Archive for February 2013

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Central Banks Debunked

Gerald P. O’Driscoll’s hard-hitting piece in today’s Wall Street Journal, Debunking the Myths about Central Banks is well worth reading. Among others, O’Driscoll addresses the myth that “central banks are intrinsically necessary for market economies.” As O’Driscoll points out, however,

A gold, or any commodity, standard places a natural limitation on money creation, which is the resource cost of extracting the commodity. It is only with fiat (paper) money that central banks are necessary to control the money supply

One should not conclude from this that O’Driscoll fallls prey to the myth of a central bank that is able to scientifically control the supply of fiat money independently of politics. In fact, he explodes this myth by pointing to the Fed under Chairmans Martin, Burns, Volcker, and Bernanke all of whose polices were powerfully shaped by the interests of the Presidents they served under. O’Drisoll concludes: “A central bank is necessary as long as an economy is wedded to a fiat currency. And it may at times behave independently—but not in the face of large-scale budget deficits, as we have today.”

The Great Sequester Ho-Hum

Economist and former Texas US Senator Phil Gramm recalls the budget sequesters in today’s Wall Street Journal:

The president’s response to the sequester demonstrates how out of touch he is with the real world of working families. Even after the sequester, the federal government will spend $15 billion more than it did last year, and 30% more than it spent in 2007. Government spending on nondefense discretionary programs will be 19.2% higher and spending on defense will be 13.8% higher than it was in 2007.

Bernanke the Comedian

Dr. Brendan Brown is an eminent financial economist in the City of London and the author of The Global Curse of the Federal Reserve, initially published in 2011 and just released in its second revised edition. In his book, Brown is critical of Milton Friedman and the monetarists for ignoring the effects of monetary expansion on interest rates and asset prices and for assuming that a stable price level indicates an absence of inflation. Brown adopts Rothbard’s view that the 1920s were an inflationary decade, because, despite the rough price-level stability that obtained, asset and commodities markets were “overheated.” Brown also rejects the monetarist argument that price-level stabilization is the sine qua non of economic stability. He argues that price stabilization policy is one of the “dangerous features of Friedmanite monetarism” which “Austrian critics have long highlighted” and “which in hindsight may have played a role in the growth in Bernanke-ism.” Finally, and most insightfully, Brown also maintains that deflation is effective–and indeed, necessary–to extricate an economy from the depths of a recession or depression.

Needless to say, Dr Brown is no fan of Chairman Bernanke. In fact, in a memo today, Brown perceptively identifies the comedic aspect of Bernanke’s testimony on the first day of his semiannual monetary policy report to Congress. Writes Brown:

Comedy according to the theorists of drama is based on inflexibility of character. The lead role cannot in any way bend his stereotyped behaviour even when this would avoid an accident or disaster which is looming. And so “Don Juan” of Molière is a comedy. Even when the ghostly statue of his slain victim threatens to take Don Juan on a fiery descent into hell, the lead character cannot show remorse and desist from his life of debauchery. Chekhov listed his “Cherry Orchard” as a comedy because the lead characters could not shake themselves out of their nonchalance and avoid bankruptcy by selling the cherry orchard of their villa to a property developer on which he would build bungalows.

And so we come to the monetary comedy which played out in Washington yesterday. Professor Bernanke, adamant as always that the road to economic prosperity and stability takes the form of a rigorous targeting of inflation and supremely confident in a good outcome to his massive monetary experimentation tells his Congressional questioners that he sees no signs of asset price inflation which would justify changing his present policies. This is the same professor who largely repudiates any concept of asset price inflation and believes totally that any such dangers can be avoided well ahead of time by skilful action on the part of an army of regulators following the recently expanded book of rules. And this is the same professor who denies that monetary disequilibrium played any role in the giant asset and credit market inflations of the last two decades.

There is another element in the monetary comedy under the title of “Fed chair’s semi-annual testimony to Congress”. This is the failure of congressional questioners to hold the professor to account. When he declared that there is no asset price inflation, there was no follow on question such as “but professor you still say there was no asset price inflation in the last great bubble and bust and deny that the Fed of which you were a leading policy maker was in any way responsible: why should we believe you now?” That there should be no such question is part
of the comedy, in its literal sense.

Dr. Brown will deliver the Murray N. Rothbard Memorial lecture at the Austrian Economics Research Conference in March 2013.

America’s Great Depression Quote of the Week: The Nature of the Boom and Bust

Boom and Bust: What must be explained in any theory of the business cycle?

First and foremost is the general cluster of errors. See Hulsmann’s Toward a General Theory of Error Cycles:

 The explanation of depressions, then, will not be found by referring to specific or even general business fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors? This is the first question for any cycle theory. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses; they are suddenly revealed to have made grievous errors in forecasting.

Second, what has been recognized in real business cycle theory as a stylized fact of cycles, is the greater fluctuation of time dependent industries (capital goods and consumer durables) relative to industries serving more immediate consumption.

 Another common feature of the business cycle also calls for an explanation. It is the well-known fact that capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries—especially the industries supplying raw materials, construction, and equipment to other industries—expand much further in the boom, and are hit far more severely in the depression.

Third is the correlation between money and output over the cycle.

 A third feature of every boom that needs explaining is the increase in the quantity of money in the economy.

This third feature is highlighted by real business cycle models as well but is viewed as harmless reverse causation. But as Rothbard shows, the money and credit creation during the expansion, rather than being a harmless endogenous response of banks to changing market conditions, sets the stage for the boom-bust pattern of the cycle.

All quotes are from pp. 8 and 9.

The $59 Recession Solution

George at “Barbarous Relic”, writes:

Joseph Salerno, professor of economics at Pace University and author of Money, Sound and Unsound, recently taught a course in Austrian Macroeconomics at the Mises Academy.  For a $59 registration fee that included all the reading material, anyone with access to the internet could sign up. As with all Academy courses, the lectures were recorded and are made available to students indefinitely.

In his final lecture Salerno presented the Austrian Business Cycle Theory and showed how, during a recession, the policy prescriptions of the Austrians differs from those of the Keynesians.  The chart below summarizes and contrasts the policies.

What follows is my understanding of the chart, and any errors of interpretation are mine alone.  In English, the chart reads as follows:

Fiscal policy, Austrians
: Lower Taxes (down-arrow T), reduce government spending (down-arrow G), and balance the budget (Taxes minus government spending equals zero).  Note: Paul Krugman would likely condemn this policy as “fiscal austerity,” and it is – for the government.  But obviously not for the taxpayers.

Fiscal policy, Keynesians: Lower taxes, increase government spending, and run deficits (government should spend more than it collects in taxes).  Note: Lowering taxes in a recession is the one area where Austrians and Keynesians agree, though President Obama, who in other ways follows the Keynesian playbook, has raised taxes.

Monetary policy, Austrians: Freeze the money supply M (delta M equals zero), let the interest rate adjust according to the time preference of market participants.

Monetary policy, Keynesians: Goose the money supply (up-arrow M), annihilate the interest rate (down-arrow i).

Microeconomic policy, Austrians: Repeal all laws keeping the market from clearing, including policies that prevent wages W and prices P from adjusting to supply and demand.

Microeconomic policy, Keynesians: Use the power of government to keep wages and prices from adjusting to market conditions.

Regulatory policy, Austrians: Remove government regulations and allow the market to perform its regulatory function instead.

Regulatory policy, Keynesians: More government regulations, especially in the financial sector.

No one in the seats of power saw the financial crisis coming because, we’re told, financial crises are a lot like “earthquakes and flu pandemics,” difficult to predict.  Not coincidentally, none of those in power are Austrians.  After five years of Keynesian and other anti-market “remedies,” Europe overall is in recession, while U.S. growth in the last quarter of 2012 declined by $4.9 billion even with a $165 billion “stimulus” behind it.  Before the Fed and the government decided to “do something” about a floundering economy, crises lasted on average 18 months to two years.  Although this last one was officially over in 2009 – see Robert Murphy’s take on what this means – unemployment is still high, while optimism among consumers and small business owners remains very low.

I don’t recall reading any restrictions that would’ve prevented central bankers and senior government officials from registering for Salerno’s course.  It’s too bad for them but especially for us, because given their track record we can expect even bigger calamities down the road.  If they found the registration fee too pricy but would otherwise be willing to take the course, I would be glad to empty my piggy bank on their behalf the next time it’s offered.

We need to let the market breathe before the Keynesian maestros put us out of business.

Mark Thornton Explains the Real Meaning of Austerity

Ryan McMaken writes:

In the February The Free Market, Mark Thornton notes that in the current media narrative, “austerity” means raising taxes to pay wealthy bankers.

Authentic austerity -the good kind-forces the government to actually get smaller:

Real austerity is not adding more difficulties on the productive sector of the economy in the form of higher taxes. The private sector produces, the public sector consumes. The IMF’s idea of raising taxes on individuals to pay off international banksters is bad economics and is not real austerity.

Read more here (PDF).

Classing Up The General Theory

Here is an image of the back cover of the Romanian edition of Keynes’s General Theory published in 2009. If you look close enough you will see that the blurbs feature quotations from Murray Rothbard, Ludwig von Mises, and Paul Krugman, in that order starting from the top. Rothbard’s and Mises’s statements do not refer directly to Keynes or the General Theory, and it is hard to understand why they would be there except to add cachet to the book. It’s just another example of the ever-expanding and world-embracing influence of the two greatest economists of the twentieth century.

HT to Carmen Dorobat.

Keynes's General Theory

A Satisfied Student

A Mises Academy student emails Joseph Salerno:

AUSTRIAN MACRO COURSE-WELL DONE!

I just wanted to tell you how much I enjoyed this course! It was my first offering from the LvMI and I look forward to many more. I also liked the title you chose….very clever….it peaked my curiosity!

I feel much better armed to define/defend Austrian concepts as I deal with the statists around me. You have helped to “deprogram” me from some of the undergraduate econ courses I have taken. Thanks again for such a wonderful learning experience. I look forward to future offerings. Well done.

Ron Paul on the Libertarian Future, at the recent Mises Circle in Houston

“Murray’s Dream Come True”

That is what the great Ralph Raico called the Mises Institute, as he was interviewed by David Gordon for our Oral History Project.

Ralph_raico

Armen Alchian, RIP

Armen Alchian died on February 19 at the age of 98.

I learned this on February 20. At the end of the day on February 19, I was working on a book I am writing on the structure of economic thought. I try to write two pages a day. I wrote this:

There is a long tradition for economics textbooks to begin with scarcity. The most rigorous of the textbooks in the Chicago School tradition, Allen and Alchian’s University Economics (3rd ed., 1972), may be the only textbook ever written that begins with Chapter 0: “How Much Mathematics and Graphs?” Chapter 1 is titled “Scarcity, Competitive Behavior, and Economics.” It begins: “Ever since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety. Two villains – nature and other people – prevent us from getting what we want. Nature is niggardly: it provides fewer resources than we could use, and much of what is available is made useful only by hard work. As for other people, the problem stems not from malevolence: their wants and ours simply exceed what is available.”

When I wrote it, I thought: “I wonder if Alchian is still alive.” I thought I would check Wikipedia, but I got sidetracked. Now I know.

I first met him at a conference at what was then called Claremont Men’s College in the summer of 1969. It was a conference of free market economists sponsored by the Institute for Humane Studies. The organizer was F. A. “Baldy” Harper, who had founded the IHS after he was dismissed in 1962 as the director of the William Volker Fund. Also in attendance were Sam Peltzman, Douglas Adie, Tibor Machan, Anne Wortham, and Alchian’s daughter, who was working on her Ph.D. Henry Manne was one of the instructors. So was Murray Rothbard. The meeting was dominated by Chicago School economists and grad students.

He devoted much of his career to studying property rights. This was surely a positive endeavor. At that conference, I decided on a new topic for my Ph.D. dissertation. I was had planned to write on the New England Puritans’ views on eschatology: the biblical doctrine of the final judgment. I changed my mind. I began work on what finally became The Concept of Property in Puritan New England, 1630-1720. There is a Freeman version here: Puritan Economic Experiments. I do not recall if Alchian’s presentation was the only reason I switched. His was surely the main one.Alchian liked to use the Socratic method. He asked questions. I recall one of his arguments, namely, that the state is like a voluntary club, analytically speaking. I should have piped up, “No professor, the state brandishes a club.” I forget what his point was. The presupposition was so preposterous that I could not shake it off . . . not after four decades.

Yet the reason I cited his textbook on the day he died was to point out that he and most other economists still begin their textbooks with the concept of scarcity, not ownership. Why not begin with private property? Alchian more than any other economist should have understood this. Academic traditions die hard.Tom Bethell was correct in Chapter 7 of his wonderfully written and horribly titled book, The Noblest Triumph (1999), when he argued that Adam Smith made a strategic error by beginning The Wealth of Nations with a discussion of the division of labor rather than property rights. For the next 180 years, free market economists were on the defensive against socialists, who went to the heart of the matter: ownership. As Bethell pointed out in Chapter 20, Alchian was the first free market economist – anyway, the first Chicago School economist – to rectify that error. (Harold Demsetz was the other major contributor.) Alchian began his work on property rights with an article on academic tenure and how it reduces productivity. Volume 2 of his Collected Works (Liberty Fund) contains his many articles on property.

I tell students that textbooks are obviously written for captive audiences, because no one goes back to re-read a college textbook. But I always offer one exception: University Economics. I read it, and no one ever assigned it to me in college. I won’t say that I have ever re-read it, but I surely go back and re-read sections. It is worth quoting. It is a shame that it has been out of print in its hardback edition for almost four decades. Its price on Amazon reflects this.

I once spotted an error of logic in the book. I recall writing to him to ask about it. I said that I realized that Chicago economists have odd ways of viewing things, but he seemed to have gotten things backward. He wrote to thank me, and said that he always appreciated free proofreading. He said to be alert to more errors. That reply persuaded me to adopt a policy of posting my books free of charge on a pre-publication basis, challenging readers to spot mistakes. That has saved me countless typos over the years. Thanks, Armen!

He wrote a textbook and dozens of journal articles. He did not write monographs.

Jews are good at business. Armenians are good at business. A lot of famous economists are Jews. Only one famous economist was an Armenian. Now he is gone. It would be nice to see a replacement with ian or yan at the end of his name. 

Two Amazingly Interesting New Courses Starting in March

From the Mises Academy, our online learning platform:

Human Action: Part II with David Gordon, covering Mises’ most profound insights into the nature of society.

American Bankster: Money, Banking, and the Power Elite in US History with Thomas DiLorenzo, covering Rothbard’s groundbreaking analysis of the American oligarchy.

Sign up and get ready to have your mental horizons enjoyably expanded!

Mark Thornton Discusses Spielberg’s Lincoln Movie and the Civil War

Mark Thornton was interviewed yesterday by Gary Franchi on Next News Network’s WHDT World News Program, which has a potential TV and internet audience of over 8 million viewers.

Coolidge and 1920s Prosperity: Some Cautions

Amity Shlaes in today’s Wall Street Journal provides  “The Coolidge Lesson on Taxes and Spending” makes the argument that those, as has been done at Mises Daily here, and here who want to “make government smaller” and “to lower taxes” as a means to “yield prosperity” should look not to Ronald Reagan but to “Silent Cal” Coolidge.

Coolidge’s record:

“The 30th president cut the top income-tax rate to 25% (lower than the 28% of the historic Reagan cut of 1986). Coolidge reduced the national debt and balanced the budget. When he departed the White House for his home in Northampton, Mass., he left a federal budget smaller than the one he found.

Shales points out Coolidge had a governing philosophy, “It is much more important to kill bad bills than to pass good ones,” which would be an ideal counter to today’s knee jerk “urge to action,” the overactive animal spirits of the political class. He had a strategy on budget cuts that would be appropriate today; he “understood that ambitious budget cuts would be accepted if he could ‘align’ them with ambitious tax cuts.”

More on why Coolidge should be on the better (not necessairy good) list of presidents comes from a speech I heard years ago at Metro State by Robert Novak. Novak argued Coolidge was his favorite president because by his (Coolidge’s) own admission Coolidge slept 12 plus hours a day. Novak added he knows of no president who had harmed the U. S. while sleeping.

Rothbard’s America’s Great Depression is a good place to get additional insight into Silent Cal, the good, the bad, and perhaps even the ugly. A quick word search for Coolidge of the pdf yields some gems worth considering.

Some good: Paul Johnson from the introduction to the 5th edition (xvi) on Hoover and Coolidge:

Hoover’s was the only department of the U.S. federal government which had expanded steadily in numbers and power during the 1920s, and he had constantly urged Presidents Harding and Coolidge to take a more active role in managing the economy. Coolidge, a genuine minimalist in government [emphasis added]“For six years that man has given me unsolicited advice—all of it bad.”

Some bad and ugly all per Rothbard:

Coolidge and low discount rate and inflationary policy (121):

An inflationary, low-discount-rate policy was a prominent and important feature of the Harding and Coolidge administrations. Even before taking office, President Harding had urged reduction of interest rates, and he repeatedly announced his intention of reducing discount rates after he became President. And President Coolidge, in a famous pre-election speech on October 22, 1924, declared that “It has been the policy of this administration to reduce discount rates,” and promised to keep them low. Both Presidents appointed FRB members who favored this policy.

As a cheerleader for the stock market boom (125):

Another important means of encouraging the stock market boom was a rash of cheering public statements, designed to spur on the boom whenever it showed signs of flagging. President Coolidge and Secretary of Treasury Mellon in this way acted as the leading “capeadores of Wall Street.

And:

The boom again began to weaken in the latter part of March, whereupon Mellon once more promised continued low rediscount rates and pictured a primrose path of easy money. He said, “There is an abundant supply of easy money which should take care of any contingencies that might arise.” Stocks continued upward again, but slumped slightly during June. This time President Coolidge came to the rescue, urging optimism upon one and all. Again the market rallied strongly, only to react badly in August when Coolidge announced he did not choose to run again. After a further rally and subsequent recession in October, Coolidge once more stepped into the breach with a highly optimistic statement. Further optimistic statements by Mellon and Coolidge trumpeting the “new era” of permanent prosperity repeatedly injected tonics into the market.

As an advocate of a polically induced business cycle (153):

 The motives for the American inflation of 1924, then, were to aid Great Britain, the farmers, and, in passing, the investment bankers, and finally, to help reelect the Administration in the 1924 elections. President Coolidge’s famous assurance to the country about low discount rates typified the political end in view. And certainly the inflation was spurred by the existence of a mild recession in 1923–1924, during which time the economy was trying to adjust to the previous inflation of 1922. At first, the 1924 expansion accomplished what it had intended—gold inflow into the United States was replaced by a gold drain, American prices rose, foreign lending was stimulated, interest rates were lowered, and President Coolidge was triumphantly reelected.

Steadfast inflationist (163):

 The proper monetary policy, even after a depression is underway, is to deflate or at the least to refrain from further inflation. Since the stock market continued to boom until October, the proper moderating policy would have been positive deflation. But President Coolidge  ontinued to perform his “capeadore” role until the very end. A few days before leaving office in March he called American prosperity “absolutely sound” and stocks “cheap at current prices.”

As an advocate of pubic works to combat recession (197):

 In January, 1925, Hoover had the satisfaction of seeing President Coolidge adopt his position. Addressing the Associated General Contractors of America (a group that stood to gain by a government building program), Coolidge called for public works planning to stabilize depressions.

Agricultural socialism (226):

 Coolidge firmly believed that government “must encourage orderly and centralized marketing” in agriculture

The prosperity of the 1920s appears much like prosperity of the “Great Moderation” where a supply-side focused fiscal policy enhanced productivity was combined with a loose monetary policy guided by an emphasis on price level stability provideda toxic mx leading to a significant boom-bust cycle. Should be a cautionary tale for those enamored by  the promise of nominal gnp targeting.

Mises’s Liberalism coupled with Rothbard’s wisdom is a better guide to truly free and prosperous commonwealth than the policies of either Reagan or Coolidge.

Armen Alchian (April 12, 1914 – February 19, 2013)

Arline Alchian Hoel reports that her father, Armen Alchian, “passed away peacefully in his sleep early this morning at his home in Los Angeles.” He was 98 years old.

Armen Alchian was a major figure in the economics profession for more than half a century. At UCLA, where he spent his academic career as a faculty member in the department of economics, he was a legend to generations of graduate students, who were required to take the price theory course he taught in the first year of the program. He used the Socratic method: he simply walked into the class each day and asked a student a question. From that point, the discussion went back and forth between teacher and students. Woe to any student who had arrived unprepared—and sometimes to those who had prepared. Public embarrassment was the price such students had to pay. But in the end, the students came away from the course with a healthy measure of their teacher’s mastery of applied price theory.

And master he was. Besides having a knack for making sense of countless aspects of economic and social life by viewing them as relative-price problems, Alchian helped to blaze trails toward extremely valuable improvements in microeconomic analysis by bringing into the analysis careful treatments of information, uncertainty, transaction costs, and property rights. For him, little difference existed between micro and macro; both were to be understood by using the same basic economic analysis of individual choice.

Alchian’s textbook, written with Bill Allen, differed from existing texts. It was, for one thing, not dumbed down. In addition, it included many questions at the end of each chapter, some of which were quite difficult. At the University of Washington in the late 1960s and 1970s, we used the Alchian and Allen book at every level: introductory, intermediate, and first-year graduate. The only difference came in the level of sophistication we expected in the answers to the questions. Although Alchian did not lack mathematical skills—from 1942 to 1946 he worked as a statistician for the Army Air Corps—his work did not display much mathematical formality. For the most part, he said what he meant in straightforward English prose, spiced with wit and sparkling asides.

Many of Alchian’s students and friends believed that he well deserved a Nobel prize in economics, but this recognition never came to him. Yet, aside from Ronald Coase, no one had a greater influence in creating and fostering what has come to be known as the New Institutional Economics, one of the most notable improvements in mainstream economics during the past half century. Armen was also a genial and friendly man who loved to play golf. He was always at ease among colleagues and affected none of the arrogance that lesser lights sometimes impose on others. He leaves a rich legacy of grateful students and friends, and a profession substantially advanced in no small part because of his creative efforts.

America’s Great Depression Quote of the Week: Hayek and Keynes in a single paragraph

My introduction to Austrian economics began over 30 years ago when my mentor Fred R. Glahe handed me a couple of pages of handwritten notes on the Hayek-Keynes debate which he had prepared for commentary at a Mont Pelerin Society meeting sometime in the late 1970s and suggested I turn the notes into a dissertation. The ultimate result was the publication (with Fred) of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research, a 200 page attempt to make Hayek-Keynes and ABCT intelligible to a traditional trained neoclassical who in the process became a self-taught Austrian. I recently revisited the debate when Chris Coyne asked me to complete a chapter (40 more pages) on Keynes and the Austrians for a forthcoming handbook on Austrian economics. Roger Garrison in Time and Money does a masterful multiple chapter comparison of Hayek-Keynes (and an excellent power point as well). More recently David Sanz Bas provides a new look at the debate in a QJAE article “Hayek’s Critique of The General Theory: A New View of the Debate between Hayek and Keynes.” Videos, “Fear the Boom and the Bust”and “Fight of the Century”, by John Papola and economist Russell Roberts  popu­larized the idea that Hayek and Keynes (and their differing views on the virtues of markets and individual planning versus government intervention and more centralized planning) are crucial for understanding the current economic stagnation and policy debates. All are useful but lengthy. For those with limited time, Rotbard, in AGD, was able to capture the essence of the debate in a single paragraph (note 1 page 37):

Hayek subjected J.M. Keynes’s early Treatise on Money (now relatively forgotten amid the glow of his later General Theory) to a sound and searching critique, much of which applies to the later volume. Thus, Hayek pointed out that Keynes simply assumed that zero aggregate profit was just sufficient to maintain capital, whereas profits in the lower stages combined with equal losses in the higher stages would reduce the capital structure; Keynes ignored the various stages of production; ignored changes in capital value and neglected the identity between entrepreneurs and capitalists; took replacement of the capital structure for granted; neglected price differentials in the stages of production as the source of interest; and did not realize that, ultimately, the question faced by businessmen is not whether to invest in consumer goods or capital goods, but whether to invest in capital goods that will yield consumer goods at a nearer or later date. In general, Hayek found Keynes ignorant of capital theory and real-interest theory, particularly that of Böhm-Bawerk, a criticism borne out in Keynes’s remarks on Mises’s theory of interest. See John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), pp. 192–93; F.A. Hayek, “Reflections on the Pure Theory of Money of Mr. J.M. Keynes,” Economica (August, 1931): 270–95; and idem, “A Rejoinder to Mr. Keynes,” Economica (November, 1931): 400–02.

If I had read that right after Fred handed me his notes, I might still be looking for a dissertation topic and world would have been spared an overpriced under read academic book.

Entrepreneurship and Knowledge

Hayek famously argued that prices embody information and that economic actors, responding to price changes, act as if they knew the underlying circumstances generating these changes. “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” To economize, people don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity . . . brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek illustrates with his famous example of the tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”

Hayek offers a powerful argument against interference with the price mechanism. But we should remember that prices embody information about the past, and the entrepreneur’s job is to anticipate, or “appraise,” the future. Entrepreneurs, far from discovering and exploiting “gaps” in the existing structure of prices, deploy resources in anticipation of expected — but uncertain — profits generated by future prices. For this, they rely on what Mises called a “specific anticipative understanding of the conditions of the uncertain future,” an understanding that requires a lot of knowledge of particular circumstances of time and place!

The knowledge requirements of the successful entrepreneur or arbitrageur are vividly illustrated in this passage from Carsten Jensen’s magnificent novel, We the Drowned, in a passage about 19th-century ship brokers, entrepreneurs who own, lease, and manage ships and shipping contracts:

A ship broker needs to know how the Russo-Japanese War will hit the freight market. He doesn’t need to be interested in politics, but he has to pay attention to his skippers’ finances, so a knowledge of international conflict is essential. Opening up a newspaper — he’ll see a photograph of a head of state and if he’s bright enough, he’ll read his own future profits in the man’s face. He might not he interested in socialism, in fact he’ll swear he isn’t: he’s never heard such a load of starry-eyed nonsense. Until one day his crew lines up and demands higher wages, and he has to immerse himself in union issues and other newfangled notions about the future organization of society. A broker must keep up to date with the names of foreign heads of state, the political currents of the time, the various enmities between nations, and earthquakes in distant parts of the world. He makes money out of wars and disasters, but first and foremost he makes it because the world has become one big building site. Technology rearranges everything, and he needs to know its secrets, its latest inventions and discoveries. Saltpeter, divi-divi, soy cakes, pit props, soda, dyer’s broom — these aren’t just names to him. He’s neither touched saltpeter nor seen a swatch of dyer’s broom. He’s never tasted soy cake (for which he can count himself lucky), but he knows what it’s used for and where there’s a demand for it. He doesn’t want the world to stop changing. If it did, his office would have to close. He knows what a sailor is: an indispensable helper in the great workshop that technology has made of the world.

There was a time when all we ever carried was grain. We bought it in one place and sold it in another. Now we were circumnavigating the globe with a hold full of commodities whose names we had to learn to pronounce and whose use had to be explained to us. Our ships had become our schools. They were still powered by the wind in their sails, as they had been for thousands of years. But stacked in their holds lay the future.

[Cross-posted at Organizations and Markets]

France Ratchets Up the War on Cash

France’s state auditing bureau, Cour des Comptes, informed the French government that it was “dreaming” in forecasting that the French economy would grow this year by 0.8 percent, which would enable it to meet its budget deficit target of 3 percent of GDP. The bureau told French Prime Minister Jean-Marc Ayrault that a growth rate of 0.3 percent was more like it, which would not be sufficient to meet the deficit reduction target. This was the case despite–or more likely because of–the fact that a broad based tax increase had just been imposed that would extract another €32 billion euros from overburdened French businesses and households this year. So would a desperate Ayrault finally open his eyes to economic reality and slash the budget of the bureaucratic and bloated French State, a budget that is liberally larded with fascistic corporate welfare subsidies and bailouts? No way, no how. Instead Ayrault convened a meeting of the National Anti-Fraud Committee to crack down on tax cheats and presided over it himself–”A first for a head of government,” he crowed.

Tax fraud in France has been estimated to be in the range of €60 to €80 billion annually. Buried in Ayrault’s proposal to crack down on tax cheats and further squeeze more revenue from its “fiscal residents”–those citizens and foreigners who have not been driven into part-time exile to escape French taxes–is a draconian provision that would lower the maximum cash payment per transaction from €3,000 to €1,000. Under the new limit a French citizen would not even be able to buy a used car for cash. The provision would not apply, however, to citizens and foreigners wealthy and savvy enough to have placed their income beyond the clutches of the rapacious French State by becoming fiscal residents of other countries. They would be subject to a limit of €10,000 per purchase in cash, down from the current limit of €15,000 per purchase. This may come to be called the Depardieu exception because French actor Gerard Depardieu recently caused a public stir by obtaining a Russian passport in order to take advantage of Russia’s flat-rate income tax of 13 percent.

One commentator perceptively summed up the inextricable link between the war on cash and the war on personal liberties:

With this law, the French government will be able to tighten the vise on its people one more turn, restricting their freedom of choice (how to pay), wiping out any privacy in those transactions, and imposing another layer of government control. Once people have gotten used to the €1,000 limit—based on the great principle of incrementalism with which restrictions of freedom come to pass in democracies—the vise will be tightened further, until the government can document every purchase made by “fiscal residents.”

HT to Nick G.

Ronald Dworkin, R.I.P.

Ronald Dworkin,  (1931-2013) who died yesterday, was widely regarded as America’s leading legal philosopher. He was decidedly not a libertarian, but libertarians will find much of interest and value in his work.  His defense of moral objectivity in his Justice for Hedgehogs (2011) is especially impressive. He argues that views about the nature of morality are themselves moral positions. If you say, e.g, that there is no objectively correct answer to the question whether abortion (or anything else) is morally  wrong, you are in effect saying that abortion is morally permissible. The supposed external criticism of morality–there is no such thing as moral truth— is really an internal proposal within morality. Many people will instinctively reject this “quietest” position; but if they do, they will I predict find it hard to show exactly where Dworkin goes wrong.

His famous essay “Is Wealth A Value?”, available in his collection A Matter of Principle, is a devastating criticism of Richard Posner’s wealth-maximization approach to law. Those of us who prefer a Rothbardian defense of the free market to the supposedly more scientific Chicago School view will find in Dworkin’s essay much of value. Although libertarians will find him far too egalitarian, he offers in Sovereign Virtue a strong emphasis on individual responsibility. In the same book, he offers some penetrating observations about Rawls’s Theory of Justice. My own favorite essay of his, also in A Matter of Principle, is his demolition of Michael Walzer’s Spheres of Justice. If you read it, you will see right away that Dworkin was a great critic.