Ludwig von Mises on socialists and nanny staters

Still right after all these years

Every now and then you read something written some time in the past and almost literally double take at how relevant it remains. Check out the below – written in 1926 – by Ludwig von Mises in The Nationalization of Credit? from his Critique of Interventionism

“Guided by central authority according to central plan, a socialistic economy can be democratic or dictatorial. A democracy in which the central authority depends on public support through ballots and elections cannot proceed differently from the capitalistic economy. It will produce and distribute what the public likes, that is, alcohol, tobacco, trash in literature, on the stage, and in the cinema, and fashionable frills. The capitalistic economy, however, caters as well to the taste of a few consumers. Goods are produced that are demanded by some consumers, and not by all. The democratic command economy with its dependence on popular majority need not consider the special wishes of the minority. It will cater exclusively to the masses.

But even if it is managed by a dictator who, without consideration for the wishes of the public, enforces what he deems best — who clothes, feeds, and houses the people as he sees fit — there is no assurance that he will do what appears proper to “us.” The critics of the capitalistic order always seem to believe that the socialistic system of their dreams will do precisely what they think correct. While they may not always count on becoming dictators themselves, they are hoping that the dictator will not act without first seeking their advice. Thus they arrive at the popular contrast of productivity and profitability. They call “productive” those economic actions they deem correct. And because things may be different at times, they reject the capitalistic order, which is guided by profitability and the wishes of consumers, the true masters of markets and production. They forget that a dictator, too, may act differently from their wishes, and that there is no assurance that he will really try for the “best,” and, even if he should seek it, that he should find the way to the “best.””

Read the full thing here

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

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

Paul Ryan’s 40 year detox: America can’t rely on China

And now a word from our sponsors…

The reaction of some to the release of the Path to Prosperity budget last week by Representative Paul Ryan, Chairman of the House Budget Committee, was incandescent fury.

A New York Times editorial painted a picture of America under the Ryan budget as

one where the rich pay less in taxes than the unfairly low rates they pay now, while programs for the poor — including Medicaid and food stamps — are slashed and thrown to the whims of individual states. Where older Americans no longer have a guarantee that Medicare will pay for their health needs. Where lack of health insurance is rampant, preschool is unaffordable, and environmental and financial regulation are severely weakened”

The Washington Post exhumed Dickens and Orwell on the way to saying

“Ryan would cut $770 billion over 10 years from Medicaid and other health programs for the poor, compared with President Obama’s budget. He takes an additional $205 billion from Medicare, $1.6 trillion from the Obama health-care legislation”

According to The New Republic the budget

“would take health insurance away from tens of millions of people, while effectively eliminating the federal government except for entitlements and defense spending”

The Huffington Post quoted one Eddie Vale, a spokesman from pressure group Protect Your Care, as saying “A Republican budget to end Medicare is a Republican budget to end Medicare, no matter what you call it”

What’s most striking about all this is what’s missing. Mr Vale and the others quoted haven’t asked themselves the crucial question about Medicare and food stamps and all the rest; will the Chinese be happy to keep paying for it all?

The United States government borrowed $4 billion today. It borrowed $4 billion yesterday and it will borrow $4 billion again tomorrow and so on. Federal government debt, which was rising by about $625 billion a year under George W Bush, is, under President Obama, rising at $1 trillion a year. According to official figures in December Federal government debt passed 100% of GDP.

In National Review Mark Steyn does an excellent job of conveying the full scale of this explosion of debt

“The 2011 budget deficit, for example, is about the size of the entire Russian economy. By 2010, the Obama administration was issuing about a hundred billion dollars of treasury bonds every month — or, to put it another way, Washington is dependent on the bond markets being willing to absorb an increase of U.S. debt equivalent to the GDP of Canada or India — every year”

And what is the Ryan budget, cause of such wailing and gnashing of teeth, proposing to do about this financial catastrophe? Under what the New York Times called “the most extreme budget plan passed by a house of Congress in modern times” Ryan doesn’t actually propose to balance the Federal budget for another 40 years.

So far America has gotten by through buying consumer goods from China and sending dollars in return. The Chinese then effectively loan these dollars back to America by buying Federal government debt, Treasury bonds. The Federal government then spends the receipts from these Treasury bond sales on Medicare and food stamps and all the rest. This is how the Federal government pays its way and it is why China is the world’s largest owner of US government debt with holdings of $1.148 trillion.

Why have the Chinese been so willing for so long to fund the consumption of Americans who’s per capita GDP is nearly six times higher than theirs?

One reason is geostrategic. America will not be able to confront the emergent power of China over Taiwan or anything else if the US government has to borrow the money from the Chinese to do so.

Another is connected to the economy and domestic politics. It has long been an article of faith among China watchers that China’s economy needed growth of 8% a year to guarantee jobs for the millions of young people entering the workforce every year, failure would lead to political unrest. If the Chinese government could only guarantee these jobs in factories producing goods for sale in the US by loaning the US the money to buy them, so be it.

Either way the entire edifice of the United States government is dependent on a line of credit from China and elsewhere. In total one third of US government debt, $5 trillion, is held overseas. With a bit of help from the Quantitative Easing of the Federal Reserve this vast market for Federal government debt has kept bond yields historically low while debt has ballooned. The Federal government is dependent upon the continuation of this line of credit for its own continuation.

But there are signs that the willingness of poor Chinese to keep lending money to rich Americans is coming to an end. Last year the previously insatiable Chinese reduced their holdings of US government debt for the first time since records began in 2001. Not only China is suffering indigestion at the amount of US government debt it is being asked to swallow. Russia and India have drastically reduced their holdings.

The reason is obvious. As a borrower, like America, piles debt upon debt it becomes ever less likely that they will be able to pay it back so you stop lending to them. Indeed, this outcome was, at some stage, inevitable.

But what of the effect on America? Like anything else as the buyers for Treasury bonds disappear their price will fall. In the world of bond financing this means higher bond yields, rising American borrowing costs in other words.

The Federal government’s debt binge will come to an end. It is simply a question, to paraphrase Von Mises, of whether this should happen sooner as the result of a voluntary abandonment of increasing indebtedness, or later amid the catastrophe of default and inflation. Maybe Ryan’s 40 year detox isn’t so bad after all?

This article originally appeared at The Commentator

Quantitative easing: why it doesn’t work

Laying the foundations for recovery

In the second year of my economics degree we were mixed in with some first years for some lectures. In the first week one of the freshers asked “Why don’t we just print more money, give it to people, and make them richer?”

We second years laughed, but that economic ingénue might be having the last laugh. As the Bank of England prepares to print another £75 billion of new money, she seems to have a seat on the Monetary Policy Committee.

Quantitative easing is the purchase by the Bank of England of financial assets so that the money spent on these will find its way back out into the wider economy.

But here’s the trick; the money the Bank spends on these assets is created out of thin air. The Bank, which controls the issue of British currency, simply creates as many new pounds and pence as it needs to buy however many of these assets it wants.

Whether this is inflationary depends on your view of the gradient of the short run aggregate supply curve.

For neo classical economists the curve is vertical, output is fixed, in other words, by real factors like the number of factories and workers. Any increase in the money supply simply causes higher prices. These economists believe money is neutral.

Keynesians disagree. For them, with idle resources in an economy, furloughed factories and unemployed workers, the aggregate supply curve is flat. It is possible, by increasing the money supply, to stimulate new output and employment because the spare capacity allows the amount of goods and services to expand with the money supply. Money is not neutral.

These are limiting examples. In practice most economists believe the aggregate supply curve is sloped, they disagree over the gradient.

Another area where neo classical and Keynesian schools agree is the transmission of this through the economy. Or, more accurately, they ignore it.

Their models are snapshots of a moment. They exclude the fourth dimension, time, and thus miss the transmission process.

They share the ridiculous notion of ‘helicopter money’ whereby newly created money, such as that used in QE programs, magically appears in people’s portfolios as though falling from a helicopter. This money is assumed to be scooped off the ground by each economic agent in proportion to their existing stock of wealth.

Austrian school economists don’t take this bogus notion seriously because they acknowledge that economic phenomenon exist in time. It follows that in the Austrian view monetary expansions are not neutral. They benefit some more than others.

The charts below from the work of economist Roger Garrison illustrate this.

Figure 1                                                             Figure 2

Garrison writes

“The vertical axis represents the nominal magnitude of the original stock of money (Mo), i.e., the stock in existence prior to the monetary expansion. The horizontal axis represents the nominal magnitude of the expanded stock of money (Me), i.e., the stock in existence after the expansion has occurred. The 45° line, representing the equality Mo = Me, serves as a reference. A neutral expansion can be shown, then, by rotating a line clockwise from the reference line” (in Figure 1)

But monetary expansions don’t occur like this. Helicopters don’t dispense the new money, banks do.

Money newly created by the fiduciary authority goes to them first. From them it goes to whoever they lend it on to. As Garrison says

“In (Figure 2) it is assumed…that all of the newly created money takes the form of credit extended to capitalists. Initially, then, the laborers are completely unaffected by the monetary expansion. This is represented in (Figure 2) by M’L, which is coincident with the 45° reference line. Capitalists, on the other hand, experience an initially amplified monetary expansion as indicated by M’c. But as the capitalists purchase additional quantities of labor services, the new money filters through the economy such that eventually the expansion experienced by the laborers is approximately the same as the expansion experienced by the capitalists. This is indicated by the expansion line Mi”c = M”L. The arrows indicate the dynamics of the expansion as it appears to the capitalists and to the laborers”

The capitalists in Garrison’s model, those first to receive the new money created in monetary expansions, get increased purchasing power. But by the time the money has filtered down to those furthest from the monetary expansion the effects have been dissipated by the rising prices created by the issue. They just get higher prices.

Garrison’s model shares the non neutrality of money of the Keynesian model and the assumption of fixed output of the neo classical model. What it adds is the effects of the expansion in time and in doing so it shows how iniquitous these monetary expansions are.

Summarising the work of Ludwig von Mises, Murray Rothbard wrote that monetary expansions like QE confer

“no social benefit whatever. In fact, the reason why the government and its controlled banking system tend to keep inflating the money supply, is precisely because the increase is not granted to everyone equally. Instead, the nodal point of initial increase is the government itself and its central bank; other early receivers of the new money are favoured new borrowers from the banks, contractors to the government, and government bureaucrats themselves. These early receivers of the new money, Mises pointed out, benefit at the expense of those down the line of the chain, or ripple effect, who get the new money last, or of people on fixed incomes who never receive the new influx of money. In a profound sense, then, monetary inflation is a hidden form of taxation or redistribution of wealth, to the government and its favoured groups, and from the rest of the population…”

 People will ring alarm bells and tell you QE is necessary. Many of them will be Garrison’s capitalists. But one thing they cannot tell you is that QE is fair.

This article originally appeared at The Commentator

The IMF: cheerleader of the rich world’s governments

If its Tuesday this must be stimulus

Ronald Reagan’s observation that “a government bureau is the nearest thing to eternal life we’ll ever see on this earth” seems to apply to supra national bodies as well.

The collapse of the Soviet Union left NATO facing an existential crisis worthy of French cinema until Slobodan Milosevic came along. So it is with the International Monetary Fund.

Established as part of the Bretton Woods system of currency management in 1944, the IMF’s job was to lend money to countries which were having balance of payments issues; who couldn’t pay their bills in other words. With their dollar exchange rates fixed, paying the bills by inflating the money supply was only allowed in the extreme circumstances of devaluation as Britain had to do under the Labour governments of Clement Atlee in 1949 and Harold Wilson in 1967.

The demise of the Bretton Woods system in 1971 rendered the IMF purposeless. Floating exchange rates replaced fixed rates so, in theory, no country should have any trouble financing its borrowing; it could just print more money, the effects being felt in internal inflation and external devaluation with the exchange rate adjusting automatically to reflect the decline in the value of the newly debauched currency.

Milton Friedman, an advocate of floating exchange rates since at least 1950, held that floating exchange rates didn’t have to mean unstable exchange rates. In practice, removed from even the questionable discipline of the Bretton Woods system, central banks around the world cranked up the printing presses and debt crises became bound up with currency/inflation crises. The IMF’s role was much as before; covering cash strapped countries while they sorted themselves out as they had to do for Britain under the Labour government of James Callaghan in 1976.

In this not-so-new role the IMF has attracted much criticism. Nobel laureate Joseph Stiglitz, among many others, has argued that the IMF’s lending conditions, generally to balance budgets, protect the currency and free up markets, are counterproductive.

In truth a country with a debt problem will have to move towards budget balance and stabilise its currency at some stage. Critics would argue that the midst of a crisis is not the appropriate time but when countries don the IMF hair shirt they have generally reached a stage where their problems cannot be solved without tackling the fiscal and monetary problems at a fundamental level. The truth is that many of the countries it has helped would have been worse off if it hadn’t been for IMF assistance.

A more serious charge against the IMF is its inconsistency. In 1997 a clutch of South East Asian countries were hit by a currency crisis and the IMF stepped in with its standard prescription of fiscal and monetary tightening with the attendant economic pain. If this was a tough sell for domestic politicians, well, that was their problem.

But when the western economies hit trouble in 2007-2008 the IMF suddenly rediscovered its dusty old copy of Keynes’ ‘General Theory’. It enthusiastically backed stimulus spending in Britain, the United States and Europe. Western politicians were given a much easier sell than their Asian counterparts had been in 1997.

The effects of the tidal wave of stimulus unleashed in 2008-2009 were subject to rapidly diminishing returns. The accumulation of vast piles of debt produced nothing beyond the short term other than higher debt. The gruesome examples of Greece and Ireland saw ‘austerity’ replace ‘stimulus’ as the economic order of the day and, again, the IMF enthusiastically backed it in Britain, the United States and Europe.

Bad economic news abounds. In Britain the service sector and manufacturing sector are struggling. The Eurozone is struggling in the face of tottering banks and battles to reign in spending. The United States economy created no net jobs in August and unemployment is stuck above 9%. Stock markets around the world have been bumping downwards.

If a second dip does emerge from all this it will no doubt enter Keynesian folklore that ‘austerity’ was the culprit. It isn’t. Economies around the world have gorged on cheap credit and are now burdened with its flipside, debt, leaving a vast overhang to be painfully deleveraged away. Further, the period of cheap credit left behind a host of malinvestments; enterprises only viable in an environment of cheap credit. Government and central bank attempts to prop these up and bail them out, soaking up much needed capital, have only delayed the economy’s move to a more sustainable basis.

The IMF may have been taken in by this burgeoning Keynesian myth. This week saw a possible switch back to the policies 2008-2009 with Christine Lagarde, new head of the IMF, calling for renewed stimulus in Europe. Keynes is reputed to have said “When the facts change, I change my mind”. The facts haven’t changed but the IMF’s stance has, repeatedly.

Ludwig von Mises wrote that Keynes’ ‘General Theory’ was “an apology for the prevailing policies of governments”. Governments may have no need of Keynes. They have the IMF in its latest role, cheerleader of the rich world’s governments.

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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Sound money is a matter of social justice

For such a pervasive term, ‘social justice’ is a notoriously tricky concept to quantify. Karl Marx’s notion of social justice was, famously, “From each according to his ability, to each according to his need”. That of the economists of the late nineteenth century was the Marginal Productivity Theory of Distribution. Friedrich Von Hayek claimed to have spent 10 years pondering the matter only to announce that he had “failed”, writing instead that the term was “an empty formula, conventionally used to assert that a particular claim is justified without giving any reason”.

Indeed, there are probably as many opinions on what constitutes social justice as there are individuals capable of holding one. The issue is also confused by the frivolous insertion of the word ‘social’, as though that gives it more weight. It is simply a matter of justice and, personally, I would regard it as unjust for a government or central monetary authority to expropriate the wealth of the poorest members of society via the debasement of their money. Yet, around the world, that is exactly what is happening.

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