:

[T]he first time I read Roth’s work in this area I had a strong reaction: this isn’t really economics. His applications, while based on general theories and principles, involve solutions that are highly dependent on the particular institutions and quirks of the setting he is studying.  In my youth, I was under the illusion that economic principles should be universal.  It was in part through my appreciation of Roth’s work, that I came to think very differently about the world and appreciate how critical it is to think about the specifics of the setting when coming up with solutions.

Charles Rowley:

The contributions of Roth and Shapley represent grunt work that can easily be provided by computer novices.  In environments where markets do not – or are not allowed – to function an infinite number of matching solutions vie for attention. Pick your preferred outcome and program the computer to deliver it.  Then sit back, hope that the Committee shares your prejudices, and wait for the 3 am call from Sweden!

Austrian Influence: China and the WSJ

More signs that the writings of Hayek, Mises, and modern Austrian economists are beginning to have some influence even in places where it might be least expected despite the efforts of Professors  DeLong and Krugman to discredit thses ideas.

Today’s Wall Street Journal  “Weekend Interview”, “Zhang Weiying: China’s Anti-Keynesian Insurgent” highlights the work of this Chinese economist’s explicit application of work of Hayek and the Austrian School to the criticize and illustrate the ineffectiveness Keynesian based economic policy in China.

Some highlights:

Zhang Weiying’s warnings that stimulus spending would lead to malinvestment were once ignored. Now official ministries invite the follower of Hayek to speak.

The economic slowdown, he calmly says over tea, is actually good news that “makes the government think we need to change”—toward reform and away from priming the pump. We aren’t all Keynesians now in China, he insists.


Then a top administrator at Peking University, where he now teaches economics, he argued that since the financial crisis was caused by easy money, it couldn’t be solved by the same. “The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final result will be much worse,” he said. He invoked the ideas of the late Nobel laureate Friedrich Hayek and the Austrian School of Economics to argue that if the economy weren’t allowed to adjust on its own, China’s minor bust would be followed by a bigger one [Emphasis mine].

Ultimately, Beijing’s stimulus fed a false investment boom that stoked asset bubbles—then the morphine wore off while the government tightened. Officials claim the economy grew at 7.6% year-on-year between April and June this year. Skeptics think the real number is closer to 4%. (One London research house says 1%.) Meanwhile, industries dominated or favored by the state, such as steel or solar power, are idling from overcapacity. Countless sheets of copper are reportedly stacked in warehouses, blocking doorways and exemplifying Hayek’s notion of “malinvestment [emphasis mine].”

He says that when he recently wrote an article praising the late Austrian economist Murray Rothbard, the Communist Party secretary of Shanghai—a fairly high-level apparatchik—told him he liked it.

We human beings always seek happiness,” says Mr. Zhang. “Now there are two ways. You make yourself happy by making other people unhappy—I call that the logic of robbery. The other way, you make yourself happy by making other people happy—that’s the logic of the market. Which way do you prefer?”

Better would be a day when the interview featured a Joe Salerno, a Roger Garrison, a Richard Ebeling, or a Pete Boettke, just to name a few possibilities, on the failure of Keynesianism and socialism in the people’s republic of the U. S. or an Adrian Ravier on the impact of Austrian economics in Latin America. Even more relevant for today’s economic conditions would be a feature on Robert Higgs explaining how regime uncertainty retards investment and real entrepreneurial planning slowing recovery or triggering a recession.