Author Archive for Mark Thornton

Colorado’s Illegal Pot Market Thrives

Not unexpectedly, Colorado’s illegal marijuana market has been reported as thriving. The reasons for this are pretty straightforward. First, it is a new and highly regulated market making it difficult to supply products and keeping legal marijuana prices high. Also, steep taxes on legal marijuana exceeding 30% also are keeping prices high.

Camouflaged amid the legal medicinal and recreational marijuana market, the underground market thrives. Some in law enforcement and on the street say it may be as strong as it’s ever been, so great is the unmet local and visitor demand.

That the black market bustles in the emerging days of legalisation is not unexpected. By some reckonings, it will continue as long as residents of other states look to Colorado – and now Washington state – as the nation’s giant cannabis cookie jar. And, they add, as long as its legal retail competition keeps prices high and is taxed by state and local government at rates surpassing 30%.

Insanonomics Failing in Japan

Bush_Abe,_Camp_DavidAbenomics–the “new economic policy” in Japan is failing badly. It is a policy of inflation targeting, quantitative easing, government spending and higher taxes. Initially, it seemed to work in that the Japanese stock market rose significantly. However more recent reports find the real economy still stagnating and shrinking. The latest reports indicating the impact of the recent increase in the sales tax reducing production, consumption, and investment.

Japan is facing a crucial period as the government presses ahead with its much-ballyhooed Abenomics revival strategy.

The country has been mired in a malaise brought on by falling prices and a strong yen for years. But the economy’s prospects have brightened since Prime Minister Shinzo Abe announced fresh spending by the government and encouraged the central bank to unleash a wave of asset purchases.

Under his leadership, the yen has fallen sharply and stocks have risen dramatically. The IMF has endorsed the plan and Japan has largely avoided charges of currency manipulation.

Related: Japan debt tops 1 quadrillion yen

But the third pillar of the Abenomics plan — structural reforms — has been tougher to implement.

Abe’s government has proposed reforms that would make the labor market more flexible, encourage immigration, bring nuclear power plants back online and draw more Japanese women into the workforce.

Many of those proposals have foundered, or have been slow to develop.

Look for a new Mises Weekends show this Friday, with our guest Mark Abela in Tokyo discussing failed Abenomics and Japanese monetary policy- ed.  

HT: Mish’s GETA

The Costs of Unions

International_Broom_and_Whisk_Makers'_UnionThe economic performance of states that supports unions has lagged the economic performance of states with “Right to Work” laws. Over the last 10 years manufacturing output was stagnant in union states but increased by more than double digits in the Right to Work states, even when you exclude Michigan and Indiana which have recently passed Right to Work laws. Right to Work states continue to gain jobs and higher wages relative to union states.

A new report finds that unions cost individuals as much as $10,000 each in the strongest union states.

In “The Unintended Consequences of Collective Bargaining,” authors Lowell Gallaway and Jonathan Robe rank the states according to the negative impact unionization has had on each state’s economy over the last 50 years.

Similarly, when looking at overall state economies over this period, the authors show a reduction in state economic growth as high as 10-12 percentage points in some states.

The top five “worst” states were: Michigan, Alaska, Nevada, New York, and Hawaii. The five states that fared best were: South Carolina, North Carolina, Mississippi, South Dakota, and Texas.

Ron Paul Poll: Economics, Not Political

The Haven has posted the following poll question:

What do you think? Is Ron Paul right to think that a crash will be forthcoming? Or will the stock market continue to plow ahead as it has done since 2009?

“If Ron Paul Is Right, Then It’s Only A Matter Of Time Before This Happens… Again”

Paul is a student of the Austrian School of Economics, which contains Ludwig von Mises and Friedrich Hayek as a couple of its most brilliant thinkers. The Austrian School has long been critical of central banking; and Paul is no exception, having authored his own book called “End the Fed.” Dr. Paul thinks that the current interest rates are faulty and artificial, caused by the Fed. In turn, says Paul, investors make bad decisions based on the artificial interest rates, resulting in bubbles:

“One thing we have to remember is that when you get false information from artificially low interest rates, that mistakes are made, they’re inevitable. You make mistakes even when you have market rates of interest. But when the market rate of interest is so low for everybody, there’s a lot of mistakes, and that’s why you have the bubbles, and that’s why you go through the catastrophe we had in ’08 and ’09, and I think the conditions are every bit as bad as they were in ’08 and ’09.”
Paul remains steadfast in his belief that an America without a Federal Reserve would be a brighter America. He described the way investors are forced to hang on to every word of the Fed in the current environment:

Big Mac and the Dollar

Using McDonals’s Big Mac as the standard, the US Dollar looks relative firm compared to some other currencies. The chart below from The Economist looks at the purchasing power of currencies relative to the Big Mac in 2009 and 2014. A half dozen currencies have been relatively weak compared to the dollar and a half dozen have been in line with the dollar. Only the Norwegian Kroner and Swiss Franc have been relatively strong compared with the dollar over the time period. In a world currency war, most currencies, including the dollar could be losing purchasing power in an absolute sense.

Some central banks have helped their currencies slim down. The Swiss franc’s decline is thanks in part to the Swiss National Bank. It put a styrofoam lid on the franc’s value when capital began flowing in from panicked European investors, lest the rising cost of Swiss exports abroad drive Switzerland into recession. The Bank of Japan has also taken a bite out of the yen’s value. Its generous portion of quantitative easing has helped push the currency down from close to fair value to 24% below it.

The Chinese yuan, once the most undercooked currency in the index, is now only the 12th-most-undervalued, thanks to slow but steady appreciation in recent years. Yet because China’s economy has grown so quickly, it has piled on weight in the index, helping to push the average undervaluation even lower.

It is not on the whole surprising that currencies globally are looking a bit less supersized. A healthier American economy and reduced asset purchases by the Federal Reserve are a recipe for a stronger dollar. But American firms need to maintain their competitiveness. History suggests that even when Fed tightening is well done, it is rare that global credit conditions shift without a little scorching.

From the print edition: Finance and economics

The Subprime Auto Loan Bubble

A New York Times investigation has revealed another bubble, in this case, subprime loans on used cars. Of course this is not a surprise given the Federal Reserves ultra loose monetary policy and near zero percent interest rates that has forced banks, insurance companies, and just about everyone else to scamper to earn some return on their capital.

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.

And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.

Just another example of the surreptitious damage the Federal Reserve is inflicting on the economy in order to help the Big Banks.

Mises University Graduates

On my recent trip to the Oxford Union debate in the UK I had the good fortune to be able to attend a lecture by Ben Powell at the Adam Smith Institute in London. Ben attended Mises University in 1999 and 2000 and now teaches economics at Texas Tech University where he is also Director of the Free Market Institute. At his lecture I also saw David Skarbek who attended Mises University in 2004 and 2007. David now is a Lecturer in political economy at King’s College London. I also renewed my acquaintance with Sam Bowman. Sam attended the Mises University in 2009 and is now Director of Research at the Adam Smith Institute. Ben gave an outstanding lecture on the economics of sweatshops, but I was also immensely pleased to see all three outstanding graduates of Mises University and to learn of their ongoing accomplishments.


With Sam Bowman


With Ben Powell


With David Skarbek


“Something amiss…so it would seem”

The National Association of Credit Management issued its Credit Managers Index, calling it “less than impressive.” “It now appears that the economy contracted by far more than originally reported,” NACM economist Chris Kuehl said. “Add to this the latest data on durable goods and there is something amiss. Consumer confidence numbers have recovered to levels not seen since the start of the recession, but that renewed level of enthusiasm has not been enough to pull the economy forward, or so it would seem.” Most importantly the number of applications for credit increased, but so did the rejection rate. According to Kuehl. “When there are more applicants and more rejections, it is a signal that more companies in financial distress are seeking credit in the hopes that somebody will help them survive.”

Columbia, MD: June 30, 2014—This month’s Credit Managers’ Index (CMI) reading from the National Association of Credit Management (NACM) was 56.1—barely higher than it was in April, but falling well below May’s 56.8. The readings had been closing in on 60 (57.1 in November and 57.3 in January) and are still firmly in positive territory, but are now just not trending in the preferred direction. The services sector took the brunt of the impact, and the manufacturing sector did not budge, for the second month in a row.

After the readings last month, it was thought that the CMI would show continued progress, but the manufacturing sector was flat and the service sector experienced a very sharp decline—enough to drag the index down. “The drop was unexpected, which has suddenly become a common refrain as some other data releases are starting to show similar trends,” said NACM Economist Chris Kuehl, PhD. The economy is clearly not out of the woods just yet, and the latest revision of first quarter GDP came as a shock. “It now appears that the economy contracted by far more than originally reported,” Kuehl said. “Add to this the latest data on durable goods and there is something amiss. Consumer confidence numbers have recovered to levels not seen since the start of the recession, but that renewed level of enthusiasm has not been enough to pull the economy forward, or so it would seem.”

The damage was greater in the unfavorable categories although the favorable factors saw some decline as well. The combined index of favorable factors deteriorated slightly from 62.7 to 62.4, but that is still firmly in the 60 range. The biggest drop was in sales, which went from a several years’ high of 65.6 to 63.9. That is still a reading higher than at any point since November of last year, but after the surge last month, it was hoped the trend would accelerate. Dollar collections dropped out of the 60s, from 61.2 to 59.3 and amount of credit extended also slipped, from 65 to 64.8, but stayed very close to the record highs of late. New credit applications improved and that could be good or bad news. It is now over 60 for the first time since the recession, sitting at 61.5 after 58.9 last month. “The problem is that there were more rejections of credit applications as well,” Kuehl said. “When there are more applicants and more rejections, it is a signal that more companies in financial distress are seeking credit in the hopes that somebody will help them survive.”

The Perfect Debate?

Just prior to my debate at Oxford Union I asked the organizers; had there ever been an unanimous vote on any debate? They replied; oh no, that would be a very bad result because it meant that they had formulated a very poor proposition to be debated and/or that they had formed very unbalanced debating teams for and against the proposition. In my case I suppose you could declare it a perfect debate because it ended in a tie.

The Oxford Union Debate: This House Should Oppose the War on Drugs, Dr Huppart, MP for Cambridge standing

The Oxford Student reported this about the debate (paraphrased):

The case for the proposition was based on a political double standard as to how far the state could go with prohibition. The war on drugs created and gave power to drug dealers which causes crime and violence. The war on drugs is doomed to fail because the more it is advanced, the more money and power it provides organized crime.

The case for the opposition was based largely on the idea that drugs are dangerous and are otherwise useless. The “war” has really never been tried and has been too liberal, not too punitive. They argued that we must use “tough love” and that legalization would lead to an immense population of hardened drug addicts, crime, and death.

The verdict:

The debate ended in a draw and Union President Ben Sullivan had a casting vote, which meant that the opposition won.

Did Carl Menger Start WWI?

On the 100th anniversary of the start of WWI this unlikeliest of anecdotes comes to us from Forbes and Mark Hendrickson.

English: The arrest of Gavrilo Princip. (Photo credit: Wikipedia)

As we mark the 100th anniversary of the assassination of Archduke Franz Ferdinand and his wife, Sophie, and the eventual start of World War I later this summer, it is fascinating the way individuals affect history and history affects individuals.

Anecdote #1:

Here’s one that I doubt you’ve heard before: The founder of the Austrian school of economics, Carl Menger (1840-1921), might have altered the course of events in a way that made possible the double assassination in Sarajevo on June 28, 1914. Let me explain:

Franz Ferdinand might not have been the heir to the Hapsburg Empire in 1914 if his cousin, Crown Prince Rudolf, had lived to be 65. However, Rudolf had committed suicide at the age of 40 a quarter-century earlier. The reason for that suicide has been the subject of speculation ever since, and the Wikipedia entry on Rudolf lists 14 productions in film and theatre that have included Rudolf as a character. The most widely accepted explanation is that Rudolf was depressed because his father was insisting that the crown prince, who was married, end his relationship with a younger woman. However, there might have been another major cause for Rudolf’s depression.

I heard this from my mentor, the late Hans Sennholz, who in turn had heard it from his mentor, Ludwig von Mises, another Austrian economist whose lifespan overlapped Menger’s by nearly four decades, although whether Mises heard this directly from Menger or from their mutual colleague, Eugen von Böhm-Bawerk or a third party, I know not. The Emperor Franz Joseph I had appointed the brilliant Menger to be the crown prince’s private tutor/mentor accompanying Rudolf on extended travels across Europe. Menger was a visionary genius who foresaw a period of revolutions and wars that would involve the disintegration of the existing order. Understandably, Menger’s predictions depressed Rudolf, and perhaps contributed to his decision to end his life prematurely so as to avoid the approaching cataclysm that we know as World War I.

Seattle’s $15 Minimum Wage

4896456113_5fb4af117c_zThe City government of Seattle has voted unanimously to raise the minimum wage in the city to $15/hour to be done is a number of stages over the next few years. College students seem to realize that such increases could be a threat to current and longer term job prospects. According to the College Fix:

OPINION: Students and recent grads will take the back of the employment line under a steep wage increase

One of my professor’s favorite pieces of advice in “Intro to Politics,” designed for freshmen political science majors and those looking for a quick social science credit, is ominously relevant: “If you’re about to graduate, you had better take that job offer at that GAP back home.”

While no fresh graduate wants to end up back at home working at the GAP in the strip mall near the local elementary school, that’s the trajectory that the current job market is headed.

Given that the Seattle economy is highly dependent on large consumer product companies and Boeing, this could make an interesting case study of the effects of the minimum wage, especially if there is a large setback for those companies in the years ahead.

Germany Reneges on Request for its Gold

7361342500_a62d22db19_zGermany has now decided that its gold is safe in the hands of the Federal Reserve after all. The budget spokesman for Angela Merkel’s Christian Democratic Union party, Norbert Barthle, said “The Americans are taking good care of our gold.” Germany initially made the request in January of 2013 after attempts to inventory the gold in 2012 were rebuffed. Juergen Hardt, also from the Christian Democratic Union party told reporters in May that there was no concern that German gold in the New York Fed has been tampered with. “It’s my view that the gold reserves should be stored wherever they might be needed in an emergency.” Of course Germany has never seen or possessed its gold. It obtained the gold in exchange for its surplus dollars in international trade prior to the breakdown of the Bretton Woods system. So I guess there really is no cause for concern.

Green and Pink Skycrapers to turn out in the Red?

6764CNN reports today that in China they plan to build the world’s tallest skyscraper. It has been designed to be very environmentally friendly i.e. green, and will be in the color pink. In my paper “Skyscrapers and Business Cycles” I show that historically speaking there is a correlation between the building of the world’s tallest skycraper and world economic crisis. I also provide reasons related to the Austrian Business Cycle theory why the correlation might hold true. Because these record setting skyscrapers often open for business in the midst of a world economic crisis they typically fail as an investment and often operate “in the red” for many years to come. My guess is that the two Phoenix Towers planned for Wuhan, the capital of Hubei province in China will meet the same fate.

Rothbard’s Theory of the Great Depression featured in course at Prager University

Course Description: A new history of the Great Depression is emerging. One that acknowledges the role that government played in causing and prolonging it, and the constructive role that free enterprise could have played, if it were given the chance. In this video, UCLA economist Lee Ohanian explains how Herbert Hoover, widely misunderstood as a champion of the free market, actually turned what should have just been a recession into a depression due to his mistrust of the market.

Although Rothbard is not specifically mentioned in the video, Professor Ohanian does reference Murray Rothbard in his research published in academic journals. This “new” emerging theory of the Great Depression should be rightly labeled the Rothbardian theory. It has much to offer us today in terms of understanding the Housing Bubble, the financial crisis, and the failure of either “federal stimulus” or “quantitative easing.”

Hoover and the Great Depression Video

My Oxford Union Debate Team

At the Oxford Union, debates are carried out in teams. My team consisted (from left to right) of a Liberal Democrat Member of Parliament from Cambridge, Julian Huppert, myself, David Browne, the student member from Merton College, and Richard Cowan, the former Director of the National Organization for the Reform of Marijuana Laws (NORML). We were opposed by Joseph Miles from Wadham College, Kathy Gyngell fo the Centre for Policy Studies, Neil McKeganey, the Director of the Centre for Drugs Misuse Research, and Sarah Graham who is on the U.K. Advisory Council of the Misuse of Drugs. The Oxford Union is one of the oldest and most prestigious debating societies and is strongly committed to the principle of free speech. Past debate presenters include the Dali Lama, Mother Teresa, Albert Einstein, former US Presidents, UK Prime Ministers, and other leading politicians and diplomats, as well as leaders from the field of art and entertainment.

VLUU L110, M110  / Samsung L110, M110

Institute for Economic Affairs

On my way to Oxford to participate in the Oxford Union debate, I stopped off in London to tour the venerable Institute for Economic Affairs which has been promoting free market ideas for many decades. I had the great pleasure to contribute a chapter to one of their book publications — Prohibitions a few years back. I was given a great tour of the facilities and had a great conversation with Dr. Steve Davies about the economic crisis, current policies issues and the challenges and strategies of free market organizations.

Entrepreneurship in the Quarterly Journal of Austrian Economics

qjaeSamuel Bostaph provides an excellent overview, analysis, and criticism of theories of entrepreneurship including Mises, Schumpeter, and Kirzner in this article.

Christopher Brown and Mark Thornton show that Richard Cantillon’s theory of entrepreneurship (adopted later by Knight and Mises) was crucial for his discovery of economic theory in this article.

ABSTRACT: Richard Cantillon is credited with the discovery of economic theory and was the first to fully consider the critical role of entrepreneurship in the economy. Cantillon described entrepreneurship as pervasive and he casted the entrepreneur with a pivotal role in the economy. Using a sample of models from Cantillon’s Essai, we provide evidence that his theory of
entrepreneurship was the fundamental tool by which he constructed economic theory and that absent his theory of entrepreneurship his theoretical constructions fail. We believe this discovery both highlights the importance of entrepreneurship and contributes to our understanding of the nature of economic theory.

The entire issue of the Quarterly Journal of Austrian Economics can be found here.

Simpson to Publish 2 Volumes on ABC Theory

51YoSabL9UL._SY344_BO1,204,203,200_Brian Simpson of National University provides a description of his two-volume book project on the Austrian Theory of the Business Cycle:

Members of this list might be interested in the book I have recently completed. It’s a two-volume book on Austrian business cycle theory (ABCT). The main title is Money, Banking, and the Business Cycle. The subtitle for volume one is Integrating Theory and Practice. The subtitle for volume two is Remedies and Alternative Theories. The book provides a comprehensive presentation and defense of ABCT and a free monetary and banking system. Volume one was published in April and volume two is due out in July. The publisher is Palgrave Macmillan.
Each book contains two parts. Part one of volume one focuses on my exposition of ABCT. In addition to the traditional presentation that shows how manipulations of the supply of money and credit by the government cause changes in interest rates that generate the cycle, my presentation incorporates the effects of changes in the money supply on spending, business revenues, and profits and the rate of profit in the economy and the role these play in generating the cycle. I show how the responses of businessmen and entrepreneurs to changes in both interest rates and the rate of profit produce the cycle. In part one I also defend ABCT from criticisms, including the criticism based on so-called rational expectations, the claim that ABCT places too much emphasis on interest rates, and the claim that it misidentifies the relationship between interest rates, inflation, and/or investment. I defend the theory from other criticisms as well.
In part two, I apply the theory to U.S. history to illustrate the explanatory power of the theory. I use extensive data for the U.S. from 1900 to 2012 to show how the theory can be used to explain specific episodes of the cycle. I use interest rate data, the rate of profit, money supply data, the velocity of money, industrial production, GDP/GNP, gross national revenue (a more comprehensive measure of spending and output than GDP/GNP), and other data. As a part of this effort, I show how the data illustrate changes in the structure of production that ABCT predicts. I also demonstrate the explanatory power of the theory using the Mississippi Bubble in 18th century France.
Part one of volume two critiques prominent alternative theories of the cycle, including Keynes’s theories of depressions and fluctuations, Keynesian “sticky” price and wage theory, and real business cycle theory. Part two discusses what a free market in money and banking would look like, provides a brief outline to transition to a free market in money and banking, and explains why it would lead to a much more stable monetary and banking environment.

The webpages for each volume are here:
Volume one

Volume two

If the book looks interesting to you, I encourage you to request that your library purchase a copy of each volume for its collection.
If you would like more information about the book, don’t hesitate to ask me.

Brian Simpson, Ph.D.
National University

Legalization Puts Drug Cartels Out of Business

800px-Cannabis-vegetative-growth-00003The Washington Post explains that drug legalization in Colorado and Washington, along with Medical Marijuana Legalization in many other states has hurt the illegal marijuana growing business in northern Mexico. However, the Mexican drug cartels have been bailed out by America’s drug warriors who have cracked down on prescription pain killers. Prescription pain killers and heroin are both very addictive and deadly dangerous so that legalization would not only put the cartels out of business, but would open opportunities to address the problems of pain and addiction in a medical format rather than the black market.

Another Student Remembers Gary Becker

beckerDr. Tracy Miller, an economist at Grove City College was a graduate student of Gary Becker at the University of Chicago. Dr. Miller provides a sketch of Becker’s contributions as well as some personal reminiscences of Becker as a professor:

Unlike some other professors I had in graduate school, I never recall Becker using offensive language in the classroom or in private conversation. Although he never said anything to indicate that he was a Christian, some of his students did research on the economics of religion and he appreciated their work and respected their convictions.

I had great respect for Dr. Becker as a teacher and scholar. In the classroom, he would frequently pick a student and call on him to answer a challenging question. The questions he asked often required the student to apply theory in a new way, not just recall something from the reading. His approach was intense and intimidating, but his former students appreciate the way he challenged them.

His passion for applying economics to a wide variety of contemporary issues was contagious. He influenced hundreds of graduate students at the University of Chicago and took a continuing interest in the work of his former students.

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