Archive for August 2013

Mises and Hayek at Columbia and the Bank of International Settlements

Peter Boettke at Coordination Problem highlighted a paper by Guillermo Calvo of Columbia University, “Puzzling Over the Anatomy of Crises: Liquidity and the Veil of Finance,” which  is very sympathetic to the contributions of Mises and Hayek . Calvo goes so far as to argue, “the Austrian school of the trade cycle was on the right track.”

One of Calvo’s references, Claudio Borio (2012 ) “The financial cycle and macroeconomics: What have we learnt?” (Bank of International Settlements Working Paper No 395 Dec 2012) should also be of interest.

The strengths of both papers from an Austrian perspective, other than the papers certainly belie the claim by critics that ABCT has nothing to add to modern macro, are three:

  1. The papers argue recent empirical evidence, contra Freidman plucking, supports the Austrian view of a boom triggering a bust. Per Calvo, “There is a growing empirical literature purporting to show that financial crises are preceded by credit booms (Mendoza and Terrones (2008), Schularik and Taylor (2012), Agosin and Huaita (2012), Borio (2012)). Adding “This was a central theme in the Austrian School of Economics (see Hayek (2008), Mises (1952)).
  2. In a growing economy such as the 1920s and the 1990s and 2000s in the U.S., a monetary regime focusing on near term inflation, price, or even nominal GDP stability would still be subject to boom-bust cycles (Hayek and the 21st Century Boom-Bust and Recession-Recovery). Per Borio, A “major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening.”
  3. Calvo and Borio recognize, as do Hayek, Mises, and modern Austrians (Rethinking Capital-Based Macroeconomics) that expansionary monetary policy during the recession phase may actually impede recovery and/or trigger renewed mis-directions of production setting the stage for a future more destructive bust a la the “unfinished” 2000 recession and the destructive 07-08 bust.

Major Weakness:

Read More→

How Do You Like Your Central Planners, Bookish or Flamboyant?

“Do we really want a system in which one person’s personality type has such a huge effect on the global economy,” I asked in a critique of the Fed. Today’s Economist vividly illustrates my point, in making the case for Yellen over Summers:

Both Ms. Yellen and Mr. Summers are “doves,” rightly worrying more about economic weakness than any threat from inflation, but it is clearer how Ms Yellen would go about putting her views into practice. As the Fed’s vice-chairman she has pushed the current set of unconventional policies, from bond-buying to “forward guidance”. Under her leadership the central bank would influence market expectations with even more detail around its future plans. Her public demeanor would be much like Mr Bernanke’s: technocratic and based on meticulous command of the data. Her cautious, consensus-building approach would minimize surprises (and financial-market volatility) as the current chairman has.

Mr. Summers has a less clearly articulated approach to monetary policy and more political baggage. He has said little in public about how central banks can best support economies when short-term rates are at zero. Judging by his record in other areas, he is likely to push for creative solutions but to prefer not to have the Fed’s hands tied by promises about its future direction. The chances are that a Summers Fed would be even bolder, but less predictable, than the Bernanke Fed. Mr Summers’s dazzling intellect would make for bravura public performances, but he would be more likely to unsettle the markets with unscripted comments and to alienate both other Fed governors and lawmakers.

I knew Yellen in grad school and have encountered Summers in person, and I agree fully with these characterizations. But the Economist’s editorialist misses entirely the bizarre, indeed grotesque, context of this discussion. The Fed is the world’s most powerful government economic planning organization and its decisions affect the lives and prosperity of millions, if not billions. All this will hinge on the personality of one person? How about a system in which authority is decentralized, power is limited, and nobody cares who calls himself “Fed Chair”?

New Joseph Salerno Shirt in the Store

Whether he’s testifying in Congress, editing the Quarterly Journal of Austrian Economics, or heading up the Mises Institute’s many academic programs, Joe Salerno is there to supply some intellectual heavy lifting when you need it most.

With this unbelievably handsome gray t-shirt, now available in the Mises store, you can signal that you’re a serious student of Austrian economics, and that you know the purchase of this shirt will be no malinvestment.



Lying Americans into War (Again)

In my article entitled “The Liefare-Warfare State” on today I survey literature that shows that America’s wars have been wars of imperialism with the lone exception of the American Revolution.  The War of 1812 was an attempt to conquer Canada; the Mexican-American War was conducted to steal California and New Mexico from Mexico; Abe Lincoln announced in his first inaugural address that the “Civil War” was to be waged over tax collection to fund the Republican Party’s dream of a continental empire; the Spanish-American War was another war of conquest primarily so that American sugar and tobacco companies could run Cuba; and on and on.

To study the history, economics, and politics of imperialism and anti-imperialism more intensely consider taking my new Mises Academy course on the subject beginning on the evening of September 9.

Creative Destruction—The Best Game in Town

In his justly famous 1942 book Capitalism, Socialism and Democracy, Joseph A. Schumpeter described the dynamics of a market economy as a process of “creative destruction.” In his view, innovation—“the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates”—drives this process. Its most important result is that for the first time in history, the mass of the population in developed countries enjoys a standard of living that even the aristocrats of past ages could scarcely have imagined, much less have actually had.

Yet, as Schumpeter sought to express by his pithy term, the process is not merely creative, but also destructive. As a market economy develops, it necessarily brings about an immense variety of changes in particular demands and supplies, and hence it results in losses as well as profits. For those who rely on selling goods or services in declining or disappearing demand, for those whose locations no longer fit well into emerging spatial patterns of production, for those whose techniques of production no longer represent a means of maximizing net revenues, for those whose skills and experience no longer attract eager buyers in the labor markets—for them and countless others, the process of economic development brings anxiety, disappointment, loss, and in some cases ruin.

The losers take little solace in the thought that their economic displacement or demotion by more competitive workers and producers constitutes the heart and soul of a process by which the entire society, on average, becomes richer. And their plight has always attracted legions of critics who correctly blame the market system for the wreckage. It is simply impossible for the process of economic development to operate without losers. A market economy is a profit-and-loss system. Profits signal the desirability (to consumers) of moving resources to new employments; losses signal the desirability (to consumers) of removing resources from current employments. On the one hand, people are drawn by the prospect of heightened economic pleasure; on the other hand, they are repelled by the onset of persistent economic pain. In this way the overall system continually reshapes itself to comport more effectively with the prevailing patterns of demand and supply. Read More→

Rothbard and Menger on Private Money in ‘TAC’

Writes Brian LaSorsa in The American Conservative, on whiskey and Bitcoins:

It really isn’t until we reach the Misesian ideals of minimal government that we begin to see worthwhile considerations of private currencies. Austrian economist Murray Rothbard explains, “Many people—many economists—usually devoted to the free market stop short at money… . They never think of state control of money as interference in the free market; a free market in money is unthinkable to them… . So it is high time that we turn fundamental attention to the life-blood of our economy.”

Westerners began to use the whiskey as a medium of exchange, allowing them to trade with and travel to the east more frequently. Everyone from bartenders to surgeons needed alcohol, and its use as an intermediary became custom, verifying Austrian School founder Carl Menger’s analysis of the development of natural currencies: “The exchange of less easily saleable commodities for commodities of greater marketability is in the economic interest of every economizing individual… . Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence.”

See more.

Summer 2013 Edition of QJAE Now Online

qjaecoverThe Quarterly Journal of Austrian Economics, Volume 16, No. 2, a scholarly refereed journal published by the Mises Institute, is now available online.

Summer 2013′s articles:

From Monetary Nationalism to Monetary Imperialism: Fractional Reserve Banking and Inter-Government Cooperation by Nikolay Gertchev

Monetary Nationalism and International Economic Stability by Andreas Hoffman and Gunther Schnabl

Dynamic Monetary Theory and the Phillips Curve with a Positive Slope by Adrián O. Ravier

Free-Banking and Financial Stability in Peru by Luis Felipe Zegarra

Central Planning’s Computation Problem by Lucas Engelhardt

Review of The Economics of Edwin Chadwick: Incentives Matter by Robert B. Ekelund, Jr. and Edward O. Price III

Animal Spirits + Too Much Savings = Recession?

6515This week in Mises Daily: David Howden makes it easy to understand the Savings Glut vs. Easy Money debate around the causes of the current crisis:

Proponents of the global savings glut hypothesis must grapple with one unanswered question: What caused citizens of Asian countries to increase their savings rate and destabilize Western economies with their excess capital outflows? One could take the view that savings rates are exogenously determined — e.g., by animal spirits — yet this “explanation” only pushes the problem one step back. What determines these animal spirits?

Read the full article.

The Mises Store Now Accepts Bitcoins

The Mises Store is now accepting Bitcoins for all the books, apparel, and Mises busts you’ve been meaning to buy. Now’s your chance. Using Bitcoins will be even easier with the many changes coming to the bookstore in the future.

Was Keynes a Brilliant Investor?

The latest example of  Keynes hagiography is an article by David Chambers and Elroy Dimson in the Journal of Economic Perspectives (volume 27, number 3, Summer 2013, pp. 213–228).

The thesis is that Keynes was an investment genius and innovator who developed methods later used by Warren Buffett and George Soros.

Keynes did make a modest fortune through a combination of writing and investing. But to compare his speculative style with Warren Buffett’s long term investment style is preposterous. Consider these facts:

Keynes’s initial foray into investing led to a smash up. He lost everything he had unwisely borrowed and had to be bailed out by his parents, who had some inherited money but were not wealthy.

He did not do well in the 1920s. He was taken unawares by the the 1929 Crash and also by the 1937 rout. In both instances, he came perilously close to being wiped out again because of very concentrated holdings of currencies, stocks, and commodities and continuing use of leverage (as much as one pound of debt for every pound of his own). In short, Keynes was a speculator, at the same time that he criticized speculators and the “casino” atmosphere of the market. He also failed entirely to understand that the casino was fueled by the easy money policies which he espoused.

The article does disclose Keynes’s very large gold mining stock position in the 1930′s but fails to note the irony of this holding or his private praise of gold as a portfolio diversifier.