Archive for June 2013

Crisis: Interventionism or Free Markets?

Shawn Ritenour, author of Foundations of Economics, channels Mises to dispute the “sad narratives of the financial meltdown of 2008 and its aftermath .. that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth” is his excellent commentary  Is the Economic Crisis an Indictment of Capitalism?” His conclusion:

In a free market rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and the like that they are able to reap profits for which they have not sowed productive activity.

I was struck by how much of what Mises said about the response of many to the Great Depression applies closely to our current situation. Just like Mises, we must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.

Pierre Lemieux’s Somebody in Charge: A Solution to Recessions? “debunks the “markets caused the problem” literature in “The Laissez-Faire Scapegoat,” and “The Crime Scene”.”

From my review:

The U.S. reforms were truly incomplete and were being reversed. Prior to the 2007–2009 recession, the U.S. system was an entrenched mixed economy with, as Lemieux puts it, “the line between politicians and bureaucrats on one hand and tightly regulated private companies on the other hand . . . blurred” (p. 82). The regulatory climate, from at least the mid- to late 1990s, was not pro-business, free market, or antiregulatory. In fact, the George W. Bush years were “one of the most regulation-heavy periods in American history,” with an “American banking system and financial system that certainly could not be described as laissez-faire. It was tightly supervised and controlled by the authorities—in the spirit of the times” (p. 102, emphasis added). One major financial institution of central control was mostly unaffected by the liberalizations of the 1980s and actually ended the era with enhanced prestige and power—the Federal Reserve System (the Fed).

Once the crisis hit, many economists (pp. 83–102), pundits, and political opportunists such as the democratic majority on the Financial Crisis Inquiry Commission jumped to the conclusion that “the banks led us into the financial crisis” (Wallison 2011). According to this faulty representation of the events leading to crisis and recession, blame lies with a malfunctioning private sector, driven by unconstrained greed and supported by a laissez-faire ideology (Wallison 2011). However, this crisis was not one of capitalism, but of “regulated capitalism” (Friedman 2009). Lemieux debunks the “markets caused the problem” literature (see chapter 4, “The Laissez-Faire Scapegoat,” and chapter 5, “The Crime Scene”).

Salerno Interview on the Fed

Joseph Salerno appeared on Russia Today’s TV show Prime Interest to discuss money, the Fed and the future economic crisis. He comes on at about the 3 minute mark.

Link to show

“Cultural Entrepreneurship”

I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:

[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.

Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”

Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)

I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.

[Cross-posted from Organizations and Markets]

Connell on Machlup

Carol Connell, author of several insightful articles on Fritz Machlup (including “Fritz Machlup’s Methodology and The Theory of the Growth of the Firm” in the 2007 QJAE), has a new book, Reforming the World Monetary System: Fritz Machlup and the Bellagio GroupThe book deals with Machlup’s attempts in the 1960s to organize a group of elite economists to make recommendations on international monetary policy. No one in Machlup’s group, including Machlup himself, recommended a return to the international gold standard, which led to a temporary falling-out between Machlup and Mises.

“Banish Fractional Reserve Banking for Real Reform”

. . . says Thomas Mayer, a former IMF economist and former Chief Economist of Deutsche Bank Group and Head of DB Research, and now a Deutcshe Bank Senior Advisor. In a letter today to the Financial Times, Mayer writes:

But no reform can make banking really safe as long as the industry operates within a fractional reserve system, where banks create “inside” money (for example sight deposits) by extending credit and promise to exchange this against “outside” money at any time on demand.

Mayer goes on to cite Austrian monetary and business-cycle theorist Jesus Huerta de Soto on the causal connection between fractional reserves and banking crises throughout history. He points out: “Since there is no single state in the eurozone able to bail out banks in a systemic crisis, a banking regime without state backing is needed.” He concludes his letter with a four-step plan for “comprehensive” banking reform that would implement just such a regime:

First, define as safe an asset that can be converted any time and under any circumstances at face value into legal tender. Second, create safe (“insured”) deposits by requiring banks to back them fully with reserves at the central bank. Third, create a cascade of loss-absorbing bank liabilities, starting starting with bank equity and ending with investor deposits (not subject to the 100 percent reserve holding). Fourth, make banks treat eurozone government bonds as assets that can default and help them to reduce their holding of these bonds.

Mayer discusses his proposal for 100 percent reserves in more detail in a policy paper published by the Centre for European Policies Studies.

HT to Toby Baxendale.

Who Says the Market Cannot Supply Its Own Money?

I just arrived back from lecturing at the week-long Free State Project’s Tenth Annual Porcupine Freedom Festival, a huge gathering of libertarians of all stripes from all over the U.S. in the beautiful White Mountains of New Hampshire. As you can see by browsing the schedule, the festival was chock full of educational and social events as well as commercial activities of the “grey market” (and perhaps  darker) variety. Many of the vendors accepted an array of payments media. I was particularly struck by the sign on one stall which read: “Bitcoin, silver coins, Shire Silver, ammo and even Federal Reserve notes accepted.”

Speaking of alternative payments media, I was very impressed with the panel on Bitcoin’s Future featuring Darren Tapp, Jay Best, Josh Harvey,and Teresa Warmke. It was very informative and the panelists avoided the usual hysteria common among Bitcoin supporters in favor of a serious and sober discussion of the advantages and disadvantages of holding and using Bitcoin and the various technological and political  factors that may affect its future value and developments as an anonymous means of transferring money payments.

shire silver photo

I was also delighted to discover that privately minted gold and silver money were circulating at the festival in the form of the aforementioned Shire Silver. This consisted of flat strips and wire strands of silver or gold of various weights embedded in plastic cards and denominated in various weight units from .05 grams to 1.0 grams. These were widely accepted as media of exchange by vendors and paid out in change. Pictured on the left are .5 grams of silver with a purchasing power of $1.00 and .05 grams of gold with a purchasing power of $4.00.

 

Mises Institute South Africa

There is now a Ludwig von Mises Institute in South Africa. This interview with Chris Becker describes the Austrian scene in South Africa and the purpose of the Institute. However, it also has a good discussion about the decline of South Africa, the rise of Subsaharan Africa, gold and much more.

The Bush-Obama Great Stagnation

Robert Higgs has another must read in his “Etceteras …  Real Gross Domestic Private Product, 2000-2012” in the most recent Independent Review.

He provides good arguments on why government product should be (and perhaps almost was) excluded from income and product accounts. He then builds a measure of Real Gross Domestic Private Product for the Bush-Obama years.

Based on his calculations, he states, “Perhaps the most positive statement we can make about the private economy’s performance during this thirteen-year period is that it has been somewhat better than complete stagnation.” Recent daily articles have highlighted how the Hoover-Roosevelt Great Depression was the result of bad policy and accompanying regime uncertainty (see here and here).  Drawing on work by Mark Thornton (“Hoover, Bush, and Great Depressions”), I have been, too slowly, working on an argument that U.S. is currently in the middle of the Bush-Obama Great Stagnation. A Great Stagnation caused by bad policy and the associated regime uncertainty.  This new data helps cement the case.

Professor Higgs might be even more pessimistic:

If the government and the Fed persist in the kind of destructive policies they have undertaken since 2007, the potential for another great depression will remain. Even without such a catastrophe, the U.S. economy presents at best the prospect of weak performance for many years to come.

“Neoclassical” Geometry

EUCLIDEAN GEOMETER: Given the standard axioms of Euclidean geometry, I have proved that the interior angles of a triangle always sum to 180 degrees.

AUSTRIAN ECONOMIST: Okay.

MAINSTREAM NEOCLASSICAL ECONOMIST: I regard the proposition that the interior angles of a triangle sum to 180 degrees as a testable hypothesis. I have obtained a $15.8 million grant from the National Science Foundation to conduct a field study. My graduate students will visit 118 countries to measure and record the interior angles of empirically observed triangles. We will then analyze these data with the latest econometric methods to determine whether, at conventional levels of statistical significance, the data warrant rejection of the hypothesis. In view of the subject’s importance, we expect that our report will be published in the American Economic Review or the Journal of Political Economy. Even if we conclude that the data do not warrant rejection of the hypothesis, however, we will continue to regard it as provisional, pending new data and tests that might warrant its rejection.

Mises Goes Global

Here is a directory of Misesian organizations. I count almost 30 Mises Institutes and over 30 Misesian-leaning organizations in all. Not all appear to be fully functional at this time, but it is a refreshing to see that we are winning the battle of idea around the world