What positive steps can we take? The energy that is now expended by well intentioned, freedom-seeking individuals on the destructive course of politics can be turned into powerful steps that will have a positive effect on the future. All are moral, right and just. None require aggressing. Consider the following...
The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”As the inequality gap grows, there is an ideological battle unfolding in the West.On the one hand, there are those who think government can fix things. It must do more, tax more, […]
On Feb. 7 the United States will once again reach its statutory debt limit, meaning it cannot legally borrow any more money. Since the obvious option of cutting spending to match the amount of revenue that the government collects is off the table for some inexplicable reason, Congress will have to pass a new, higher […]
The New York Times published an interminable article on health care recently. Plenty of facts — how scrupulous are these journalists! — but the article displayed absolutely no comprehension of the basics of cause and effect. I was left wondering about the whole point.The article details how the health care system rewards specialists to an […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Dr. William C. Padgett is a retired optometrist who has been trying to bring an elderly care facility to Beaufort County, North Carolina, for over a decade.“Our senior citizens,” he laments, “are finding that it is difficult and in many cases impossible to find an appropriate long-term care facility locally.” Though he has received several […]
If you don’t have the angst out of your system concerning Wall Street banksters, Government Sachs, and the Affordable Care Act, settle in with Matt Taibbi’s Griftopia to make your blood boil one more time.Investors should be reminded of 2008 as they shrug their shoulders and put their money back in the stock market. The […]
What do 8 of the 10 wealthiest people in the U.S. have in common?Aside from being able to fly in private jets, the common thread is that each of them has made their fortune thanks to a start-up.Let me explain…From tech titans like Bill Gates and Larry Ellison (founders of Microsoft and Oracle, respectively), to […]
“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi […]
In December of last year, I left my career to travel the world for one year.My plan was to visit as many countries as possible on my Star Alliance Around-the-World ticket in the first nine months, then, for the remaining three months, return back to the country that most caught my eye and my curiosity.Nine […]
Economic history is primed to repeat in the nastiest of ways unless the government stops distorting the price of something we use every day.Every product, good, or service has a price, which is essential to rational decision-making. We use prices every day as vital data that guide us. Without true prices, prices not distorted by […]
A new survey from Harvard University found a large majority of young Americans do not believe the law will save them money, do not believe it will improve their health, and do not intend to sign up for insurance through the new exchanges.
Uh-oh!The new pope, Francis from the Pampas, has just warned us to beware the “tyranny” of capitalism.Each man worships his own gods. Some worship at the altar of Jesus of Nazareth. Some at the altar of the Almighty Dollar. The capitalists don’t bad-mouth Francis’ god. You’d think he would cut them the same slack.Bad-mouthing Catholicism […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
Finally, after years of economic turmoil, of boom and bust in the global economy, the great Austrian Friedrich von Hayek (1899-1992) is making an impact as the premier challenger of John Maynard Keynes and Keynesian policies of easy money, stimulus, and Big Government.
The real estate boom-bust cycle and the financial crisis of 2008 caused the academic world and government officials to search for a theory that explains asset bubbles and structural imbalances in the global economy, and the Austrian theory of the business cycle has suddenly come back into vogue.
Even the mainstream CFA Institute recently featured Austrian economics in its study materials for the Level 1 exam for would-be Chartered Financial Analysts, and has published several Austrian-friendly articles.
Economists in China are taking notice, some raising the specter of the “Hayekian risk” of wasted investment (what fellow Austrian Ludwig von Mises called “malinvestment”) over the “Keynesian risk” of inadequate demand and weak growth. As the Economist states: “Malinvestment … squanders the hard-earned saving of China’s citizens, leaving them with empty malls, rather than much-needed clinics; vacant villas alongside overcrowded dormitories; sewers that cannot cope with downpours; and buildings that collapse like tofu.”
In late 2012, a Wall Street Journal reporter interviewed Zhang Weiying, the top economist at Peking University and former government official in charge of Chinese economic policy. In the interview, Dr. Zhang invoked Hayek’s business cycle theory to warn against further Keynesian-style government spending and easy-money policies to keep the Chinese economy propped up.
“The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final result will be much worse,” he said. The reporter noted, “[Zhang] invoked the ideas of the late Nobel laureate Friedrich Hayek and the Austrian School of economics to argue that if the economy weren’t allowed to adjust on its own, China’s minor bust would be followed by a bigger one.” Zhang even wrote an article lauding the libertarian Austrian economist Murray Rothbard.
Hayek’s economics have reached pop culture among economics students with the release of two rap videos: “Fear the Boom and the Bust” in 2010 and “The Fight of the Century” in 2011. Both are available on YouTube and have been seen by over 3 million viewers. Developed by director John Papola and GMU economist Russ Roberts, the lyrics pit Hayek against Keynes in the battle of ideas over how to cure depressions.
Hayek introduced his theory of the business cycle to the English-speaking world with the publication of his book Prices and Production in 1931. When Jeffrey Tucker, executive editor of Laissez Faire Books, asked me to write a new introduction to this little volume (which combines Prices and Production with the earlier Monetary Theory and the Trade Cycle), I jumped at the opportunity.
Most great works are “fat books.” Adam Smith’s Wealth of Nations, Karl Marx’s Capital, and Ludwig von Mises’ Human Action come to mind. Hayek’s Prices and Production is a thin volume of only 162 pages. Yet in its concentrated form, it brilliantly develops the key elements of the Austrian macro model and generates fruitful insights into monetary policy, the business cycle, economic growth, and finance. Sometimes, great things come out of small packages.
Hayek’s small work is relatively unknown compared to his other works, such as The Road to Serfdom (1944) and The Constitution of Liberty (1960). His Austrian-style capital and business cycle theories have come under criticism from members of the Keynesian and Chicago schools, and even occasionally from within the Austrian school. As a result, Hayek’s economics — his capital theory and his ingenious stages-of-production “triangles” — have been sadly ignored, unfairly maligned, and only recently gained respect.
Friedrich von Hayek (1890-1992) was an Austrian-born economist who earned two doctorate degrees in law and political science at the University of Vienna in the early 1920s, and then worked together with his mentor, Ludwig von Mises (1881-1973), to establish the Austrian Institute of Economic Research. Mises and Hayek were among a handful of professional economists who predicted the stock market crash in 1929 and the subsequent Great Depression of the 1930s.
More eminent academics, like the British economist John Maynard Keynes and the American Irving Fisher, failed to anticipate the collapse. The ability of Mises and Hayek to forecast the depression catapulted the Austrian school into the limelight in the early 1930s. Lionel Robbins, chairman of the economics department at the London School of Economics, invited the young Fritz Hayek to deliver a series of lectures, which were delivered in early 1931.
Prices and Productionoffered an alternative to the popular Cambridge professor J.M. Keynes (1883-1946), who favored government deficit spending to stimulate the economy and end the depression. Joseph Schumpeter claimed that Prices and Production was “met with a sweeping success that [had] never been equaled by any strictly theoretical book” — that is, before Keynes’ own General Theory swept the profession.
Hayek’s book offered a monetary explanation of the Great Depression, arguing that “monetary influences play a dominant role in determining both the volume and direction of production.” It introduced “Hayek’s triangles,” diagrams that demonstrated how all useful products go through a series of stages from earlier stages of production (raw commodities) to later stages of production (final product). For example, iron ore becomes steel, and steel becomes a hammer, where value is added with each succeeding stage.
Using the diagrams and a “time structure of production” concept, Hayek expresses the long-standing Austrian view that investment capital, once invested in specific capital goods and production processes, is inherently heterogeneous and specific in its use.
Hayek first analyzed the effects of a permanent increase in society’s saving rate. As members of society become thriftier, interest rates fall and the time dimension in Hayek’s triangle increases. As long as the national saving rate stays permanently at this higher level, macroeconomic stability can be achieved, and a nation enters a period of sustainable economic growth.
Hayek then considered the very different case of the government adopting an “easy money” policy by expanding the money supply and artificially lowering interest rates below the “natural” rate of interest. In this case, the economy suffers an inflationary boom that is not sustainable.
The effect is felt unevenly in the economy. There are winners and losers. Monetary inflation is never neutral; it affects some industries and income earners more than others. In the beginning, the boom occurs largely in the higher-order capital goods industries and commercial building sector.
Once again, the time dimension in Hayek’s triangle increases, but not permanently. Eventually, interest rates must rise, and the inflationary boom inevitably tops out and turns into a bust. Hayek’s triangle shrinks, the economy collapses into a recession, and it may take years for the industrial capital goods and building markets to recover because of their specificity and heterogeneity.
In applying his monetary theory to the Great Depression, Hayek concluded that the 1929-32 crisis occurred as an inevitable result of an unsustainable boom in the 1920s. He contended that the best cure would be to adopt a laissez faire policy — “not to use artificial stimulants… but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.” He and Robbins (the LSE school) strongly opposed the “elastic,” easy-money, and deficit-spending proposals of Keynes and his disciples.
The appealing contribution made by Hayek and the Austrian school is their contention that easy-money policies, artificially low interest rates, and fiscal stimulus have unintended consequences — a boom that inevitably turns into a bust.
In this sense, the Austrians are the purest of free market advocates. They are saying to the Keynesians, Marxists, and the Chicago schools that there is no free lunch in either monetary or fiscal policy. If the government embarks on these artificial means of prosperity, society will have to pay the price. This is the genius of Hayek’s Prices and Production.
Prior to the financial crisis of 2008, most economists dismissed the importance of asset bubbles having global macroeconomic effects. The Chicago school always maintained they had only secondary effects and were seldom if ever a threat to the global monetary system. But when the mortgage-derivative-securities market proved to be far larger and more global than anyone expected on Wall Street, the financial crisis of 2008 exposed the vulnerability of the monetary system.
Suddenly, the Austrian theory of structural imbalances came into vogue as one of the few macro models that explained asset bubbles. The Austrians put forth their fundamental thesis that monetary inflation is never neutral, and that asset bubbles cause unsustainable structural imbalances on a macro level. Inflation has negative unintended consequences, and they could be massive in scope. The Austrians knew that eventually a collapse was inevitable in the real-estate market. As Ludwig von Mises once said, “We have outlived the short-run and are suffering from the long-run consequences of [inflationary] policies.”
Now, finally, the Austrians were having their day in the sun.