Archive for October 2012 – Page 2

Luxuries into Necessities

About sixty years ago [i.e., sixty years before 1956] Gabriel Tarde (1843-1904), the great French sociologist, dealt with the problem of the popularization of luxuries. An industrial innovation, he pointed out, enters the market as the extravagance of an elite before it finally turns, step-by-step, into a need of each and all and is considered indispensable. What was once a luxury becomes in the course of time a necessity. The history of technology and marketing provides ample exemplification to confirm Tarde’s thesis. There was in the past a considerable time lag between the emergence of something unheard of before and its becoming an article of everybody’s use. It sometimes took many centuries until an innovation was generally accepted at least within the orbit of Western civilization. Think of the slow popularization of the use of forks, of soap, of handkerchiefs, and of a great variety of other things.

–Ludwig von Mises. Luxuries into Necessities

A Small Step Forward in Ending the Irrational War on Drugs

My colleague at Metro State, Alex Padilla, provides solid commentary (on-line Denver Post) on a Colorado ballot issue, amendment 64, to decriminalize marijuana in Colorado.

Nicely done Alex. However as a small quibble from someone who has written on separating school and state, I am not sure that the measure  “dedicates $40 million in revenue to fund school construction” is a real plus for the people of the state even though it is probably necessary to draw marginal support for a measure that in a free society should be a non-issue.

Alex’s conclusion:

“The evidence is clear: as long as drugs are prohibited, everyone but drug producers and dealers will lose. Approving Amendment 64 is an important step towards reforming the nation’s drug laws …”

Heterogenous Capital: 9 October, 2012

Robert Murphy on Krugman and iPhone 5 in The American Conservative.  Check out all the Keynesian and Monetarist objections in the comments.  Even a TAC columnist weighed in to defend government stimulus.

Walter Block also takes on Krugman’s iPhone follies, making the excellent point that what is basically Krugman’s “Obsolescent Window Fallacy” is essentially no different from The Broken Window Fallacy.  Block also announces that he’s expanding his targets to not only include false friends of laissez-faire, but outright enemies (like Krugman) as well.  A welcome development!

One area of bi-partisan agreement in America is protectionist China-bashing.  And now, the Congress is using “security” as an excuse to try to push two major Chinese companies out of the American market.  This direction is ominous.  Never forget Bastiat’s warning that when goods don’t cross borders, armies will.  Economic ties are bonds of peace.  Break them at your peril.

Glenn Greenwald writes about the murderous sanctions on Iran.  He asks the trenchant question:

 …if “terrorism” means the use of violence aimed at civilians in order to induce political change from their government, what is it called when intense economic suffering is imposed on a civilian population in order to induce political change from their government?

In a side-note, Greenwald quotes a Pakistani who, protesting America’s Drone War, accurately states that, “The war on terror has become a war of terror.”

Justin Raimondo (who, like Greenwald, is a national treasure) gives us a very brief history of the neoconservative coterie.

Global warming, the food pyramid… establishment-fostered “consensuses” have been eroding everywhere.  It seems that the same is true for the myths about higher education.  Here’s a great piece in Yahoo News titled, “How to burst the college bubble: Stop pretending your alma mater matters“. (H/T Tom Woods)

Menger’s Proto-Misesian Methodology

I was reading Jeffrey Herbener’s incredibly educational introduction to The Meaning of Ludwig von Mises (which he also edited), and came across a quote he cites from Carl Menger’s Investigations into the Method of the Social Sciences that makes abundantly clear how close Menger and Mises were to each other on method, contrary to the claims of Max Keiser and John Aziz.

“Among economists the opinion often prevails that the empirical laws, ‘because they are based on experience,’ offer better guarantees of truth than those results of exact research which are obtained, as is assumed, only deductively from a priori axioms …

Testing the exact theory of economy by the full empirical method is simply a methodological absurdity, a failure to recognize the bases and presuppositions of exact research. At the same time it is a failure to recognize the particular aims which the exact sciences serve. To want to test the pure theory of economy by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects. . . .

An empirical law lacks the guarantee of absolute validity a priori, i.e., simply according to its methodological presuppositions …

To want to transfer [the empirical method] to the results of exact research is, however, an absurdity, a failure to recognize the important difference between exact and realistic research. To combat this is the chief task of the preceding investigations.”

Also see David Gordon on this topic.

Salerno in a Roundtable Discussion in New York City this Saturday (October 13). Admission is Free.

Professor Salerno, along with two other economists, will be discussing the topic, “Why Do Economists Disagree?” in a “pre-election roundtable of a politically diverse group of noted economic theorists exploring their philosophical convergences and divergences.”  The event is free and open to the public, and it 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.

As Professor Salerno wrote,

“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.”

MMMF, Intermediation and Bad Policy

Today the Mises Institute faculty provide excellent responses to Paul Krugman  and his query re Austrian economics, MMMF, and financial intermediation.

But even legitimate intermediation can be a source for bad policy. Re MMMF and the past crisis see some interesting commentary by Garett Jones at

Some highlights:

During the worst days of 2008, something strange happened. During the Eight Days of Terror, the S&P 500 fell by 23% but there were no loud calls for the government to guarantee the value of stocks (Aside: TARP was signed into law on Day 3 of the 8).

By contrast, about two weeks beforehand, Treasury guaranteed the solvency of many money market mutual funds, the de facto bank accounts created by investment companies. Why the guarantee? Because of the panic induced by one money market mutual fund (MMMF) when it announced that its value had plummeted: Instead of being able to repay 100 cents on the dollar, the Reserve Fund would only be able to pay—-wait for it—ninety-seven cents.

Yes, the Reserve Fund was an historically important MMMF–it was the first. And surely its failure contained a signal about the health of the others. But three cents on the dollar? That set off a mad scramble for safety that spurred the Bush Treasury to create a new government guarantee?

No Paul, Austrians do not want to ban financial intermediation just bad or inappropriate policy responses which keep gains private but socialize losses.

Mises, in particular, was one of the best at clearly differentiating intermediation from credit creation.


Should Government Promote Entrepreneurship?

That’s the title of my talk tomorrow evening at the CEVRO Institut in Prague (5pm, Tuesday 9 October). You can probably anticipate the answer, but you have to come for the full explanation!

The CEVRO Institut is a private college, founded in 2005, offering undergraduate and graduate degrees in political science and international relations, public administration, sociology, and business law, and a center of free-market thought in Eastern Europe. The Institut also has an active publishing program. President Josef Šíma is a leading figure in Austrian Economics.

Government Can Be Prevented! Repelling States: Evidence from Upland Southeast Asia

“The peoples of the vast Southeast Asian region of Zomia were successful in providing incentives against statecraft–that is, they successfully prevented their own appropriation by external states and successfully prevented local state formation–for most of their long history. James C Scott notes that Zomian populations disincentivized statecraft via ‘patterns of settlement, agriculture, and social structure.’ We describe these interrelated mechanisms–settlement, agriculture, and social structure–more broadly as (1) locational, (2) productional, and (3) cultural mechanisms to repel states.”

–Edward Peter Stringham and Caleb J. Miles. Repelling States: Evidence from Upland Southeast Asia

QE Infinity as a Hail Mary

U. S. Monetary Policy, during and since the economic slowdown and financial crisis, has been criticized by non-Austrian economists such as John B. Taylor as a mondustrial policy and as a movement from central banking to central planning by John H. Cochrane.  Austrians have long viewed central banking and monetary policy as financial central planning. Jeffrey Rogers Hummel, in the Independent Review, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner”, provides ample evidence of Fed central planning. He builds his case by illustrating the significant differences in “approaches to financial crisis” between the Bernanke approach and a Friedman approach. In addition to exposing the theoretical foundation of this misguided and dangerous policy, Hummel provides a very detailed almost step by step use of this type of policy in response to the major events of the recent crisis. A must read for anyone interest in the minute details of how and why the Fed balance sheet expanded so significantly and how much of what was done did not and does not show explicitly in ‘regularly’ reported monetary aggregates, their sub components or Fed balance sheet reports.

He argues the differences have been only recently been noticed, but the impact as “those differences resulted in another Fed failure – not quite as serious as the one during the Great depression, to be sure, yet serious enough – but they have also resulted in a dramatic transformation of the Fed’s role in the economy. Bernanke has so expanded the Fed’s discretionary actions beyond controlling the money stock that it has become a gigantic, financial central planner.”

An Austrian would argue that the changes have been of degree only, not of substance.

From an Austrian perspective, central banks, through their ability to create credit and distort interest rate signals, are the major source of boom-bust cycles which are, for all practical purposes, mini-calculation failures. Through their ability to monetize debt, central banks support over expansion of government which retards economic growth and prosperity while putting economies at risk of crack-up booms and hyperinflation.

In today’s Wall Street Journal, Holman W. Jenkins adds another play to Chairman Bernanke’s irresponsible central planning playbook. QE infinity ($40 Billion a month in bond purchases as far as the eye can see), is a “Hail Mary”! What should be added is this is a Hail Mary which could not succeed even in a world with replacement referees, but might succeed in a world where helicopter drops of freshly printed currency could actually create real wealth.

Those who see the economy as suffering from nominal aggregate demand shocks best represented by the failure of the economy to return to its pre-crises trend growth path of nominal GDP are defending the policy (see , , or ). Selgin and White provide an Austrian based-criticism.

The defense could be stronger. The U. S. economy clearly suffered two ABCT boom-bust events between 1996 and 2009 as shown Roger W. Garrison in “Interest-Rate Targeting During the Great Moderation,  or “Natural Rates of Interest and Sustainable Growth.” Cato Journal, vol. 32, no. 2 [Spring/Summer]: 423-437 and And Ravier and Lewin, 2012, “The Subprime Crisis.” A slow non-recovery due to malivestments, overconsumption, and associated wealth destruction and extreme regime uncertainty continues in to the foreseeable future. What is needed is not more nominal demand stimulus [which would actually be more likely with a helicopter drop than another round of QE], but a dose of Austrian policy.  The Austrian policy [from]:

What then would be the Austrian policy recommendations for today’s problems? First, according to Hayek and Rothbard, stop the credit creation and inflation. Then, per Hayek, prevent a secondary deflation. Further, remove all government impediments to effective entrepreneurial planning by avoiding protectionist measures and allowing prices and wages to adjust as needed to restore market equilibrium. Cut tax rates, as was done in the incomplete reforms of the 1980s and during the crisis of 2001–2003, and drastically reduce the government budget.To prevent future boom-bust episodes, reform the monetary system from the current government monopoly to a market-determined medium of exchange.

Even though I first argued this in 2010, it is still relevant, but not likely.

There is, however, still time to turn course and follow the Austrian path to sustainable prosperity. End government intervention in the economy and return to a sound money policy. Such a policy has been dubbed as harsh or too draconian; but the pain of a short, severe recession followed by renewed, sustainable growth and prosperity may actually be “comfortable and moderate compared to the economic hell of permanent inflation, stagnation, high unemployment, and inflationary depression” that is the likely outcome of a continuation of our current policy [Rothbard, America's Great Depression. p. xxvii.v ].

An Exciting New Appointment

The Ludwig von Mises Institute welcomes its new Executive Director, and inaugural Carl Menger Research Fellow, Peter G. Klein!

Lew Rockwell announced the appointment at the Manhattan Mises Circle.

Click here for audio, or read the transcript:

Peter is an associate professor of Economics at the University of Missouri. He also taught at the University of Georgia, teaches in Copenhagen, is the author or the editor of five books.  But I want to mention one new thing about Peter, if I may make an announcement. He’s going to be joining the Institute as our Executive Director.  I’m looking forward to having him come to Auburn.

I’ll just tell a couple of stories. I’ll always remember this one. It was in 1988; Peter was leaving Chapel Hill and going to get his PhD at Berkeley. He wrote to the Institute for some help. I read his letter, and Judy Thommesen, who is our publications editor, reminded me the other day of just how agog I was when I saw this letter. I immediately called Murray Rothbard, and I said, “Murray, I’ve just gotten the most extraordinary letter from a student that I’ve ever seen. May I fax it to you?  And if you’d read it, and if you agree with me, would you talk to Peter?” So Murray was very excited and did indeed talk to Peter. Peter was very close to Murray, and to the late Burt Blumert, who was our chairman at that time. I can tell many other stories about Peter; I’ll just mention one other.

As a post-doc he spent a year internship on Bill Clinton’s council of Economic Advisors. So about four or five months after he finished his year in Washington, I get a visit from a local FBI agent. He’s wanting to check out Peter’s bona-fides and see if he’s a security risk, because he’s going to have this internship. I said, “But, he’s already had his internship. It’s already over.” And the guy said “You know the government.” And so I said, “Yes, I do know the government.”

More Evidence on the Impact Regime Worsening on Slow Recovery

Regime Uncertainty and Slow Recovery

Robert Higgs at the Beacon again reminds us that “anemic investment recovery evinces, at least in part, the prevailing regime uncertainty brought about by the Fed’s and the Bush and Obama administrations’ massive, ill-advised, and counter-productive interventions in the economy during the past five years.”

Higgs provides the chart on RGDI, but private non-farm employment closely follows RGDI up and down over the relevant period and remains anemic as well.

Some non-Austrian economists have also made similar arguments relative to anemic growth and slow recovery. For details see John Taylor’s blog post from May, “More Evidence on What Is Holding the Economy Back.”   Here, using a Freidman Plucking Model as the basis that recovery from a severe recession or pluck should be strong, he argues, “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 [now out] book (Government Policy and the Delayed Economic Recovery) edited by Lee Ohanian, Ian Wright and me.”

Critics of regime uncertainty; in reality a real threat of regime worsening relative to property rights, return on investment, and economic freedom, as a significant contributor to the slow growth have argued that significant recessions accompanied by financial crisis are followed by slow, not rapid recoveries. However, this argument is not supported by economic history as recently shown by Michael Bordo, in a Wall Street Journal, editorial contribution, “Financial Recessions Don’t lead to A Weak Recovery. He concludes, “The evidence since 1880 shows a faster pace of recovery, The [Bush] Obama years are the exception.”

More reasons and more evidence that QE infinity will be just as ineffective as QEI and QE II.

I share now as I have in the past, Dr. Higgs’s pessimism, “Policy makers have cost the U.S. economy a decade or more of normal economic growth. How long will people in their capacities as political and financial actors continue to tolerate this foolish, destructive policy making? I do not know, but I believe I know what the result of these misguided ongoing experiments will be—economic stagnation at best, relapse or another bust at worst.”

Historicism and Epistemological Problems of History

“The theorems of economics, say the historicists, are void because they are the product of a priori reasoning. Only historical experience can lead to realistic economics. They fail to see that historical experience is always the experience of complex phenomena, of the joint effects brought about by the operation of a multiplicity of elements. Such historical experience does not give the observer facts in the sense in which the natural sciences apply this term to the results obtained in laboratory experiments. Historical facts need to be interpreted on the ground of previously available theorems. They do not comment upon themselves. The antagonism between economics and historicism does not concern the historical facts. It concerns the interpretation of the facts.”

–Ludwig von Mises. Theory and History: An Interpretation of Social and Economic Evolution

Mises University in 8 Minutes

A wonderful video tribute to a life-changing week by Amanda BillyRock.