What's this thing all about?
Basically, this blog is the place I ramble on and on about mostly economics, and sometimes other things. There are three other co-contributors that occasionally post something. But mostly it's just me and my blather.
For a more thorough answer visit the about page.
What's with this whole 'Austrian' thing?
Contrary to popular belief and the way it is portrayed in most venues, the subject of economics is not a settled science. Part of this is due to actual limitations of human understanding, but only part. A greater portion must be attributed to the fact that, like religion and politics, the subject of economics touches on many issues that inflame human passions. It is therefore likely to be forever under a pall controversy and obfuscation.
There are at present several schools of thought within the subject that differ in various ways, but their most important differences are in their theories of money. The Austrian school falls outside the mainstream of the debate, and is not a strong contender by popular acclaim or in academic circles. It has experienced a resurgence of interest in recent years as a result of the financial crisis, but is still not taken seriously by most established economists.
The principle assertions of the Austrian school that clash with the established schools are that money supply fluctuations caused by the normal operations of banking as it is now practiced, especially when exacerbated by the activities of a central bank, are responsible for price and interest rate distortions that sweep through the economy, causing investors and businessmen to miscalculate and make mistakes that lead to the boom and bust of the business cycle. Hence, the attention the school typically receives during particularly noteworthy busts.
At the center of the Austrian school's approach is the notion that all economic phenomena necessarily flow from individual human action. While this may appear as something of a truism, it is nevertheless violated by the 'aggregating' assumptions inherent in many modern economic theories and is frequently cited by adherents of the Austrian school in rejecting the theories of other schools. This unwavering commitment to 'inviolable individuality' even in theory gives the school a distinctly libertarian flavor. The Austrians are noted for advocating free-market principles into realms not normally suggested by even the most lasseize-fair of non-Austrian economists, including the private issuance of money.
However, it should not be assumed that such assertions are merely expressions of eccentricity, blind ideology, or made purely for shock value. The Austrian school is a serious theoretical school that has made important, widely recognized contributions to the subject of economics and counts among its ranks some very serious and influential scholars, including a winner of the Nobel Prize in Economics. It is an old and established school which has faithfully preserved ideas that have fallen out of favor with time. As the culture has morphed over time and grown accustomed to the ideas of collectivism, planning, and state activism, the Austrians have remained largely unchanged. But they are still here and are not to be brushed off lightly.
Despite its status at the economic fringe and relative obscurity, I believe the Austrian school to be articulating the most coherent and correct economic theory. I have found more 'standard' theories to be noticeably incomplete. They have a hollow feel to them, like 'spinning a wheel without an axle.' There seems to be nothing fixed, only fleeting statements which reference and justify other statements around and around in circles forever. It is almost as if they are avoiding some central truth that would call into question one or more of their assertions that they would rather not let go of. After listening to it for awhile, one gets the feeling they are actively avoiding making any sense and only pretending to believe what they say.
Austrian theory is structured very differently, and declares a great deal to be unknowable right off the bat. But at its center is a theory of money and exchange which forms a solid core about which the remainder of the theory is built up. I find it to be consistent within itself and consistent with what I observe, across vastly different situations without frequent invoking of special cases. It provides great insight across a wide spectrum of phenomena which I have found lacking in other theories. And most impressively, its conclusions almost always match up with very straightforward common sense. Austrian theory as it stands may prove not quite correct in some number of details or incompletely developed, but I think that on the whole it will be shown someday to have gotten the bulk of things right.
One more interesting note -- unlike most other members of the Austrian community (at least in my experience), it was not the theory's libertarianism that initially attracted me to it, but the fact that the theory appeared to me to be correct. Eventually, it drew me into libertarianism, not the other way around. I was actually uncomfortable with libertarianism at the time, and skeptical of the theory because of its apparent 'extremism.'
What are your 'qualifications' on the subject of economics?
If it is formal education you mean: zip, zero, nada. I took one semester of economics in high school. That's pretty much it, though for some reason I've always seemed to have an innate knack for the subject. By formal education, I'm a chemist.
On the other hand, I haven't been quite so miseducated on the subject either, and bad educations are often harder to overcome than learning horse sense straight off the bat. Austrian theory isn't taught in school -- it is sneered at. It contradicts the status quo. Established education, naturally, is apologetic of the status quo. But as we are all finding out, the status quo isn't so desirable. It's kind of, well, wrong.
Fortunately, there are answers out there, most of them freely available on the web. I have read a good bit of this material, as well as having spent about five years beforehand reading mainstream stuff, mostly in periodicals like The Economist before getting fed up with their ineptness and incoherency. I spent a (very) little time as a Chicago School follower of Milton Friedman, shortly before discovering Gary North. I've been an Austrian ever since.
Of course, the real measure of expertise isn't how much one has read. It's what he can do. Which is to say, there are no easy measures or answers to this question, despite what paper-chasing educrats will tell you. So, if you really want to see what I can do, I suggest you spend some time perusing the site and judge for yourself.
You seem to have a few odd disagreements with most other free-market types that don't seem to jibe with your stated libertarianism. What gives?
Though I am mostly in agreement with standard free-market theories, I take exception where I see the need. I probably agree more than I appear to, simply because I see no reason to articulate ideas that most people understand and are already accepted as mainstream. Why do what others are already doing quite well without me? Who cares?
Like most other economic 'conservatives,' I am broadly pro-free markets, support traditional property rights, anti-welfare, anti- tax, anti-regulation, and in almost all other ways anti-state interference. My principle beefs concern the proper role of money and the business of banking in the economy. I am vehemently opposed to the existence of central banks like the FED, the practice of fractional reserve banking, and other schemes which attempt to manipulate the money supply or seek power and influence towards that end. These concerns are often seen as obscure to the typical committed economic conservative, but the reality is that fundamental issues of money are central to the functioning of the free-market. Without a money system that itself respects free market values, the rest of the market gets undermined. My understanding of these subjects and the economy leads me to draw some conclusions that are sharply at odds with most conservatives.
My understanding of the economy as a whole and how it structures itself to achieve increasing efficiencies is informed by three principle theories -- the Austrian conceptualization of the division of labor, Austrian monetary theory and the theory of the trade cycle. These are the major lenses through which I view economic events, and they reveal to me glaring inconsistencies between 'what is and ought to be.' It is my opinion that the money system is being used to manipulate economic outcomes in a way that would offend most other adherents of free markets, if they knew what to look for. In recognition of the intrinsic discrepancies introduced by a corrupted monetary system and state interference, my modus operandi is that the outcomes of the market should not be accepted as innately legitimate without scrutiny.
Namely, I am deeply suspicious of corporatism and corporations, globalisation, free-trade, the FED and the banking system. On these particular subjects, I cut against the conservative grain.
What's your deal with corporations?
I am not opposed in principle to people coming together to form companies in such manner as they see fit. However, I am highly, highly skeptical of the proliferation of the corporate business model as being purely a product of its inherent competitiveness compared to other models, and dubious of the many claims made by 'conservatives' of corporate virtue and their unquestioning acceptance and even defense of behaviors they would not accept in other circumstances.
For starters, any conservative should instantly recognize the corporate model as being designed to operate in a manner similar to a government bureaucracy. It has a very similar structure. Corporations should therefore operate inefficiently, and obtusely, and ploddingly, and inflexibly. In my experience and the experience of many others, they do. According to the basic principles underlying the division of labor, highly complex, centralized structures composed of many different individuals would be expected to be difficult to manage. While it is true that complex labor structures are a necessary component of a capital intensive and highly productive economy, it is not the case that such a division of labor can only be achieved through a corporate structure. There are many other ways to accomplish this effect, and experience with the corporate structure should reveal to almost anyone the negative effects of diffuse responsibility, conflicts of interest, and initiative deadening effects that plague collectivist environments, to name but a few of the glaring inefficiencies one observes running rampant through the corporate world. It would seem that if almost any other structure was available, it would be preferable to the corporate organization.
And yet, they dominate so many markets. Why?
Corporations are the principal beneficiaries of a wide range of government policies, and unsurprisingly, are often intimately tied up in affairs of state. That is bad enough. But possibly the biggest unfair advantage the state throws their way is to regulate the money supply in such a way as to favor high debt levels and excessive capital accumulation through inflation and suppression of interest rates. Large corporations are uniquely positioned to benefit from the inflationary policies of the banking system, so they tend to grow disproportionate to their actual market competitiveness and displace other players, cheating both consumers and their erstwhile competitors.
So, it seems to me that mankind wasn't intended for corporate life, as most conservatives seem to believe. In my opinion, it brings out the worst in us. It seems more likely that the corporatization of America is the unnatural result of state intervention. Socialistic societies are frequently home to massive monopolistic corporations, usually state owned but sometimes not. I don't hear many conservatives arguing for their intrinsic competitiveness.
I see no reason to equate capitalism and free-markets with the corporate business model. I see many reasons not to.
What about free-trade? Isn't globalization a free market ideal?
Yes, it certainly is. And free trade would be great if we could actually get it. Unfortunately, what we have today is not free trade at all, and without some major changes it is not even a possibility, in my opinion. With things as they are, what we actually have is a wasteful, dangerous, highly contrived situation that benefits almost no one except a few players with political sway.
The main problem with free trade is, once again, the banking and monetary systems. With fiat currencies and floating exchange rates, it is extremely easy for a government or central bank to distort trade for political reasons, usually to enrich some favored segment of the economy or in pursuit of some agenda. Ever since the abandonment of the international gold standard, this behavior has run rampant. The gold standard kept exchange rates fixed because all currencies were themselves exchangeable for gold at fixed rates. In essence, the entire global economy operated on a single currency -- gold. The system could be gamed, and frequently was, but it was considerably more difficult than today.
Nowadays, with hundreds of different currencies managed by activist governments and central banks with economic agendas, it has become a joke. Artificial profits and contrived trade patterns are enforced by aggressive states with axes to grind. Rivalries and unhealthy artificial dependencies develop, encouraging further 'competitive' market tampering. In the end, we wind up with a nonsensical, wasteful and unstable situation that is a danger to everyone. Just as a lie can only misrepresent the truth but cannot change it, phony profits do not a productive system make. The contrived systems that develop in search of phony profits do not further human welfare and increase overall wealth because the profits are meaningless misrepresentations of the underlying economic reality. Because these activities would not be profitable without the government sponsored incentives, it is a safe assumption that they are actually destructive of wealth.
Human institutions as they now stand are not realistically capable of sustaining a productive free-trade regime. It is just too easy and too tempting to cheat. Advocating free-trade in this monetary environment, especially when the trade crosses the monetary boundaries that separate currencies, is about like advocating marriage and child rearing for a 14 year-old. Family and children are perfectly wonderful things, but a 14 year-old probably isn't ready to handle them. To go ahead and do it anyway will probably create a situation that will turn out badly.
That is to ignore the distorting effects of more traditional tariffs, quotas and other such policies which have been used for ages to skew trade relationships. The present social climate simply isn't committed to free markets and classical liberal economics the way it was two centuries ago. It is unlikely that pursuit of a free trade agenda will result in stable, productive relationships in this environment, even under a single currency. Witness the unfolding disaster of the EU and the euro.
What's your take on the present economic crisis?
The present economic crisis is a classic bust at the end of the business cycle, much like the Great Depression, with some differences that are the result of changes that have been made to the monetary and banking systems since that time. It also has a sovereign debt crisis thrown in for good measure. It would probably be best to understand the present crisis by looking back at the Great Depression and making inferences back to our present situation.
OK, I'll bite. What's your take on the Great Depression?
In my opinion, the best way to look at the Great Depression is to break it up into stages, each of which had its unique problems and policy responses that set up subsequent stages.
In the first stage, roughly 1921-1929, the FED and banking system inflated the money supply coming out of WWI and set the business cycle in motion. The inflation was instigated by several circumstances, including a recession following the end of the war and the natural tendencies of the banking system to inflate for its own benefit, but also by a desire of the New York FED president to aid the Bank of England in establishing a gold exchange rate that heavily overvalued the pound. In any case, with America's new central bank in place, the inflationary boom was able to continue for far longer than had been possible in the past. Enormous levels of debt and leverage built up in the investment boom that the FED's easy money policy created.
The next stage began in 1929 when the FED stabilized the money supply. This pushed the economy and banking system into the next stage of the business cycle. Prices began correcting downwards as credit dried up. Bankruptcies ensued, and in particular, bank failures exacerbated the situation as they defaulted on deposits and contracted the money supply, creating further downward pressure on prices.
The principle response by the government was to attempt to prop up prices with various initiatives, in particular subsidies and deficit spending in support of certain markets. However, during this stage, the more extreme policies of outright price fixing and rationing was mostly avoided. These efforts were counterproductive nonetheless, as they were fighting the necessary price corrections that would allow resources to be allocated in such a way as to make business profitable in the absence of subsidy. Basic, real profitability would have allowed these wealth building activities to form the basis of a recovery. Without profitability, economic activity seizes up, and subsidies to create artificial profits cannot be maintained indefinitely. These expensive programs cost the taxpayer considerably, and eventually, most had to be abandoned as the bills mounted. Taxes were even raised in attempt to balance the budget -- another big economic blunder. Prices continued their downward trajectory.
The downward spiral was brought to a halt in 1933 with the advent of the FDIC, marking the end of the second stage and the beginning of the third and longest stage. The FDIC put an end to the destruction of deposits upon bank failure, relieving pressure on the banking system and the downward pressure on prices, which began to stabilize. This probably would have been sufficient to bring an end to the depression and begin recovery, however, the government was impatient for results, and opted to undertake an intensified campaign to 'restore the economy' with far more deleterious approaches. By this time, Hoover had been replaced by FDR.
The most destructive policies of this period were attempts to fix prices and wages. There were many others that were also destructive and wasteful which no doubt every student of American history has heard of, but it was the fixing of prices that really seized up the markets. Just as the easy money policies of the '20's had rendered virtually any economic activity profitable, price fixing in the '30's rendered virtually every economic activity unprofitable. So, there was very little economic activity.
It may seem very silly that people would do such a thing as render almost all business unprofitable by law in an attempt to revive the economy, but the modern observer must keep in mind the mindset of that day. For several decades to that point, the rigid economic dogma of the 19th century had been eroding and was being replaced with nice sounding, but incorrect, economic platitudes. Some of the more important ideas of the period that motivated these policies were that stable prices should be an important goal of monetary and government policy, that higher wages for workers would lead to economic growth by increasing demand for output, and that modern production methods and technologies had become too complex for a free-market organization to handle.
Ideas have consequences, and the government and society at large acted on the guidance offered by these notions. With consequences. They attempted to fix prices as they had been at the market peak of 1929 -- when they were least realistic -- in attempt to restore the market 'as it was.' They raised wages as high as business would bear -- squeezing out profits and any motive or ability to expand production and hire more people. Many able workers were therefore left unproductive and unemployed. And they entered into all kinds of other schemes aimed at economic management, flirting with the socialist and fascist models they saw being erected in Europe.
Note that Hoover was no better about this than FDR, but had only attempted the same goals through very slightly different means. Both administrations pushed the US economy deeper into recession and dysfunction. But it was the price controls, motivated by powerful political and ideological convictions, that put permanent shackles on economic growth. Economies can absorb a great deal of bad policy and meddling so long as there is enough flexibility to find workarounds. But there are few practical workarounds for rigidly fixed prices. The economy might never have recovered had external events not intervened.
This stage ended with the entry of the US into WWII. In my opinion, WWII really did get the US out of the Great Depression, as most economists claim, but not for the reasons they typically cite. The war demanded 'sacrifice' and 'practicality.' There was less room for idealistic political indulgences, and the price controls and inflated wages had to go. Rationing and inflation to support the war effort eventually rendered them obsolete. Minimum wage and price laws mean less and less as the value of the currency falls.
By the time the war was over, the political shackles on the economy had worn away, and a robust recovery took hold. But it was principally a political effect of the war, not an economic one or the actual activities of the war itself, that corrected the problems that had the economy in a straightjacket. There was and is no 'magic' in all of this.
When economic problems are correctly identified and addressed, almost always by repealing some senseless policy that caused the trouble in the first place, there is no difficulty in things setting themselves right all on their own. It is not a matter of chance whether recovery will 'take hold' or not, or figuring out 'what should be done to fix the markets.' They will, as a rule, fix themselves if left well enough alone. But when passions, idiotic political convictions or craven political designs are allowed to run wild and overrule long established good common sense, there's no helping things.
So how does that compare with the present crisis?
The present crisis has a lot in common with the Great Depression, but there are several important differences that will probably cause things to turn out very differently.
The setup is basically the same -- a long period of monetary expansion in the '80's and '90's instigated a credit fueled investment boom and distorted prices very badly. This time, however, the scale is much larger because the gold standard no longer restrains the banking system the way it did in the 1920's. The inflation was allowed to get much worse over a longer period of time, and the accumulation of debt and the distortions are much greater this time around.
A second very important difference is that the FDIC is already in existence. Therefore, we have not experienced anywhere near the level of bank failures that were experienced in the early '30's or the destruction of deposits that contracted the money supply. The price correction has mostly been limited to capital markets. Consumer prices are almost completely unchanged, which was not the case in the '30's. Our 'second stage' looks very different and has been far less severe than it was back then. It has, however, taken far longer to unfold, as the government and the FED now have more experience with these kinds of events and have fought their effects more effectively this time around. (Note that that is not 'a good thing.' Those price correcting events and bankruptcies are what bring about recovery.)
The 'third stage' will likely be very different, and much shorter as well. Having witnessed the effects of hardcore socialism and price controls in the recent past, our society is not nearly as given to those kinds of responses as it was back then. The policy responses to economic events so far have resembled Progressive Hooveresque initiatives on steroids more than the more hardline fascist, economically debilitating tendencies of FDR. Bad as they have been, they simply can't match FDR's statist incompetency. There has also been a strong political reaction against what has been done to this point, rather than a popular demand for more vigorous efforts.
However, the softer socialism that has prevailed in the last half of the twentieth century has not abated, and there is still the strong flavor of the Progressive mindset, more as a consequence of having lost the moorings of the old classical liberalism and conservatism than a loving embrace of activist government. People simply can't imagine a non-Progressive society anymore. The focus is still on national government 'do-somethingism' as a source of tinkering, symptom-addressing 'solutions,' rather than confident articulation of the source of the problem (the FED, inflation) and its resolution (abolition of the central bank and fractional reserve lending, gold-based money).
I expect that, as a result, 'recovery' will be far more forthcoming this time around, since most prices will have more flexibility to correct. It will not take something as drastic as a war to get prices to clear markets and far less than ten years to exit this depression. However, as faith in the banking and money system as it is now constituted have not been shaken and the system remains unreformed and intact, there will in all likelihood be disastrous inflationary consequences to 'recovery.'
In the long term, the government and central bank will be less inclined to see capital goods prices drop than they will to allow consumer goods prices to rise, as government in particular greatly fears price deflation and the ruinous consequences it would have for its finances at all levels, as well as the political fallout of a prolonged period of economic stagnation: high unemployment, investing losses, angry voters, and falling tax receipts. On the other hand, the reputation and credibility of the FED is staked on its ability to maintain the value of the dollar, at least in the short term, and it is far less concerned with political and economic fallout outside of the interests of the banking system. It remains to be seen how the conflicting interests of these two powerful groups will play out.
Which brings up another important difference -- other longstanding and important problems impinge on the decisions being made today, most importantly, the impending bankruptcy of the Federal government and it's inability to sustain entitlement payments. At the onset of the Great Depression, government spending and obligations were far smaller, so there was more room for expansion of government in response to political forces without the likelihood of calling its legitimacy or solvency into question. That is not the case today. Other forces were at work in creating this situation, but in some important respects, these are also consequences of the inflationary buildup and the economic crisis, but in a somewhat different way.
The inflation created an illusion of long term sustainable returns far higher than realistically possible. This ratcheted up expectations of economic growth and prosperity and encouraged politicians to make unrealistic promises to taxpayers, unencumbered by the fiscal discipline that would have come with more realistic projections. Likewise, financial firms and individuals were fed a rosy picture by inflated markets that encouraged them to enter into inadvisable long term relationships and obligations. Now, with those returns melting away and the illusion being revealed, the balance sheets of these entities are being dealt heavy, and likely unsustainable blows. Their obligations far outstrip the ability of their assets to deliver.
And as the reckoning weighs on individuals and the economic distortions are slowly revealed, lifestyles and expectations are slowly changing. It is unlikely that individuals will be as willing to focus and make personal sacrifices for their careers as they have been until just recently if they expect far less reward for doing so, which is the logical implication of falling returns, devaluing assets, and an evaporating retirement. This is to say nothing of rising tax rates as the government desperately tries to maintain its finances. In all likelihood, a mass lifestyle change less focused on economic production is waiting in the wings that will make it even more difficult for these obligations to be met.
This situation will not be changed by recovery. There is really nothing that can avert it. The Great Correction is destined to be followed by a Great Default on the part of governments worldwide, which will in all likelihood transform the world for generations to come.
more as I get 'em done...