Hayek’s guidance for western politicians on MidEast

Freedom fighters

In his final book, The Fatal Conceit: The Errors of Socialism, Freidrich von Hayek wrote that: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”.

Few people are more in need of one of Hayek’s lessons than western politicians.

Nearly two and half years ago civil unrest broke out in a number of Middle Eastern countries. An excitable western media, this generation of journalists eager for its own Fall of the Berlin Wall, soon christened it the ‘Arab Spring’.

How misguided this characterisation was quickly became apparent. Whereas the Prague Spring of 1968 had actually been about freedom the ‘Arab Spring’ saw unpleasant secular regimes elbowed aside only to be replaced with at least as unpleasant Islamist regimes.

Every use of the phrase ‘Arab Spring’ became an insult to those Czechs and Slovaks who had risked their lives for freedom. Eventually even the credulous journalists who had coined the phrase stopped using it.

While the regimes in Libya and Egypt quickly collapsed, the one in Syria put up a fight. A civil war broke out and settled into a bloody stalemate. On one side are the relatively secular, bloodthirsty Ba’athists led by Bashar Assad, on the other are the equally bloodthirsty Islamist; Al Qaeda inspired rebels.

There are deeper currents swirling in Syria. Assad and his Shia followers (as well as the non-Muslims who back him fearing the fate of their co-religionists in places like Morsi’s Islamised Egypt) are on opposite sides from the Sunni rebels of a schism that divides the Muslim world as the Thirty Years War did the Christian world.

Behind them, on either side, stand the Muslim world’s great Sunni power, Saudi Arabia; and its leading Shia power, Iran.

Of these two contending sides in the civil war in Islam, it is not immediately clear that we should be celebrating the victory of militant Sunnis. It is even less clear that we ought to be intervening to ensure it. Nevertheless, that is what we now appear to be drifting towards in Syria.

It is happening with a notable lack of enthusiasm in the west. When Britain went to war with Russia in 1854 a song became popular in music halls which went:

We don’t want to fight but by jingo if we do,

We’ve got the ships,

We’ve got the men,

We’ve got the money too

There is no such excitement now. Jaundiced western electorates seem to have a clearer appreciation than their leaders of the fact that in 2013 we have neither the ships, men, nor money for this adventure.

But politicians in the west have incredible faith in their own power. They are constructivist rationalists in the tradition of Descartes, possessed of the belief that with the judicious application of their power they can construct an optimal social order.

Armed with this belief David Cameron and Barack Obama appear to believe they can topple Assad, replace him with Syria’s version of Herman van Rompuy, and watch the country turn into West Germany.

This was the central fallacy of neo-conservatism. Contrary to Hayek, who believed that successful social orders emerge, neo-cons believed that order could be imposed or consciously constructed.

Despite the evidence of the last few years, our leaders’ Cartesian faith appears unshaken. There is a very real danger that in striving for an unattainable optimal solution they end up landing us with a situation which is worse than we have now.

This article originally appeared at The Commentator

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Hayek on the euro

Tru dat

I’ve just finished a book titled Hayek, Currency Competition and European Monetary Union, the text of the 1999 Hayek Memorial Lecture given at the Institute of Economic Affairs by European Central Bank bod Otmar Issing.

Issing quotes Hayek’s Denationalisation of Money from 1978 saying

“though I strongly sympathise with the desire to complete the economic unification of Western Europe by completely freeing the flow of money between them, I have grave doubts about doing so by creating a new European currency managed by any sort of supranational authority. Quite apart from the extreme unlikelihood that the member countries would agree on the policy to be pursued in practice by a common monetary authority (and the practical inevitability of some countries getting a worse currency than they have now), it seems highly unlikely that it would be better administered than the present national currencies.”

Issing spends his lecture arguing that Hayek was wrong.

Otmar 0 – 1 Hayek

Why do smart people still choose Keynes over Hayek?

The ridiculous and the sublime

On October 17th a group of concerned economists wrote to the Times. The current economic woes, they wrote, were down to insufficient spending/increased saving. “[W]hen a man economizes in consumption”, they argued, “and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources do not find a new home waiting for them.” Crucially, “In present conditions their entry into investment is blocked by lack of confidence.” The government should step in and spend to make up the shortfall they said.

On October 19th another group of economists replied with their own letter to the Times. They believed that the cause of the economic problems was monetary mismanagement which had created “a deficiency of investment-a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption.” They argued for the necessity of increased saving to readjust this and explicitly rejected any role for government spending, writing that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities.”

But this was October 1932 and the letters were written by John Maynard Keynes and Friedrich von Hayek. It says much about the essentially static nature of economic knowledge that an 80 year old debate remains so compelling today that it continues to inspire radio shows, debates, books, and even rap-offs.

Keynes’s economics, in a nutshell, argues that of the two components of ‘effective demand’, consumption and investment, investment is prone to volatile swings. As Keynes put it, investment spending was reduced when their expected payoff, the Marginal Productivity of Capital, dipped below the cost of financing them, the interest rate.

Why might this happen? “Animal spirits” was Keynes’ answer; “Don’t ask me guv” in other words. Whatever it was that tipped investors from optimism into effective demand-sapping pessimism is exogenous to the model; it cannot be accounted for by it.

Either way, the policy prescriptions of the Keynesian model are obvious. Financing costs must be held down with low interest rates and the Marginal Productivity of Capital must be underwritten by a government guarantee to purchase, with deficit spending if need be, whatever output industry might produce. Low interest rates and deficit spending. That is the Keynesian prescription for prosperity.

Hayek’s theory is very different. For Hayek, when low interest rates cause an expansion of credit, this credit flows into some parts of the economy before others. This blows up bubbles in the affected part of the economy, be it in housing, internet stocks, or tulips.

At some point, Hayek argues, the inflationary effect of this credit expansion overwhelms any wealth effect and interest rates begin to rise. With no further credit available to purchase the bubble assets the prices of these assets and their attendant industries collapse. This is the bust.

A major difference between Hayek’s theory and Keynes’s is that for Hayek the bust as well as the boom is endogenous to the model, it is explained by it. The bust isn’t caused by “animal spirits” switching inexplicably out of the clear blue sky, but by the predictable outcome of actions undertaken in the boom.

As Hayek’s model is radically different from Keynes’s, radically different prescriptions follow from it. Viewing the cycle as a whole Hayek believed that preventing a future bust was as important as fighting the current one and he proposed measures to limit the ability of banks to swell credit, his favoured solution being competing currency issue by banks.

More immediately, Hayek argued that as the bubble assets and attendant industries had been pumped up by unsustainable injections of inflationary credit, they could only be liquidated; any attempt to preserve their value would only prolong the bust or, as bad, set another cycle in motion. Sound money and non-intervention was the prescription of Hayek and his fellow Austrian Schoolers.

Looking back over the last few years you have to ask how intelligent people, examining the evidence, can still choose Keynes over Hayek. In both Britain and America we had monetary policy makers working to keep financing costs down with low interest rates. We had governments running budget deficits and applying fiscal stimulus to economies which were already growing. We followed the Keynesian prescription for prosperity and we still ended up with a bust – a bust which Hayekians, with their superior model, saw coming.

The answer lies in the prescriptions. Keynes, with his cheap credit and shower of borrowed money, is a pleasant prospect. Indeed, Paul Krugman, one of the most uncompromising modern Keynesians, believes that “Ending the depression should be incredibly easy”, all we need is cheaper credit and more borrowing. Just, in fact, what we had going into the crisis.

Hayek, on the other hand, offers a more painful prospect. As his mentor Ludwig von Mises put it:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”

Which of these vistas would you prefer to gaze upon?

But these theories should be judged not on how warm and fuzzy they make us feel but on how accurate they are. On that score Hayek wins hands down yet some still cling doggedly to Keynes. It’s for the same reason the aunt who gives you chocolates is preferred to the aunt who makes you do your homework.

This article first appeared at The Commentator

Von Hayek was right

The Road to Serfdom is paved with good intentions

I’m a big fan of Hayek’s The Road to Serfdom. In it Hayek argued that there was a tendency for growth of government to feed on itself to the extent that individual freedom was snuffed out and we all become lackeys of the state. It’s a controversial argument. Folks on the left dislike it, indeed, they find it personally insulting, as they take it that you are insinuating that in each of them is a totalitarian Soviet Commissar dying to get out.

That, indeed, is an argument I (and, I believe, Hayek himself) would refrain from making. But every now and then you will be talking to someone who considers themselves a sincere, well meaning, left wing, liberal, social democrat, and you will end up having a conversation like this…

Him – I wonder if looking back it would have been better for the West if Afghanistan had managed to get some stability as a Soviet satellite

Me – Impossible to say. Would a government imposed by the USSR have outlasted the USSR even without a war?

Him – I dunno, but I think there’s a very strong argument that Turkmenistan, Tadzhikistan etc are much better off for their years of Soviet rule than the ethnically and economically similar Afghanistan.

Me – I’d always secretly suspected it but now the truth is out; you’re a Tankie.

Him – Not really, I just prefer living under a Marxist-Leninist regime of the post Stalinist variety to living under Islamic fundamentalists. As I suspect would you (though that admission might have to be dragged out of your with red hot pincers…)

Me – I look at Cambodia and Ethiopia and I really am not so sure. To paraphrase Montesquie, there has never been a kingdom given to so much bloodshed as that of Marx.

Him – I did say of the post-Stalinist variety – i.e. the USSR and its European satellities c 1956-1991. (note that the i.e. does not follow)

There’s actually a point that the more the post war Soviet Union influenced a 3rd world country the more relatively civilized it was (see Mongolia and Vietnam). It was where in places like Cambodia and Ethopia where the Societ writ didn’t really run that you got blood baths

Me – You mean like Czechoslovakia in 1968?

Him – Reprehensible but compared to say, Chile 1973, hardly a blood bath. (Who knew ‘bloodbath’ was a relative term?)

Me – Not the point though surely?

Him – We were talking about blood baths.

Me – But I dont see why your judgment on the Soviet invasion of Czechoslovakia should be tempered by what happened in Chile five years later. You know, I was joking when I called you a Tankie, but now…

Him – Ok. The Soviet invasion of Czechoslovakia in 1968 , whilst wrong, did not lead to a significant number of deaths and hence cannot be characterised as a blood bath.

Me – Yes, but it does rather knock your characterisation of the Soviet dictatorship post 1956 (ie stripping out all the millions of inconvenient dead) as a misunderstood philanthropic organisation into a cocked hat.

72 Czechs and Slovaks were killed by the way, thats insignificant for you.

Him – Where do I say that exactly?

Me – “There’s actually a point that the more the post war Soviet Union influenced a 3rd world country the more relatively civilized it was (see Mongolia and Vietnam)” quoth the raven

Him – I still can’t see the words “misunderstood philanthropic organisation”.

Me – But you can see the words “There’s actually a point that the more the post war Soviet Union influenced a 3rd world country the more relatively civilized it was (see Mongolia and Vietnam)”

I also notice no comment on your dismissal of the deaths of 72 Czech’s and Slovak’s in 1968 as insignificant.

Him – I don’t know whether you really can’t see my point or are being deliberately obtuse.

Post WWII the USSR was a status quo power. The last thing it wanted was chaos and destruction in its satellites. It wanted stability. Hence the countries more directly under its influence tended to be more stable (perhaps a better word that civilized). How you get from that a moral approval for the Soviet system per se I can’t see.

On your last point, I am really not getting into this. You seem to be in one of your belligerent moods this morning. But if you recall were talking about Cambodia and Ethiopia. Whilst the death of anyone is a tragedy and hugely significant for them and their families, I am sure you will agree with me that Czechoslovakia 68 did not involve a blood bath on the Cambodian and Ethiopian scale.

This started out as a interesting discussion on the benefits or otherwise of the USSR in promoting modernisation in Central Asia, but you seem to want to turn it into a fight. Sorry I am not up for that.

Me -I’m in a belligerent mood? Says a man defending the Soviet invasion of Czechoslovakia (not something my Trotskyite former comrades would do) and dismissing 72 deaths as not “a significant number of deaths”

Indeed it was an “interesting discussion on the benefits or otherwise of the USSR in promoting modernisation in Central Asia” but if you are going to make such barmpot assertions expect to get called on it.

Him – Don’t you think a casualty total of 72 for the invasion of a foreign country on the low side? And where exactly have I defended the invasion of Czechoslovakia? My first post on the subject said it was reprehensible.

Me – Yes, those wonderful Soviets, killing so few in the course of their invasion.

Him – Ok, we have descended to the level of the playground. That’s me finished.

“For by thy words thou shalt be justified, and by thy words thou shalt be condemned.” – Matthew, 12:37

Overrated: Paul Krugman

“Snake oil, £14.99!”

When Friedrich von Hayek became a Nobel Laureate in economics in 1974 he said: “The Nobel Prize confers on an individual an authority which in economics no man ought to possess.” The truth of this is demonstrated daily by the case of Paul Krugman.

Krugman and his supporters whip out his Nobel Memorial Prize in Economic Sciences like a Top Trump of Diego Maradona. It is awarded annually — so why the special fuss about a prize Krugman won four years ago? His Nobel is being used to intimidate opponents. Any opposition to Krugman with his Nobel Prize is opposition to science itself.

Why Krugman generates so much opposition isn’t hard to fathom. From his perch in the New York Times he says one ridiculous thing after another. In the British context Krugman’s risible thesis is that the economy is struggling because the government isn’t spending enough money, that austerity is driving us back into recession, and that the solution to our debt crisis is to borrow and spend even more money.

But there is no austerity. British government spending has fallen from record highs by only about 1 per cent since the coalition took office. This has tipped us back into recession? Most private sector companies could save that by switching to cheaper copier paper.

Krugman argues that we need vast government spending to get us out of the recession. But Britain is running a budget deficit of more than 8 per cent of GDP, one of the highest in the developed world. The government is spending more than 400 million borrowed pounds every day; the national debt is increasing by more than £5,000 every second.

And yet, with all this extra borrowing and all this spending Britain’s economy is still tanking. Perhaps this suggests that massive deficit spending isn’t the answer. That’s one interpretation. Not for Krugman. To him the problem is that even the record levels of borrowing which will see Britain’s national debt increase by 60 per cent, from £1 trillion to £1.6 trillion, by the next election, are not enough. We need to borrow more. That, he claims, would solve our debt crisis.

Krugman’s new book (its recommended retail price an aggregate demand boosting £14.99) is called End This Depression Now! (Norton) as though that hadn’t previously occurred to anyone else. Indeed, it’s possible that if George Osborne decided to increase borrowing to 10 or 12 per cent of GDP we might have a quarter or two of growth. Labour managed to boost GDP growth to 1 per cent by dumping £160 billion of borrowed money into the economy.

But after that? Don’t ask Krugman. He follows John Maynard Keynes who, accurately but none too helpfully, observed: “In the long run we are all dead.” Actually, if you did ask Krugman, you might get a response like the one he gave when the dot com bubble burst: “To fight this recession the Fed needs . . . soaring household spending to offset moribund business investment . . . Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

That worked out fine, didn’t it? Well yes, in Krugman’s terms it did. Sure, we are now living with the effects of the bursting of that bubble but we did get a few good years of rocketing property prices which made us all feel as though we were getting richer just by sitting in our homes. And now that bubble has burst we just inflate a new one somewhere else. And when that bursts we inflate a new one. And when that bursts . . .

This is where the Keynesian ignorance of the long run demonstrated by Krugman leads you: lurching from one catastrophe to the next with a series of increasingly expensive quick fixes of ever shorter duration which do nothing to address the underlying problems.

The economic problems of Greece, Spain, and Britain are not that the deficits of 7 per cent, 7 per cent and 8 per cent their governments are respectively running are not high enough. Greek labour costs are higher than elsewhere and Greece doesn’t export very much. Spain has unemployment of 24 per cent thanks to a labour market which makes job creation almost impossible. Britain is  already one of the most indebted nations on the planet.

These fundamental problems are ignored by Krugman and his followers. In his 1994 book Peddling Prosperity Krugman accused the supply-side economists of the 1980s of being “cranks” selling “snake oil” because, he said, they offered politically expedient economic non-remedies with no   basis in fact. Hypocrisy, thy name is Krugman.

As for that Nobel Prize, Paul Krugman won it for his work on international trade patterns, not his crackpot Keynesianism. Sir Paul McCartney won an Ivor Novello award for writing “Yesterday”. That doesn’t mean sentimental schlock like “Mull of Kintyre” is worth listening to.

This article originally appeared in Standpoint

As easy as ABCT

Wise guys

In economics as with medicine any cure must begin with a sound diagnosis. But if economists were doctors the patient would have died on the table. Despite its pretensions to scientific exactitude, the discipline has offered a bewildering array of diagnoses; the doctors still arguing.

Some diagnoses can be ruled out. The Marxist theory of economic cycles with its declining rate of profit is clearly useless; businesses were making record profits on the eve of the bust. There was no shock to Total Factor Productivity which a Real Business Cycle explanation would require. Keynesian ‘animal spirits’ are also unsatisfactory. The flight from mortgage backed assets was a totally rational response to the Federal Reserve raising interest rates between 2004 and 2007.

But there is another diagnosis which fits the symptoms quite well; Austrian Business Cycle Theory (ABCT), so called because it grows out of the Austrian School of economics founded in Vienna by Carl Menger in the nineteenth century. It describes the causes and course of the current crisis better than any other theory and offers some insights in to what lies ahead.

ABCT starts with the idea that the interest rate is a price like any other matching the supply of something to the demand for it. Funds for investment are supplied (via saving); savings are demanded (for investment). If people cut back on current consumption and save more to increase future consumption then the interest rate falls and firms are able to borrow more to invest in the means to supply that future consumption. And when people begin drawing down their savings to fund current consumption the interest rate rises and firms cut back on investing for future consumption.

The key insight is that the interest rate is a real phenomenon. As the Austrian School economist Eugen von Böhm-Bawerk put it, it reflects the ‘time preference’ of economic agents, the value they place on consumption of something now compared to the value they place on consumption of the same thing at some given point in the future. The interest rate reflects the compensation/incentive for abstinence on the part of the saver.

But in the real world we have central banks. In response to something like the bursting of the dot com bubble the Federal Reserve can lower interest rates, as it did in that instance, from 6.25% to 1.75% over the course of 2001.

However, the interest rate is not falling because of increased saving (or decreasing time preference), rather it is being forced down artificially by the expansion of credit; the creation of phony capital in other words.

As interest rates fall firms see ever more marginal investment opportunities becoming profitable. They borrow and undertake them. A boom is underway.

But eventually the inflation caused by this credit expansion starts to show even in the central bank’s cooked figures as when inflation went above 4% in the US in 2006. Interest rates are raised; the Fed Funds rate went above 5% the same year. Those marginal investments that looked viable at 1% are now scuppered.

This is the bust. All the enterprises undertaken in the expectation of catering for the demand for future consumption indicated by low interest rates discover that there is, in fact, no such demand. There never was. They are revealed as ‘malinvestments’, with no hope of ever producing a return above their borrowing costs unless interest rates are kept artificially low and cheap credit is kept flowing.

The recession is not some mysterious collapse in aggregate demand which can be stopped with a dose of government spending. It is the liquidation of these unviable credit positions and it will not be over until this process is complete.

The Austrian School economist Ludwig von Mises wrote

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved

This is the Austrian choice; recognize the liquidation and allow zombie banks to collapse and stop soaking up scarce capital so we can get the recovery going or keep putting it off with more monetary and fiscal stimulus. And, as another Austrian Schooler, Friedrich von Hayek, warned,

The magnitude of unemployment caused by a cessation of inflation will increase with the length of the period during which such policies are pursued

True, this is a grim prospect, but that matters less than whether it’s correct. Anyone who says there is a third option, a painless way out which can be found simply by ticking a different box on a ballot paper, truly is peddling snake oil.

This article originally appeared at The Cobden Centre

Conservative, liberal, and all the rest

Out of the mouths of Vulcans

One of the great things about sites like Facebook is that every now and then a half forgotten name from the past pops into your head, you rattle it into the search box and up they pop. It can be fascinating and enjoyable to see what someones journey through life has been since it diverged from yours.

So I was happy to see an old friend of mine from university called Gordon on there, someone I’d not seen in ten years. He seemed to have a wife and kids, stuff we’d talked about back when it was in the distant future.

He and his girlfriend Tess were American exchange students at Swansea University. Me and Gordon got on incredibly well. We hung around together, travelled to Ireland together and he came to stay at my parents.

Gordon was a pretty political guy. I suppose he was fairly left wing by American standards which is to say not very by British standards. It was from him, a gun owner and recreational shooter, and not Charlton Heston, that I first heard the phrase “From my cold, dead hand” But he supported the rights of any group you care to name; gays, African-Americans, Native Americans, ‘diversity’ was his watchword.

So when I sent him an email saying hi and asking how he was I was dismayed to get this reply

“Things are good! Thanks. I read some of your writings and, well, have a nice life. I hope the whole conservative thing works out for you”

When he’d finished typing he blocked me. Apparently Gordon’s support for diversity stops short of people’s politics. That is a diversity too far.

I think that’s sad. Beyond having the memory of a nice guy and friend tainted he isn’t even right; like Margaret Thatcher’s idol Freidrich von Hayek, I am not a conservative. I’m a liberal.

I don’t mean that in the sense that it is used in America where it has become a term for what, in Europe, we would call social democrats. I mean it in the original, enlightenment sense, of being a believer in the sovereignty of the individual.

This is why I am not a conservative. There are still very many areas where the scope for free people to pursue their welfare and that of others, to map out their own paths and define their own destinies is hobbled. I do not want to conserve this.

So much for semantics. The real sadness here is a lost friendship. And for what? Because he didn’t like my politics? Many don’t. I don’t like theirs.

But there is more to each of us than that. Human beings are deep, complex, fascinating creatures. There is more to each of us than our politics, our social class, our nationality, religion, race or sports team. As the Vulcans had it, ‘Infinite Diversity in Infinite Combinations’

So there are few more depressing trends in the world today than that of sticking labels on each other. ‘conservative’ or ‘liberal’, ‘rich’ or ‘poor’, ‘Christian’ or ‘Muslim’, all of these may be partly true for some of us but are never wholly true for any of us. We are all more complex than that with more identities. To boil us down to this label or that label strips us of the rich variety of our humanity. It is debasing and dehumanising.

In large part this accounts for the increasingly divisive and bitter tone that public debate is conducted in. I’m guilty of it myself from time to time.

So in losing, or not regaining, a friendship with Gordon, I have not lost some leftie Democrat. I have lost a guy who came to see me in the plays I was in, who I introduced to Newcastle Brown Ale and who I spent long hours with discussing the novel I wonder if he wrote. I lost a guy I liked just because my politics were different from his.

As for my friend Tess, well, she’s better off with her new guy. He’s a lovely chap, a dyed in the wool Democrat, but we get on because there is more to us than our political views. We are all human beings. Which ever box you tick on election day, that remains our inalienable common ground.

Why mathematics and modeling should not be equated with economics and human action

A long way from the pin factory

A very intelligent friend of mine of markedly different political persuasions said the other day that he avoided “technical economic arguments” with me as I’ve just graduated with a degree in economics. I was rather sad to hear this.

The simple truth is that after doing a module called, say, ‘Introduction to Economic Principles and Policy’, you will not study very much more which will add greatly to your understanding of the subject. Beyond that, in an ‘Intermediate Microeconomics’ course for example, you are simply ladling mostly unnecessary algebra onto the subject.

Take this from a course in ‘Intermediate Macroeconomics’ for example:

This is actually some of the more accessible math involved in modern economics. Furthermore, the concepts it is dealing with, constant returns to scale and the per worker production function, are pretty straightforward. Yet many, including almost all university economics lecturers, will tell you that this is economics. It is, in fact, simply applied algebra – mathematics looking for a real world application. Economists eager to give their art the patina of science and mathematicians searching for real world relevance have combined to render economics impenetrable.

This trend also stems from the view of economics as the study of a mechanism. People may now laugh at the model of the economy A.W. Phillips built in the basement of the London School of Economics in 1949 with its gurgling pipes full of different coloured liquids representing money literally sloshing around an economy controlled by sluice gates. But it isn’t conceptually different from the computerised models that are in use today guiding research and government policy.

These models often fail. If your model is based on erroneous assumptions, such as the creation of phantom capital called Quantitative Easing actually stimulating an economy, you will get erroneous outputs; Garbage In Garbage Out as they say. But there is a more fundamental problem. There is no exogenous ‘thing’ called ‘The Economy’ which can be quantified and controlled, there is only each of us doing what we do every day. That is why Ludwig von Mises called his great treatise on economics ‘Human Action’. Or as Friedrich von Hayek rapped recently “The economy’s not a car. There’s no engine to stall. No experts can fix it. There’s no “it” at all. The economy is us”.

It is little wonder that even intelligent people feel themselves cowed and run in terror from the thicket of abstraction that shrouds modern economics. It needn’t be like this. The great works of the discipline, those of Adam Smith or Carl Menger for example, managed to lay the foundations of the subject without it.

And it is sad that people like my friend feel put off because the economy affects all of us and, to return to the point made by the rapping Hayek, it is the study of all of us. Given this we all have economic insights by virtue of being human beings, the very subject of economics itself. As von Mises wrote:

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.

Do not leave economics to the abstract eggheads. Pick up Economics in One Lesson by Henry Hazlitt, Free to Choose: A Personal Statement by Milton Friedman or even Eat the Rich: A Treatise on Economics by P.J. O’Rourke: writers who, in these books and others, passed the economist Armen Alchian’s test of whether they truly understood the subject – they could explain it to someone who doesn’t know a darn thing about it.

Economics is about you. It is your subject. Reclaim and enjoy it.

This article originally appeared at The Cobden Centre

The failure of monetary socialism

The central planner’s unlikely redoubt

There is a story from the Cold War era about a Soviet official who travelled to London. As he was shown around he couldn’t believe how full the shops were of all sorts of produce. Amazed by this bounty, he eagerly seized his guide and asked “Who is in charge of the bread supply to London?” The baffled reply came – “No one”.

I was reminded of this story and how, from the Austrian viewpoint, economics is about coordination, at an excellent talk I heard in east London last Thursday night by Steven Baker, MP and Cobden Centre board member.

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Hayek vs Keynes at the LSE

No contest

July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Friedrich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.

In front of a boisterous crowd, Hayek won fairly easily. Skidelsky’s haughty style contrasted with Selgin’s bullishness and the perennial Keynesian failure to look at the origins of the bust won over nobody in an admittedly partisan crowd. But even an hour of discussion left a few things hanging.

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