Archive for May 2013

George Selgin Defends Deflation–and Quantitative Easing

In an interview on CNBC’s European Closing Bell show, George Selgin presents an eloquent and compelling defense of deflation that is caused by increasing productivity in the economy. He refers to this as “good deflation.” Indeed, Selgin argues that such deflation is “desirable,” because any attempt by the Fed to offset it by monetary expansion will create asset bubbles.

Unfortunately, in the same interview, Selgin defends the first round of quantitative easing undertaken by the Fed in 2008 on the Keynesian grounds of the necessity of offsetting a fall in total spending or “aggregate demand.” In Selgin’s words:

Back in 2008 a case existed for quantitative easing because there really was a shrinkage of demand and the Fed needed to do something about it. . . . It [quantitative easing] is sometimes flawed and sometimes not depending on whether it is in response to falling demand that needs to be revived, where it can play a role in reviving it under the right circumstances. . . .

Furthermore, Selgin correctly points out that arguments for the Fed targeting a stable price level or an inflation rate of two percent “aren’t founded on anything really sound.” And yet Selgin goes on to call on the Fed to target a constant level of total spending or “nominal GDP” in order to achieve his own preferred rate of price change for the economy. “According to my theory,” says Selgin, “a healthy rate of deflation is one that looks like productivity growth.” But why is this rate of change in overall prices any less arbitrary than, for example, the 2.5 percent increase in prices that Bernanke prefers? Why must changes in overall prices reflecting the public’s changing relative valuations of cash holdings vis-a-vis consumer and producer goods be eternally suppressed by the Fed, particularly falling prices resulting from an increase in the demand for cash?

In fact Selgin expresses a profound solidarity with Keynesian macroeconomists like Bernanke when he states in his interview that a shrinkage in the demand for goods is undesirable and must be avoided, whether by quantitative easing or by mandating that the Fed target a constant level of nominal GDP in the long run. Like Bernanke et al. it seems that Selgin has not learned the first principle of business cycles, which was originally discovered by the classical economists and elaborated into a full theory by Mises, Hayek, and later Austrian economists. The classical economist David Ricardo gave this principle concise and elegant expression:

Men err in their productions, there is no deficiency of demand.

Those Threatening “Customers”

dmvI spent a lovely morning at the local office of the Department of Motor Vehicles. These are uniformly horrible places with long waits, surly employees, and arcane rules and procedures, and it’s not unusual for “customers” to get angry as well as frustrated.

I noticed this sign posted on the counter: “We reserve the right to refuse service to anyone because of irrational or threatening behavior.” It’s obvious why you might see such a sign at a DMV office. But what’s remarkable is that you never, ever see anything like this at a commercial enterprise. To be sure, customer service varies from store to store. But customers are, after all, customers, and it’s in the merchant’s interest to treat customers well. With government provision of goods and services, of course, the reverse is true: the “customers” have no choice where to go, and from the supplier’s point of view, each customer adds to its cost. As Mises noted in Bureaucracy, in government enterprises, “[t]he criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules. The supreme rule of management is subservience to such rules.” For the DMV, all that matters is making sure people wanting license plates or drivers licenses have filled out the proper forms, brought the proper documentation, waited in the proper lines, and behaved in the proper manner. Do the rules make sense? Do they increase the satisfaction of the customer? Who cares! They’re not “customers” anyway.

Sign of the Times

A new book by Portuguese economist João Ferreira do Amaral entitled Why We Should Leave the Euro is outselling Fifty Shades of Grey there. This makes sense given that both books center on painful relationships in which one party is being spanked and that are apparently difficult to dissolve. (h/t Bill Easterly)

Reading Hayek on the Road to Famine

Yang Jisheng, a Chinese journalist, is the author of the 2012 book Tombstone, a meticulously researched and definitive history of the Great Chinese Famine engineered by Mao Zedong from 1958 to 1962, during which 36 million Chinese perished from starvation.

In an interview with the Wall StreetJournal Mr Yang now reveals that he was greatly influenced by Friedrich A. Hayek’s classic work The Road to Serfdom , a heavily redacted version of which was translated into Chinese in 1997. Indeed Hayek had presciently written in this book, “In a country where the sole employer is the state, opposition means death by slow starvation.” Not only did Hayek’s book provide Mr. Yang with an explanation of the tragic events of his youth, it also explains the current Chinese system, which he maintains, has been completely misunderstood. The Wall Street Journal summarized Mr. Yang’s position as follows:

“China’s economy is not what [Party leaders] claim as the ‘socialist-market economy,’ ” he says. “It’s a ‘power-market’ economy.”

What does that mean?

“It means the market is controlled by the power. . . . For example, the land: Any permit to enter any sector, to do any business has to be approved by the government. Even local government, down to the county level. So every county operates like an enterprise, a company. The party secretary of the county is the CEO, the president.”

Put another way, the conventional notion that the modern Chinese system combines political authoritarianism with economic liberalism is mistaken: A more accurate description of the recipe is dictatorship and cronyism, with the results showing up in rampant corruption, environmental degradation and wide inequalities between the politically well-connected and everyone else. “There are two major forms of hatred” in China today, Mr. Yang explains. “Hatred toward the rich; hatred toward the powerful, the officials.” As often as not they are one and the same.

Hmmm, a market economy controlled by power, heavy regulations on new entrepreneurial ventures, arbitrary exercise of political power, economic cronyism, rampant corruption, the close correlation of wealth and political power? Sounds like another so-called market economy we are all familiar with.

Krugman Accused of Uncivil Behavior

“The gloves are off in the roiling academic dispute over the merits of austerity and the dangers of debt.”

In the latest round, Harvard economists Kenneth Rogoff and Carmen Reinhart accused Princeton economist and New York Times columnist Paul Krugman of “spectacularly uncivil behavior” and the inaccurate allegation that they refused to share data supporting their work linking heavy debt levels to subsequent slow economic growth.”

China Review

Here is a book review from the Wall Street Journal that gives a good picture of the past and present of China.

The Last Knight in Russia


May 24th, 2013 will remain in the annals of the Circle Bastiat as an infamous day of self-promotion. There is indeed a second publication which yours truly is most happy to announce: the Russian edition of the Last Knight of Liberalism: Последний рыцарь либерализма: Биография Людвига фон Мизеса (Chelyabinsk: Социум, 2013), 893 pp. Translated by Alexander Kuryaev, Tatiana Danilova, Elena Vasilyeva, Marina Oborina, Yuri Nurmeev, Vasily Koshkin, and Natalia Avtonomova.

My Bielorussian doctoral student, Olga Peniaz, sent me the picture of the book-cover, which seems to be identical with the Amercian edition except for the Cyrillic letters. How truly astonishing that the first translation of this book (and possibly the only one ever) has been made for those very people who arguably suffered most under the ideas of statism and socialism, which the great Ludwig von Mises opposed so fiercely during all his life. My special thanks go to the wonderful persons who have made this edition possible, especially to the sponsors, and to the translator team coordinated by Alexander Kuryaev, who also made a book presentation on May 18th (watch the video as from about 1h30). God bless you, and I hope to meet you all in person one day.

Political Economy of Finance


Yours truly is happy to announce a new book publication : Krise der Inflationskultur (Munich: Finanzbuch-Verlag, 2013), 320 pp.

The strongest criticisms of fiat money and central banking have been based on monetary considerations and on the theory of capital. By contrast, the repercussions of an inflationary monetary system on financial markets and on the use of wealth has been somewhat neglected. The present essay on the political economy of finance fills this gap. The central thesis is that, in a fiat money system, financial markets tend to turn into engines of destruction; they absorb excessive amounts of savings, facilitate the consumption of savings, and reinforce a culture of inflation that saps and undermines the economic foundations of civilisation.


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Six Stages of the Libertarian Movement

Speech (transcript) by Murray Rothbard: The Six Stages of the Libertarian Movement.

Mises U on

The Mises Institute and Mises Univeristy are mentioned and pictured in this column asking Will Think Tanks Become The Universities of The Future?