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Richard Maybury on Austrian Economics

"The Austrian economists point out that the economy is not a machine, it is an ecology composed of living organisms, people. The Austrian school is in the forefront of the effort to expose the madness of the government's Keynesian and socialist policies."

read the essay

The Framework

The Framework: Explained from Mises Media on Vimeo.

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Spreading Hayek, Spurning Keynes

Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls "dress Crocs," hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

To these free-market economists, government intrusion ultimately sows the seeds of the next crisis. It hampers what one famous Austrian, Joseph Schumpeter, called the process of "creative destruction."

Governments that spend money they don't have to cushion downturns, they say, lead nations down the path of large debts and runaway inflation...

"What I'm really worried about is an endless cycle of deficits, debt, and debasement of currency," Mr. Boettke says. "What we've done is engage in a set of policies that's turned a market correction into an economy-wide crisis."...

And the tenures of Paul Volcker and Alan Greenspan at the Federal Reserve seemed to quell doubts about the central bank's ability to manage the U.S. economy.

But all along, the Austrians weren't so sure. Economics, they feared, was increasingly narrow and technical but not necessarily wise. They also remained skeptical of the Fed's approach to targeting stability in consumer prices.

That shouldn't be the Fed's goal, says Mr. Boettke, who a friend lured back to George Mason a year after he was denied tenure. The Fed, he says, should be to make money "as neutral as possible, like the rule of law, which never favors one party over the other."...

It wasn't a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.

read the WSJ article

Bruce Caldwell on Hayek and the Economic Meltdown

Bruce Caldwell:

the Austrian /public choice one-two punch: we usually do not have the necessary knowledge to intervene effectively, and the political process is such that, even if we did, we still likely would get bad policy, and this together with an ever growing government sector.

read the paper

Keynesianism and the Lost Decade

The Austrian free-market economists use common sense principles. You cannot spend your way out of a recession. You cannot regulate the economy into oblivion and expect it to function. You cannot tax people and businesses to the point of near slavery and expect them to keep producing. You cannot create an abundance of money out of thin air without making all that paper worthless. The government cannot make up for rising unemployment by just hiring all the out-of-work people to be bureaucrats or send them unemployment checks forever. You cannot live beyond your means indefinitely. The economy must actually produce something others are willing to buy. Government growth is the opposite of all these things...

It is time to be honest about our problems.

The tragic reality is that this fatally flawed, but widely accepted, economic school of thought called Keynesianism has made our country more socialist than capitalist. While the private sector in the last ten years has experienced a roller coaster of booms and busts and ended up, nominally, about where we started in 2000, government has been steadily growing, because Keynesians told politicians they could get away with a tax, spend and inflate policy. They even encouraged it! But we cannot survive much longer if government is our only growth industry...

but if we continue to listen to Keynesians in the next decade instead of those who tell us the truth, zero will start to look pretty good. The end result of destroying the currency is the wiping out of the middle class. Preventing that from happening should be our top economic priority.

read the entire essay

The Depression of 1920-21

It is a cliché that if we do not study the past we are condemned to repeat it. Almost equally certain, however, is that if there are lessons to be learned from an historical episode, the political class will draw all the wrong ones—and often deliberately so. Far from viewing the past as a potential source of wisdom and insight, political regimes have a habit of employing history as an ideological weapon, to be distorted and manipulated in the service of present-day ambitions. That’s what Winston Churchill meant when he described the history of the Soviet Union as “unpredictable.”...

If the Austrian view is correct—and I believe the theoretical and empirical evidence strongly indicates that it is—then the best approach to recovery would be close to the opposite of these Keynesian strategies. The government budget should be cut, not increased, thereby releasing resources that private actors can use to realign the capital structure. The money supply should not be increased. Bailouts merely freeze entrepreneurial error in place, instead of allowing the redistribution of resources into the hands of parties better able to provide for consumer demands in light of entrepreneurs’ new understanding of real conditions. Emergency lending to troubled firms perpetuates the misallocation of resources and extends favoritism to firms engaged in unsustainable activities at the expense of sound firms prepared to put those resources to more appropriate use....

The experience of 1920–21 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–21 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode—and observe how hastily our interrogators try to change the subject.

read the entire essay

How to Avoid Great Depression II

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch... The proper injunction to government in a depression is cut the budget and leave the economy strictly alone.
Murray Rothbard

A Program of True Economic Reform

1) End the Fed.

2) Restore sound money to the economy.

3) Lower taxes and cut government spending.

4) No bailouts.

5) Allow prices and wages to fall to levels set by the market.

6) Regulate the government, not private property and markets.

read the entire essay

My thoughts: This is an outstanding essay that provides many fact and figures debunking the idea that massive government intervention can solve economic problems.

The Austrians Were Right

Ron Paul Addressing the House of Representatives 11/20/08

Madame Speaker, many Americans are hoping the new administration will solve the economic problems we face. That’s not likely to happen, because the economic advisors to the new President have no more understanding of how to get us out of this mess than previous administrations and Congresses understood how the crisis was brought about in the first place.

Except for a rare few, Members of Congress are unaware of Austrian Free Market economics. For the last 80 years, the legislative, judiciary and executive branches of our government have been totally influenced by Keynesian economics. If they had had any understanding of the Austrian economic explanation of the business cycle, they would have never permitted the dangerous bubbles that always lead to painful corrections.

Today, a major economic crisis is unfolding. New government programs are started daily, and future plans are being made for even more. All are based on the belief that we’re in this mess because free-market capitalism and sound money failed. The obsession is with more spending, bailouts of bad investments, more debt, and further dollar debasement. Many are saying we need an international answer to our problems with the establishment of a world central bank and a single fiat reserve currency. These suggestions are merely more of the same policies that created our mess and are doomed to fail.

At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve. It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form. Congress added fuel to the fire by various programs and institutions like the Community Reinvestment Act, Fannie Mae and Freddie Mac, FDIC, and HUD mandates, which were all backed up by aggressive court rulings...

The Federal Reserve created our problem, yet it manages to gain even more power in the socialization of the entire financial system. The whole bailout process this past year was characterized by no oversight, no limits, no concerns, no understanding, and no common sense...

All the programs since the Depression were meant to prevent recessions and depressions. Yet all that was done was to plant the seeds of the greatest financial bubble in all history. Because of this lack of understanding, the stage is now set for massive nationalization of the financial system and quite likely the means of production.

Although it is obvious that the Keynesians were all wrong and interventionism and central economic planning don’t work, whom are we listening to for advice on getting us out of this mess? Unfortunately, it’s the Keynesians, the socialists, and big-government proponents.

Who’s being ignored? The Austrian free-market economists – the very ones who predicted not only the Great Depression, but the calamity we’re dealing with today. If the crisis was predictable and is explainable, why did no one listen? It’s because too many politicians believed that a free lunch was possible and a new economic paradigm had arrived. But we’ve heard that one before – like the philosopher’s stone that could turn lead into gold. Prosperity without work is a dream of the ages...

The policies of big-government proponents are running out of steam. Their policies have failed and will continue to fail. Merely doing more of what caused the crisis can hardly provide a solution...

There are limits. A country cannot forever depend on a central bank to keep the economy afloat and the currency functionable through constant acceleration of money supply growth. Eventually the laws of economics will overrule the politicians, the bureaucrats and the central bankers. The system will fail to respond unless the excess debt and mal-investment is liquidated. If it goes too far and the wild extravagance is not arrested, runaway inflation will result, and an entirely new currency will be required to restore growth and reasonable political stability.

The choice we face is ominous: We either accept world-wide authoritarian government holding together a flawed system, OR we restore the principles of the Constitution, limit government power, restore commodity money without a Federal Reserve system, reject world government, and promote the cause of peace by protecting liberty equally for all persons. Freedom is the answer.

read the entire speech

My thoughts: Markets work, socialism doesn't.

Bailout and Markets

So much for all those predictions that the markets would begin to recover once members of the U. S. House of Representatives summoned the courage to resist the populist outcry and vote for Hank Paulson's $700-billion rescue plan...the market appears to have arrived at a more considered view of the U. S. Treasury Secretary's scheme. Sadly, the market's negative verdict is on the mark...

While there isn't perfect unanimity on this, it is widely acknowledged that a significant part, if not the root, of our difficulties originated with the low-interest-rate policy implemented by the Alan Greenspan-led Fed in 2001-2005.

This generated a housing boom, which was further stoked by the financial engineering of Wall Street in securitizing mortgages, by obliging bond rating agencies in evaluating these securities and by portfolio managers eagerly willing to buy them, hungry for extra returns in a low interest rate environment...

Austrian economists hold that downturns are the inevitable aftermath of loose monetary policy, thus opposing explanations typically heard prior to the current crisis that attributed recessions to price shocks, underconsumption or central bank tightening of monetary policy...

Most commentators resist following the Austrian logic through to the end out of the fear of repeating the policy mistakes that led to the Great Depression. This reflects the orthodox interpretation of that period, according to which the economy fell apart in the early 1930s while U. S. president Herbert Hoover took a laissez-faire approach to the downturn and the Fed ran an overly tight monetary policy.

The truth is that the Fed at the time did try to add liquidity, lowering its rediscount rate until late 1931 and continuously increasing reserves under its control. Money supply nevertheless fell, but that was because people lost faith in the financial system and hoarded currency. Meanwhile, Hoover met the downturn with interventionist gusto. He passed the Smoot-Hawley tariff to help domestic industries and obtained the co-operation of business leaders to support wages and investment. We haven't gone down this protectionist and corporatist road yet but Hoover's attacks on short selling and his creation of the Reconstruction Finance Corporation, which among other things loaned money to banks, bear an eerie resemblance to the current policy response.

"We might have done nothing", Hoover said, "[but] we determined that we would not follow the advice of the bitter-end liquidationists." Thus has the Bush administration decided as well, having successfully cajoled a recalcitrant Congress to follow Hoover's example.

read the full article

My thoughts: We are repeating the mistakes of the past. Bush is following the Hoover playbook of intervention to re-inflate a bubble. Commentators either through ignorance or ideology are blaming free markets. We are going to elect a president who will openly embrace more intervention, regulation, and socialism. The question now becomes will this be worse than the Great Depression?

Bailout marks Karl Marx's comeback

If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.

Indeed, analysts at the Heritage and Cato Institute, and commentators in The Wall Street Journal and on this very page, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled US$700-billion bailout package. Some of the same voices were calling for similar interventions following the burst of the dot-com bubble in 2001...

At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments...

But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital.

For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles...

As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels.

During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years...

As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”

The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.

read the entire essay

My thoughts: One of the best essays on the current crisis I have seen.

Here is the suggested Austrian solution:

Austrian Bailout Package--Part A
1. Suspend Basil II regulations (to at least 4/2/09)
2. Cancel FDIC insurance on all demand deposits after 1/1/09.
3. Increase FDIC premiums on short term time deposits of less than one year.
4. Make interest earned (starting 1/1/09) on bank time deposits and non-governmental, non-agency, and non-authority bonds tax free (not demand deposits and MMMF).
5. Convert Fannie Mae and Freddie Mac's status from conservatorship into receivership.
6. Convert AIG's status from government owned to receivership.
7. Cancel the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) at the end of the announced program (January 30, 2009).
8. Announce that the Federal Funds rate will be allowed to "float" at market rates starting January 30, 2009.
9. Announce that the Federal budget will be prorated beginning with the fiscal year starting 10/1/08 including all defense spending and transfer payments.
10. Restore constitutional monetary status to gold and silver to act as an alternative medium of exchange (no capital gains taxes).

Austrian-style Business Cycle

ECONOMISTS cannot reliably forecast recessions. Nor can they detect for certain when a recession is in progress. Only after the fact do the official cyclical timekeepers identify the beginning and ending dates of a slump.

Though deficient in the powers of foresight and observation, economists do believe they know how to treat an economy on the brink of recession, as this one seems to be. They administer what non-economists know as the “hair of the dog that bit you.”

But booms not only precede busts, they also cause them. Bargain-basement interest rates are a potent stimulant. Borrowing more than they might at higher rates, people stretch. Businesses stock up on labor, machinery and buildings. Consumers buy cars and houses — houses, especially, these past five years. The G.D.P. takes flight.

Then unwelcome facts intrude. Easy money, it seems, was an illusion. Society was not so rich as it seemed. The prosperous future for which people had collectively prepared is slow to arrive. The inflation rate picks up. Supposedly creditworthy consumers and businesses turn out to be risky. They were creditworthy only so long as lenders were willing to advance them more and more funds at those ever-so-affordable low rates.

Now what to do? Why, slash interest rates to coax forth still more lending and borrowing. It’s the customary curative, seemingly as humane as it is politic.

And if recessions served no useful purpose, it might be. But recessions do. On Wall Street, they speak of “corrections.” What corrections correct are errors in judgment. So do recessions.
They allow the sorting out of boomtime error. They permit — indeed, force — the repricing of inflated assets. In a downturn, previously overpriced businesses, houses and buildings are made affordable again.

Naturally, people hate these painful, salutary interludes. Nobody likes insecurity, bankruptcy and joblessness. So the Fed keeps slashing interest rates. And this balm does mitigate the suffering. Homeowners and businesses refinance their debts. Fewer houses are thrown on an overstocked market.

Observe, however, that the great preceding illusion is undispelled. Prices have not come down as they should have. Neither has indebtedness. The architecture of the economy remains as it was. Land, labor and capital are still structured for an imagined glittering future.

Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?” The answer: It’s wrapped in the coils of debt.

— James Grant, the editor of Grant’s Interest Rate Observer.

HT: Mises Blog