Friday, December 31, 2010

No Inflation? Gasoline Edition

I've written before about how the assertion that there is no inflation depends on what goods we are counting.

One good's price that is experiencing upward pressure is gasoline. That's according to Business Insider.

Now of course this upward movement of gas prices could certainly be partially or even mainly a response to increased demand relative to other goods, and not due to monetary inflation. Still, the notion that all or most prices are perilously close to deflation does not seem to be the case.

Happy New Year!

Wednesday, December 29, 2010

The Trouble with Fractional Reserve Banking

Thorsten Polleit, Honorary Professor at the Frankfurt School of Finance & Management, has an excellent piece on briefly explaining "The Faults of Fractional-Reserve Banking." Among the problems of fractional-reserve banking he cites are the following:
  • It violates property rights. It does so because it asserts two people have exclusive ownership rights over the same piece of property.
  • Contrary to popular belief, fractional reserve banking is not the result of the natural workings of a free market.
  • The fact that, in our current system, the central bank can bail out a fractional-reserve bank that is in financial trouble by creating additional fiat money does not make fractional-reserve banking any more legitimate.
  • It generates inflation via credit expansion and, hence, sets in motion the business cycle
Polleit's essay is a response to Martin Wolfe's "Could the World Go Back On a Gold Standard?" Wolfe says that we will not and we should not. (Incidentally Wolfe cites a recent article on privatizing money, by my graduate money and banking professor, Leland Yeager).

One of Wolfe's assertion that Polleit responds to is that 100 percent reserve banking is wasteful, because most of the time depositors do not need the money they have in their deposit accounts. Forcing the bank to hold onto that money would force society to do without the productive forces unleashed by lending out that money to a productive entrepreneur.

Polleit does a good job responding to Wolf's assertions, however, I would like to add one more bone of contention. People do not hold money in demand deposits because they don't "need it." People purposely choose to hold a specific quantity of money in their cash balance. Demand deposits make up part of that cash balance. People hold money because the future is uncertain and it is impossible to know exactly how much money will be needed when to fulfill all of the various transactions that will be undertaken. People purposely decide to hold a specific amount of currency and money in their checking accounts as they deal with uncertainty. It is simply wrong to assert that people hold money in a checking account because they do not need it.

Monday, December 27, 2010

Woods Gets It Very Right About the Fed

Historian and author of Meltdown, Tom Woods recently appeared on Judge Andrew Napolitano's television show Freedom Watch. Woods gives a brief but powerful history lesson while refuting conventional wisdom about the beneficence of the Federal Reserve. It had to be the best, most educational four minutes and seventeen seconds on television last Tuesday. Woods is especially good at the end making Mises' point that sound money is even more important for maintaining a free society than any written constitution.


Saturday, December 25, 2010

Merry Christmas!

Matthew 1:18-25 

Now the birth of Jesus Christ was on this wise: When as his mother Mary was espoused to Joseph, before they came together, she was found with child of the Holy Ghost. Then Joseph her husband, being a just man, and not willing to make her a publick example, was minded to put her away privily. But while he thought on these things, behold, the angel of the Lord appeared unto him in a dream, saying, Joseph, thou son of David, fear not to take unto thee Mary thy wife: for that which is conceived in her is of the Holy Ghost. And she shall bring forth a son, and thou shalt call his name JESUS: for he shall save his people from their sins. Now all this was done, that it might be fulfilled which was spoken of the Lord by the prophet, saying, 
Behold, a virgin shall be with child, and shall bring forth a son, and they shall call his name Emmanuel, which being interpreted is, God with us. 
Then Joseph being raised from sleep did as the angel of the Lord had bidden him, and took unto him his wife: And knew her not till she had brought forth her firstborn son: and he called his name JESUS.

Jesus Christ came into the world to save lost sinners like myself. As it says in Paul's letter to the Romans, "While we were yet sinners,Christ died for us." Later Paul writes, "For if, because of one man's trespass [here Paul is speaking of Adam's sin through which all humans inherit a sinful nature], death reigned through that one man, much more will those who receive the abundance of grace and the free gift of righteousness reign in life through the one man Jesus Christ." Indeed the wages of sin is death, but the gift of God is eternal life through Jesus Christ our Lord. This is the real reason to celebrate Christmas.

Because Jesus is Lord, the Incarnation changed everything. Back in 1992, the late John Robbins wrote a very thought provoking article entitled, "The Coming of Christ" that was published in The Freeman. He examined the broader social significance of the coming of Christ into the pagan Ancient world. Robbins writes
the work of Christ—his birth, life, death, and resurrection-is the most important event in the history of mankind. Christ’s life is the point from which we date all of world history, and it is impossible to understand Western civilization, especially the United States, without understanding Christianity. 
In his article Robbins details what social life was like in the world before Christ and documents how social relationships changed as people converted to faith in Christ and began living out His ethics. On this Christmas day and season, may "The grace of our Lord Jesus Christ be with you all."

Friday, December 24, 2010

Bastiat--Christian Economist

Frederic Bastiat (1801 - 1850)
One hundred sixty years ago on this date, Christmas Eve, Frederic Bastiat breathed his last. There are some who think Economics and Christianity are and will remain in eternal conflict. Bastiat, like myself, was not one of these. He is most well know for his Economic Sophisms and his brilliant essay "That Which Is Seen, and That Which Is Not Seen," in which he refutes the economic beneficence of Keynesian-style economic stimulus decades before Keynes was born.

The opening chapter of his Economic Harmonies is a sort of exhortative prologue directed to "the Youth of France." In this chapter he says this:
In these days in which a grievous skepticism would seem to be at once the effect and the punishment of the anarchy of ideas that prevails, I shall esteem myself happy if this work, as you proceed in its perusal, should bring to your lips the consoling words, I BELIEVE—words of a sweet-smelling savor, which are at once a refuge and a force, which are said to move mountains, and stand at the head of the Christian’s creed—I believe. “I believe, not with a blind and submissive faith, for we are not concerned here with the mysteries of revelation, but with a rational and scientific faith, befitting things that are left to man’s investigation. I believe that He who has arranged the material universe has not withheld His regards from the arrangements of the social world. I believe that He has combined, and caused to move in harmony, free agents as well as inert molecules. I believe that His over-ruling Providence shines forth as strikingly, if not more so, in the laws to which He has subjected men’s interests and men’s wills, as in the laws He has imposed on weight and velocity.

In the concluding chapter of the book entitled "The Relationships Between Political Economy and Religion," he says
[I]t is not true that as science advances, the idea of God recedes. On the contrary, what is true is that, as our intelligence increases, this idea is enlarged, and broadened, and elevated. When we discover a natural cause for what we had imagined an immediate, spontaneous, supernatural act of the Divine will, are we to conclude that His will is absent or indifferent? No, indeed; all that it proves is that that will acts by processes different from those it had pleased us to imagine. All that it proves is,that the phenomenon we regarded as an accident in creation occupies its place in the universal frame; and that everything, even the most special effects, have been foreseen from all eternity by the divine prescience. What! Is the idea we form of the power of God lessened when we come to see that each of the countless results which we discover, or that escape our investigations, not only has its natural cause, but is bound up in an infinite circle of causes; so that there is not a detail of movement, of force, of form, of life, that is not the product of the great whole, or that can be explained apart from that whole.

For those interested in learning more about he economic contributions of Frederic Bastiat, I recommend, Guido Hulsmann's "Bastiat's Legacy in Economics" in the Quarterly Journal of Austrian Economics.

Thursday, December 23, 2010

Black Tuesday, Federal Reserve Edition

For most people, the phrase "Black Tuesday" conjures thoughts of the 1929 stock market crash that is commonly interpreted as the trumpet blast ushering in the Great Depression. Students of economic history, however, can look back more than a decade earlier to an even blacker Tuesday, that help make the 1920's stock boom and subsequent crash possible. Tuesday, December 23, 1913, Woodrow Wilson gave the banking community what it wanted. He signed into law the Federal Reserve Act, creating the Federal Reserve System to serve as our central money printing machine. The rest, as they say, is monetary history. (For more on the origins of the Federal Reserve, I highly recommend Part 2 of Murray Rothbard's A History of Money and Banking in the United States: The Colonial Era to World War II.)

While the Fed was sold to the American public as an institution necessary to provide an "elastic currency" that would wax and wane with commercial demand for money, the Fed saw to it that the money supply did a lot more waxing and not much waning. The data tell a remarkable story.

In 1913, the M2 money supply was approximately $16 billion. Last month M2 came in at $8,804.2 billion. $8.8 trillion! Who knew elastic stretched in only one direction? What did all of this monetary inflation get us?

In the name of economic stability, the Fed has presided over seventeen recessions, several of them very serious, including the Great Depression, and a century of higher prices. After more than a century of generally decreasing prices, the Fed ushered in almost one hundred years of price inflation that really took off after the final severing of gold from the dollar in 1971. That move itself was the necessary consequence of Federal Reserve inflation.


Wednesday, December 22, 2010

The Lack of Coincidence of Wants

I am in the middle of grading Money and Banking Finals. The best answer so far is from a student answering a question asking him to identify the problems of barter and how the development of money solves these problems.

The student begins explaining the problem of the lack of coincidence of wants. If both potential parties to an exchange do not value the good they would receive in exchange more highly than what they trade away, an exchange will not take place. Therefore, in a barter economy, it is difficult to facilitate many transactions. "For example," the student says, "If I'd want to hear an economics lecture, but all I had was a Britney Spears CD, I would not be able to make a trade with Dr. Ritenour."

Tuesday, December 21, 2010

Municipal Debt Might Be the Next Crisis Shoe to Drop

This according to an article in the London Guardian. Cities can get caught up in malinvestment during an inflationary boom too. If we try to keep nominal spending up with mountains of debt, we ask for trouble.

Monday, December 20, 2010

When the Hyperinflation Crack-Up Boom Comes, It's Often Back to Barter

Ludwig von Mises in his essay on monetary economics, "Stabilization of the Monetary Unit--From the Point of View of Theory" posited one possible terminal point following a monetary authority's attempt to prolong a boom with ever increasing inflation to be the crack up boom.  That is the boom to end all booms in that it is the result of hyperinflation where the monetary system cracks up and breaks down. The necessary end result is hyper inflation. Hyper inflation destroys the purchasing power of money, becomes worthless in exchange. and, hence, ceases to be used. Society then either must adopt another currency or devolve back to barter, in which producer or consumer goods are exchanged directly for other producer or consumer goods.

The New York Times reports that this has happened in Zimbabwe. The story focuses on a hospital that is now accepting payment in peanuts which its grinds into peanut butter that it feeds to its patients. As the story reports
The hospital, along with countless Zimbabweans, turned to barter in earnest in 2008 when inflation peaked at what the International Monetary Fund estimates was an astonishing 500 billion percent, wiping out life savings, making even trillion-dollar notes worthless and propelling the health and education systems into a vertiginous collapse.

Below is a barter exchange rate list for different goods.

The exchange rates are denominated in dollars, because last year Zimbabwe did away with its currency and replaced it with the U. S. Dollar. You know things are bad for your currency when you want to adopt the U.S. Dollar in its place!

As the report indicates, thoroughly debasing the general medium of exchange can have grave consequences.
For most of the past year, the hospital did not have enough money to stock blood. Ms. McCarty said women who hemorrhaged after giving birth or experiencing ruptured ectopic pregnancies were referred to bigger hospitals, but often they had no blood either. Eight women died, she said. Just recently, the United Nations has begun paying for blood at the hospital to improve women’s odds of surviving.

Sunday, December 19, 2010

Federal Reserve Regulates More Than the Money Supply

Besides spending its time forming and facilitating monetary policy, it also is quite active as a regulatory unit. It turns out that a local bank in Oklahoma was a bit too free with its wishes of Merry Christmas, Bible verses of the day, and Christian decorations. The Fed forced them to take them down as a violation of Regulation B because they could suggest "a discriminatory preference or policy of exclusion." Too free with money creation, not a problem. Wishing customers "Merry Christmas!" Big problem. (HT: Lew Rockwell)

Update: It looks as if the Fed may be backing down.

Saturday, December 18, 2010

What Malinvestment Looks Like: Chinese Edition

Back in October I blogged about aerial photos of unfinished and abandoned real estate developments in Florida.  They are a pictorial manifestation of capital malinvestment undertaken in the housing bubble.

It appears that similar activity may have been taking place for awhile in China. A few days ago Business Insider published photos of, at most, barely occupied developments in various regions of China. Below is a picture of a residential apartment complex in Zhengzhou New District. It is completely empty.

Banks in China have now been told by banking regulators to cease lending to companies for the purchase of fixed assets, including real estate. It sounds as if Chinese authorities are beginning to suspect a bubble.

Friday, December 17, 2010

Private Property: The Real Key to Prosperity

As I have mentioned in previous blog posts (here, here, and here), economic theory identifies three sources of prosperity: the market division of labor, capital accumulation, and entrepreneurship. There is no single factor that generates economic expansion and development, however, because all three must work together in order for economic progress to occur.

The real key to unlocking economic expansion is to identify the institutions that allow the sources of prosperity to function. We need social institutions that foster the development of the division of labor, the accumulation of capital, and successful entrepreneurship. The common condition necessary for all three to function is the institution of private property. In order for the market division of labor to function, people must be able to exchange what they produce, which requires private property. For people to have an incentive to save and invest, they must be relatively certain that they will be able to keep any positive return in that investment. In order for entrepreneurs to calculate profit and loss, money must be in use and money prices used in economic calculation must be manifestations of voluntary exchange motivated by subjective preferences, which again requires private property.

Private property, therefore, is the institutional bedrock upon which any true free market economy is constructed. That is why we should be every vigilant against politicians and technocrats championing “markets,” all the while finding reasons to curtail private property in their efforts to regulate the economy. Political leaders will praise freedom and then expand the welfare state, socialize health care, embark on massive increases in government spending, and create $600 billion in additional commercial bank reserves, with many economists cheering them on. As Wilhelm Röpke in his A Humane Economy,
certain contemporary economists who, while not open partisans of socialism and sometimes speaking in the name of the market economy, work out the most elaborate projects for regulating the movements of the circular flow of the economy…All of these protagonists of social rationalism—socialists and circular-flow technicians alike—have a common tendency to become so bemused by aggregate money and income flows that they overlook the fundamental significance of ownership. The market economy rests not on one pillar but on two. It presupposes not only the principle of free prices and competition but also the institution of private ownership, in the true sense of legally safeguarded freedom to dispose of one’s own property, including freedom of testation.”
Playing the role of the hypocrite by praising the efficiency of markets and then curtailing the very right to private property that sustains capitalism will always hamper the market and result in less economic expansion than a society could achieve with real freedom.

Thursday, December 16, 2010

Is Inflation Low? It Depends on Where You Look

Reuters reports that prices "barely rose" last month furthering the story that price inflation remains subdued. The U.S. Bureau of Labor Statistics reported that the CPI increased last month by 0.1%. These numbers prompted Joe Weisenthal to warn that "We're REALLY Close to a Deflationary Relapse" when drawing attention to Business Insider's Chart of the Day.

Weisenthal claims that the entire increase in CPI was due to energy prices. That is not exactly the case. If we dig a little beneath the composite CPI number,  it turns out that prices for a number of goods are substantially higher then they were a year ago.

For example, the prices of meat, poultry, fish, and eggs have increased 5.8% since last November. Dairy prices are up 3.8%. The prices of cooking fats and oils have increased 3%. Meanwhile medical care services have increased 3.4%.

Various housing related expenses are noticeably higher. Fuel Oil prices, for example, have dramatically increased by 10% since a year ago. Prices for water, sewer, and trash collection services have increased by 5.5%. 

A number of transportation related goods have also increased substantially over the past year. Used car and truck prices have increased 6% since last November. Gasoline prices are up 7.3%. Public transportation prices have increased 4.4%. 

Now I realize that I have cherry-picked, so to speak, a certain number of product categories that showed substantial annual increases. There are categories that have shown price decreases over the past year. Apparel prices, for example, have fallen 0.8% since a year ago. The point remains, however, that a significant number of products that are important for the typical household are no where close to experiencing deflation.

Other goods show even greater price increases since last November. The price of gold has increased approximately 23% since last year. Silver prices have increased a whopping 65%. Copper prices are up about 22%, while oil prices have increased about 26%.

The prices of equities are up as well. The Dow Jones Industrial Average has increased by 9.8% over the last year. The NASDAQ is up 18.9%.

The dollar price of foreign currencies has also increased since last November. The price of Euros is also up by 9% compared to last year. The price of the British Pound Sterling is 4.7% higher.

As Mulder might say, the inflation is out there.

Wednesday, December 15, 2010

Bad News for the Fed

According to a Bloomberg National Poll, more than half of Americans are getting the picture. The Fed is the problem, not the solution.

What I found particularly revealing in the story--apart from the poll result itself--was the Fed mindset as demonstrated by former Fed governor, Lyle Gamely. He is quoted as saying:
The Fed had to do extraordinary things to keep us from going into a great depression, and the public doesn’t see it this way. The last time we had any really severe criticism of the Fed was in the early 1980s, when the Fed was pursuing this brutally tight policy to keep inflation under control.
Below, however, is a picture the "brutally tight" monetary policy of the early 1980s. Not once was there a monthly decline in M2 from 1979 through 1982.

Tuesday, December 14, 2010

The Scary Get's Scarier

This is about news that is a bit old, but it is as timely as the ongoing debate over quantitative easing. Business Insider posted an updated Scariest Job's Graph ever that now looks even scarier with unemployment rising again to 9,8%.

The Situation is even worse when we realize the larger employment picture. The number of unemployed out of work for more that fifteen weeks is again near 2010 highs. Civilian employment as a ration of population is at a recession low. Meanwhile, food stamp rolls continue to rise.

If we are in recovery, what is going on? Lew Rockwell explains. He says, correctly in my view:
Businesses thrive in an environment of freedom. But enterprise is no longer free in any area. In boom times, the consequences are less obvious. In the bust, the regulatory thicket, taxes and mandates, and legislative threats all become decisive in a way they were not before.

Monday, December 13, 2010

Ritenour Talking about Japan, the Federal Reserve, and Macroeconomic Policy

Saturday I was privileged to be a guest on the Glen Meakem Program discussing my op-ed "The Lessons of Japan" (do not inflate and do not increase government spending); the Federal Reserve (abolish it), quantitative easing (bad idea), and fiscal policy (cut government spending).  You can listen to a podcast of the program by clicking here. My section of the show begins at 41:11.

Saturday, December 11, 2010

Friday, December 10, 2010

QE2: It Is Both a Mistake and Criminal

So says Vitaliy Katsenelson of Investment Management Associates in this Tech Ticker interview with Aaron Trask.

As the interview reports:
"I think it's criminal," he tells Aaron in the accompanying clip. "They're forcing people that should not be taking risk to take risk." The fear is the Fed is repeating its past mistakes -- helping to build an asset bubble that will eventually burst with grave consequences.
It sounds like he understands that more malinvestment is on the way.

Thursday, December 9, 2010

What We Need Now Is Sound Money

That is the opinion of John Cochran and I could not agree more. The Great Recession is the logical consequence of a decades long process departing from sound money. The reason we are still muddling through with very high unemployment is we have refused to move back toward sound money.

Joseph T. Salerno's work on monetary economics is what one could call the gold standard of monetary theory (if people would recognize the metaphor anymore). Cochran justifiably calls Salerno, "today's leading monetary scholar in the tradition of Mises and Rothbard." The collection of his essays on monetary theory and policy, Money, Sound and Unsound is a intellectual tour de force. I received my own copy a few weeks ago and could not be more pleased. I had read a number of the essays before in their original format, but some were in relatively hard-to-obtain journals and it is wonderful to have them all in one place.

Salerno understands the nature of money as a medium of exchange. His analysis of the gold standard from the perspective of both theory and history demands careful attention. This book also includes an excellent essay documenting the link between war finance and monetary inflation. He explains the economics of international monetary systems, and is masterful explaining the nature and consequences of inflation as well as the various forms and consequences of deflation. He especially notes that we have no need to fear deflation resulting from the liquidation of unsound investments. Would that Ben Bernanke would understand this.

Morgan Reynolds on the Trouble with Modern Macroeconomics

In his recently published "The Poverty of Modern Macroeconomics and Power of Austrian Business Cycle Theory," Morgan O. Reynolds, professor emeritus of economics at Texas A & M University, does a masterful job highlighting the weaknesses in analysis of our economic banana by macroeconomists of various economic stripes. He documents the explanations given by eminent scholars such as Alan J. Aeurbach, John Taylor, Martin Feldstein, Gary Gorton, Frederic Mishkin, and others, noting that none of their explanations are satisfactory, because they fail to explain the cause of and hence property remedy for the Great Recession.

The article is highly recommended for those interested in seeing the poverty of modern macroeconomics in action.When citing the reason for such intellectual barrenness through much of modern macro, Reynolds quotes the late Larry Sechrest, "Without a sound capital theory, macroeconomics is incomprehensible." Indeed.

Wednesday, December 8, 2010

The Lessons of Japan

My latest op-ed, "The Lessons of Japan," was published by The Center for Vision and Values at Grove City College. It discusses the deflation bogey as a justification for QE2 in light of Ben Bernake's recent appearence on 60 Minutes and explains the real lesson to be learned from the Japanese lost decade(s). As I see it,
The true lesson to be learned is that after an inflationary boom turns into the inevitable bust, trying to fix the mess by fiscal stimulus, monetary inflation, and bank bailouts is a fool’s game.

Tuesday, December 7, 2010

Martin Van Buren: More Than Merely the Least Bad President?

Jeffrey Rogers Hummel thinks so. On this date in 1836, Martin Van Buren was elected our eighth president. Hummel describes Van Buren as "An American Gladstone," and describes his presidential actions as they related to both foreign and domestic policy. In an excerpt from his contribution Reassessing the Presidency, Hummel has this to say about why he considers Van Buren a great president:

But the case for Van Buren's greatness goes beyond his being the least bad US president. While avoiding foreign wars, he did more than maintain the domestic status quo. He reduced the power and reach of central authority in the face of stiff resistance and thereby helped the American economy weather one of its most severe deflations. The Little Magician also brought an ideological clarity to American politics that has seldom been equaled. Although the Democracy would stray in significant and reprehensible ways from the principled course he had charted, his imprint still left an enduring legacy. The Democratic Party remained the political alliance with the strongest affinity for laissez-faire, personal liberty, and free trade until almost the turn of the century. All will acknowledge, I believe, that Americans once enjoyed greater freedom from government intervention than any other people on the face of the earth. For that accomplishment, Martin Van Buren deserves as much credit as any other single individual — and certainly more credit than any other president of the United States.:

Monday, December 6, 2010 on Ritenour on Interests, Hobbies, Inspirations, Foundations of Economics, and More

The Ludwig von Mises Institute economics blog has a kind faculty spotlight about yours truly. The interview includes questions about my interests, hobbies, and inspirations that you may or may not have been dying to know.

Sunday, December 5, 2010

The Westminster Divines on Property

As I've noted before, there is a strong historic Christian tradition upholding the sanctity of private property. Participants in the tradition include, Augustine, Francis Wayland, and Basil Manly to name a few. A strong Reformed Protestant tradition affirming the right of property exists as well. We see this in the work of the Westminster Divines who produced the Westminster Standards: the Westminster Confession of Faith, and the Longer and Shorter Catechisms. While the Confession and the Shorter Catechism are more well known, one of the chief virtues of the Longer Catechism is its exposition of Christian ethics in its section on the Ten Commandments.

The Westminster Divines saw the Ten Commandments as a summary of God's moral law, so each commandment is read as having many implications. The questions and answers concerning the eighth commandment are as follows:
Q. 140. Which is the eighth commandment?
A. The eighth commandment is, Thou shalt not steal.

Q. 141. What are the duties required in the eighth commandment?

A. The duties required in the eighth commandment are, truth, faithfulness, and justice in contracts and commerce between man and man; rendering to every one his due; restitution of goods unlawfully detained from the right owners thereof; giving and lending freely, according to our abilities, and the necessities of others; moderation of our judgments, wills, and affections concerning worldly goods; a provident care and study to get, keep, use, and dispose these things which are necessary and convenient for the sustentation of our nature, and suitable to our condition; a lawful calling, and diligence in it; frugality; avoiding unnecessary lawsuits, and suretiship, or other like engagements; and an endeavor, by all just and lawful means, to procure, preserve, and further the wealth and outward estate of others, as well as our own.

Q. 142. What are the sins forbidden in the eighth commandment?

A. The sins forbidden in the eighth commandment, besides the neglect of the duties required, are, theft, robbery, man-stealing, and receiving anything that is stolen; fraudulent dealing, false weights and measures, removing landmarks, injustice and unfaithfulness in contracts between man and man, or in matters of trust; oppression, extortion, usury, bribery, vexatious lawsuits, unjust enclosures and depredation; engrossing commodities to enhance the price; unlawful callings, and all other unjust or sinful ways of taking or withholding from our neighbor what belongs to him, or of enriching ourselves; covetousness; inordinate prizing and affecting worldly goods; distrustful and distracting cares and studies in getting, keeping, and using them; envying at the prosperity of others; as likewise idleness, prodigality, wasteful gaming; and all other ways whereby we do unduly prejudice our own outward estate, and defrauding ourselves of the due use and comfort of that estate which God hath given us.
There is a lot here to take in. The breadth of their thought is remarkable. One challenge in applying these ethical standards is that personal ethics is intermingled with social ethics.

Nevertheless, it is clear that the Westminster Divines had a high view of property. For them, Christian ethics demand "truth, faithfulness, and justice in contracts and commerce between man and man; rendering to every one his due; restitution of goods unlawfully detained from the right owners thereof. . ." It also prohibits "theft, robbery, man-stealing, and receiving anything that is stolen; fraudulent dealing, false weights and measures, removing landmarks, injustice and unfaithfulness in contracts between man and man, or in matters of trust. . . "

Saturday, December 4, 2010

Falling Prices Are "Tip of Iceberg of Housing Market Woes"

Asha Bangalore, Senior Vice President and Economist for Northern Trust Corporation, is a bit to focused on aggregate demand in her overall economic analysis for my taste, but her recent daily commentary about the housing market is worthy of attention. She offers insights on the housing market that reinforces what I said earlier this week. In fact Bangalore says lower house prices are merely the "tip of the iceberg" for the problems facing the housing market. She reports that in the second quarter of this year 11 million home mortgages were "under water,"--meaning owners owed more on their house than the house is presently worth. She says that, due to prolonged unemployment, an increase in underwater mortgages is likely in the near future.

Friday, December 3, 2010

Engines of Prosperity: Is There a Single Cause of Economic Expansion and Development?

Economic theory teaches that there are three contributing factors to economic expansion and development: the market division of labor, capital accumulation, and entrepreneurship. From time to time, however, different economists have sought to emphasize one of these three engines of prosperity over against the others in explaining economic progress.

Adam Smith, for example, placed great emphasis on the division of labor as the cause of national wealth. The classic Harrod-Domar model focuses exclusively on capital investment, while the Solow growth model uses a neo-classical production function to conclude that the important contributor to sustained economic progress is technology. This conclusion heavily influences the thought of William Easterly in his book The Elusive Quest for Growth

It turns out, however, that we cannot neatly sever the components responsible for economic expansion from one another and find a single cause that explains economic progress. Certainly the division of labor has been a great boon to productivity and the standard of living. However, a highly developed division of labor would be impossible without the accumulation and use of capital goods.

Likewise, entrepreneurial activity presupposes an already existing division of labor and stock of capital to which entrepreneurs have access. As Rothbard and Salerno have noted, the entrepreneur must invest real property in the production process and if he errors in his market forecast, he can indeed reap large losses.

At the same time, we should never forget that capital per se never guarantees economic progress either, because it must be wisely utilized. One thing that will surely quickly shrink the capital stock is for it to be invested in wasteful production projects. Economic expansion and development is the result of all the contributors working together. It is the blessed result of a highly developed division of labor, taking advantage of a growing capital stock productively invested by entrepreneurs.

Thursday, December 2, 2010

Understanding the Great Recession and the Potential for Recovery

Those wanting to understand the economics behind the Great Recession that were are still struggling through will benefit from a new scholarly article by John Cochran. He is the the dean of the School of Business and Professor of Economics at the Metropolitan State College of Denver. His article "Capital in Disequilibrium: Understanding the 'Great Recession' and the Potential for Recovery" was recently published in the Quarterly Journal of Austrian Economics. The abstract is as follows:
The process of reabsorbing an economy’s various unemployed resources into new or expanding enterprises (i.e., economic recovery) potentially begins in the same moment that the discovery of and adjustment to previous errors and resource misallocations take place (i.e., the onset of recession). If all resources were perfectly homogenous and all prices, wages, and interest rates perfectly flexible, then the recession and recovery phases would indeed be a single process. Yet the fact that declines in economic activity are coupled with factors like non-homogenous capital, price rigidities, and time lags in adjustment processes means that the recession phase precedes the recovery, which is a second and lagging phase. Recession is further prolonged by interventions, especially those that create “regime uncertainty.” This paper argues that a capital structure based macroeconomics is a superior guide to policy.
The entire issue which contains Cochran's article appears worth reading as it includes articles presented at a symposium about the Great Recession held at the 2009 Southern Economic Association convention in San Antonio.

Wednesday, December 1, 2010

Economic Law Beats Artificial Stimulus in the Housing Market

Housing prices appear to be heading for a downward slide again. The most recent Case-Shiller index released yesterday reveals that housing prices in its 20-City Index rose less than 0.6% in September, which was below what was forecast. The U.S. National Composite Home Price Index actually fell. This has led Business Insider to proclaim that "The Housing Double Dip is Here." Its chart of the day does not paint a pretty picture for those hoping that housing prices will soon return to their relentless march onward and upward into the profitable light. 

This is another illustration of the futility of trying to fix our economic problems by artificial means. There were good reasons for such a sharp fall in housing prices from 2005 through 2008. The Federal Reserve inflated a housing bubble. Way too many houses were built compared to demand. For the housing market to clear, prices had to come down and they did. So much for prices being sticky downward.

The government thought that one thing that could get the economy back on firmer footing would be for the housing market to stabilize so that home prices would begin rising again. They passed a large tax credit designed to provide an incentive to buy a house and it worked--as these things do--for awhile. As soon  artificial stimulus runs out, however, things again begin to reflect economic reality. Trying to "jump-start" the housing market via tax credits has not worked. Trying the "jump-start" the entire economy through fiscal stimulus or monetary inflation has not worked either. What is needed is the building up of our capital stock and investing that capital wisely. This requires that the state get out of the way, letting capitalists and entrepreneurs do their work.

Tuesday, November 30, 2010

Taxes and Smuggling

A fundamental principle of economics is that incentives matter. They do so because when forming their preferences people take into account their circumstances. That is why government intervention in the economy so often breeds what is often referred to as the underground economy. When supplying goods legally becomes more expensive due to taxes or regulation, the incentive to skirt the law so as to supply them more affordably is very powerful. For many the temptation is too great to resist.

An excellent illustration of this principle is the consequences of this summer's New York City cigarette tax hike. FoxBusiness reports that, "Sales of taxed cigarettes plummeted 27 percent since July, when state lawmakers raised the excise tax to $4.35 a pack on top of the city's tax of $1.50, making the average price of Marlboros in New York $11.60, with some shops charging as much as $14."

Now comes a story from the New York Post (HT: and Economic Policy Watch) reporting that several people are willing to risk being run in by the cops to sell illicit cigarettes--those not bearing a tax stamp--in Gotham. One underground entrepreneur drives to Delaware to pay $27 a carton and is able to make up to $160 a day by selling them for $8 a pack in Midtown NYC.

Monday, November 29, 2010

Engines of Prosperity: Entrepreneurship

A couple of weeks ago, I began a series explaining what economics teaches us about the causes of prosperity (see here, here, and here). Because capital accumulation increases productivity of land and labor, the size of the capital stock is positively related to economic expansion. In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated. Capital must not be consumed by being sunk in unproductive uses. This is why entrepreneurship is the third major contributor to economic development.

If the capital stock is unwisely employed, it will shrink over time, resulting in a decline in the standard of living. Merely because a capitalist sits on a pile of capital that he is ready to invest does not guarantee that he will have an equivalent or larger pile of capital to invest a year from now. He could invest his present capital to produce goods that are unwanted and fail to reap enough revenue to maintain his capital stock.

Capital accumulation, per se, does not guarantee success in any business venture. As Austrian economist Ludwig von Mises explained in Human Action (p. 295),
Capital does not ‘beget profit’. Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. 
Capital is accumulated out of savings. Savings is income held back from consumption. If income declines, then savings declines, if there is not an accompanying decrease in time preference (and there is no reason to think that there would be merely due to economic losses).

Capital accumulation over time, therefore, also depends upon the wise use of capital. Waste is possible, because production decisions in the present are based on a forecast of uncertain future market conditions. If the producer forecasts incorrectly, he will use his capital to make something people do not want and he will not be able to sell his output at prices he anticipated would cover his costs. His income falls and his capital is consumed. Successful entrepreneurship is needed to reap profits that are the result of the wise use of capital.

Entrepreneurship is necessary because in the market division of labor people produce goods more for the market than directly for themselves. As my friend Jeff Herbener notes, they must therefore forecast the subjective values of other people. The entrepreneur performs the valuable social function of dealing with uncertainty, coordinating diverse land, labor, and capital goods owned by numerous people, and directing production into the most socially valuable ends. A society that wants to flourish economically, must embrace social and legal institutions that allow entrepreneurs to perform their function.

Sunday, November 28, 2010

Charles M. Schulz: Economic Commentator

Friday was the birthday of Charles M. Schulz, creator of the Peanuts comic strip. I grew up on Peanuts and had several collections of his strips in paper back. His older material was very witty, sometimes biting in its commentary on life, but also generally uplifting. His A Charlie Brown Christmas is rightfully a classic with its straightforward telling of the Christmas narrative by Linus.

On occasion Schulz would write a strip that could be construed as at least tangentially related to an economic issue. In fact, I liked them so much I used five Peanuts strips in my book. One of the funniest is from May of 1987 and can be read by clicking here.


Would that every macroeconomist favoring monetary and fiscal stimulus would read and heed.

Saturday, November 27, 2010

Auction of Apple-1 Computer Teaches Two Economic Lessons

This Tuesday, an original Apple-1 Computer sold at auction at Christie's of London for $213,600. The original 1976 sticker price for the computer when it was first released was $666.66. This recent sale illustrates two important economic lessons.

The first lesson is that value is subjective. People value goods according the the ends those goods satisfy. When acting, because economic goods are scarce, a person must rank his ends, choosing to obtain some while leaving others unfulfilled. This ranking is done by a process of subjective, or personal, valuation. As explained by Carl Menger in his Principles of Economics , it is this subjective value that determines the price of a good. Menger's theory that is derived from the reality of human action is in stark contrast with Karl Marx's labor theory of value and even Alfred Marshall cost of production theory of value. With an original price tag of $666.66, we know that the original cost of production was something less than that. It surely was not $213, 600. The reason the selling price for the Apple-1 was that high is that someone subjectively valued that particular computer more than $213,600. Value is subjective and the prices of goods are determined by the subjective valuations of all buyers and sellers in the market.

The second thing we learn from the story of the computer sale is that free enterprise, capital investment, and entrepreneurial drive result in economic development. The story about the Apple-1 auction reports that in today's dollars, $666.66, the original purchase price, is approximately equivalent to $2593.96 today. Spending that much money will buy you three top of the line iPads. It could also buy a personal computer that can do vastly more that the creators of Apple-1 (with its 8K bytes of RAM) ever dreamed a computer could do.

Friday, November 26, 2010

Books for Black Friday

Traditionally, the Friday after Thanksgiving is the beginning of what has become known as the Christmas shopping season. When I was in high school working at a retail store similar to Wal-mart, but on a smaller scale, I remember having to make sure our store was decorated for Christmas by November 10th. Now, of course, most stores begin trying to manufacture the happy holidays cheer the day after Halloween. Nevertheless, Black Friday is still seen as THE big day.

This year I decided to do my bit to help the puzzled Christmas shopper by providing a list of the most rewarding books you can give your loved ones who are thoughtful people interested in economics, theology, and perhaps even philosophy.

The following is a list of books that I've found important and have positively influenced my thinking in a number of areas.


Heurta de Soto, Jesus, Money, Bank Credit, and Economic Cycles.

The finest economic treatise of the decade. Anyone who wants to do serious work on monetary or macroeconomic theory should begin here.

Hulsmann, Jorg Guido, Mises: The Last Knight of Liberalism.

A magisterial biography of the great economist. Well written and a tremendous scholarly achievement.

Mises, Ludwig von, Human Action.

Mises' magnum opus. The most important book written in the social sciences ever.

Mises, Planning for Freedom and Other Essays.

This is an excellent introduction to Mises' thought in the form of a collection of essays, the vast majority of which are written for the intelligent layman.

Rothbard, Murray N., Man, Economy, and State.

Rothbard's magnum opus in which he builds a grand edifice of economic theory upon the foundation laid by Ludwig von Mises.

My own economics treatise written as an introduction to economic thought built upon the economics of Mises and Rothbard. It shows why and how sound economics develops out of a Christian view of creation and man. Tom Woods says that my book "is everything a textbook on economics should be: clear, well organized, easy to understand -- and interesting!"


Bavinck, Herman, Reformed Dogmatics

This is a massive and, as a colleague of mine put it, stirring systematic theology in four volumes. Bavinck maintains a wonderful mixture of outstanding scholarship, theological orthodoxy, and devotion to Christ.

Machen, J. Gresham, Christianity and Liberalism

Machen's trumpet blast against theological liberalism in which he conclusively demonstrates that liberalism is not merely a different, modern expression of the Christian faith. It is an entirely different religion.

The above two works are what we could call Machen's popular theology. They are based on radio addresses he gave on parts of the Westminster Shorter Catechism.


Carson, Clarence, Flight from Reality.

A profound mix of history, political thought, sociology, and philosophy. Carson attempts to explain how the drive to reform society in the Twentieth Century was largely the result of intellectuals turning their back on reality.

An excellent and thorough introduction to philosophy from a Christian perspective. Clark devotes separate chapters on epistemology, history, politics, ethics, science, and religion. 

Schaeffer, Francis, The God Who is There.
Schaeffer, Escape from Reason.

The above three works make up Schaeffer's "philosophy trilogy." They may not be the last word on the subject, but they are pretty good first words.

Schlossberg, Herbert, Idols for Destruction.

A monumental critique of modern American intellectual culture from a Christian perspective. One of the great books written during the 1980s. Any Christian who is at all concerned about modern culture must read this book.

Scruton, Roger, An Intelligent Person's Guide to Modern Culture.

The title is very accurate in this case. In this relatively brief work, Scruton explains and critiques the various philosophies that underlie many aspects of modern culture. If one wants to make sense of our contemporary world, this is an excellent place to start.

Thursday, November 25, 2010

Being Thankful for the Blessings of Property

Happy Thanksgiving! During the day we pause to thank the Lord for the many blessings he has bestowed upon us, I recommend the following essays by Richard J. Maybury and Gary Galles.Both explain the economic lessons to glean from the experience of the Pilgrims and both note that the primary reason for God's blessing them with relative prosperity after years of famine and hunger was a shift away from socialism and toward private property. In their essays, both authors draw upon William Bradford's History of Plymouth Plantation to get the straight scoop.

One misconception that is still with us is that the Pilgrims adopted socialism out of religious conviction. Galles notes that this is a misconception, but it is beyond the scope of his essay to provide the full historical back drop to that initial fateful economic design.

In fact, the Pilgrims did not desire to establish Christian communism. As I noted a couple of years ago in response to this essay, the Pilgrims original communal property arrangements were foisted upon them by their colonial sponsors. The sponsors did this after they learned that they would not be granted a monopoly of fishing rights in Cape Cod. The sponsors’ original agreement with the Pilgrims was such that the Pilgrims were to work for four days for the sponsoring company and then would have two days to work for themselves. The sponsors later changed their deal and told the Pilgrims that they would have to work all six days of the work week for the sponsors. At the end of seven years, the Pilgrims would be granted title to the property they worked. The Pilgrims were not happy with the change, several of them recognizing that the new arrangement would make them virtual slaves of the sponsors, but they went along with the deal because many had already made large investments toward the move and they were convinced that emigrating to the New World is what God wanted them to do.

Bradford’s establishing private property was not a repudiation of any belief they had that Christian charity requires communism. They had no intention of implementing such a system. The Pilgrims’ move to private property was, in fact, a move to a properly Christian ethic as it regards property. God blessed the Pilgrims with material plenty as they forsook their original socialist property arrangement and adopted one more in agreement with Christian ethics.

Wednesday, November 24, 2010

Engines of Prosperity: What About Technology?

Last week I began a series of posts discussing the sources of economic prosperity. I began the series because I think it absolutely necessary to understand these basic principles if we want to properly evaluate various policy suggestions about how to promote prosperity in less developed countries or how do we get out of the Great Recession. So far I have explained the importance of the market division of labor and capital accumulation.

Since the development of the Solow Growth Model by Robert Solow, it has been argued by many that capital is not the real source of economic expansion, but that technology is. This is so, it is argued, because capital, like labor, faces diminishing returns, so that as we increase capital investment, at some point total output reaches a maximum and then economic expansion resulting from increased capital will be exhausted. The source of sustained economic progress, therefore, must be technology, according to this view.

What are we to make of this argument? It is certainly true that new and better technology allows for more efficient production. As I note in my book, Foundations of Economics, according the the USDA, in 1987 it took the average American farmer 3 hours to produce 100 bushels of wheat, compared to 275 hours it took the average American farmer to do the same thing in 1830. Since the 1830’s there has been tremendous technological advance in the number and quality of tools, equipment, fertilizers, and pesticides available for farmers, greatly increasing farmer yields.

Is technology, then, a separate component generating economic expansion? As the knowledge regarding how to do something, technology does set a limit on our production.  As Rothbard notes in Man, Economy, and State, however, capital is a narrower limit. For technology to be usable it must be bound up in actual capital goods. It does no good for a secretary to know that he could use an electronic device to type and edit written documents if programmed correctly, if he does not have access to an actual personal computer. In order to take advantage of technology, we must, consequently, have capital investment. Rothbard summarizes,
To expand production, the important consideration is not so much technological improvement as greater capital investment. At no time has invested capital exhausted the best technological opportunities available. Many firms still use old, unimproved processes and techniques simply because they do not have the capital to invest in new ones. They would know how to improve their plant if capital were available. Thus, while the state of technology is ultimately a very important consideration, at no given time does it play a direct role, since the narrower limit on production is always the supply of capital (p. 626).
Therefore, it turns out that capital is the relevant factor for economic expansion. Without capital investment, technology is of no use. With capital investment, technology will advance as entrepreneurs continually seek to use better, more efficient, capital goods.

Tuesday, November 23, 2010

Wages Sticky Downward?

One of the staples of Keynesian thought (whether paleo or new) is the premise that in a free market wages are nevertheless sticky downward. By 'sticky' they don't mean like Oakland Raider cornerback Lester Hayes' hands during the stickum era. They mean that, for some reason, wages do not fall when the demand for labor falls. Wages, therefore, stay above the market clearing rate, resulting in unemployment. That is why, Keynesians say we need fiscal or monetary stimulus to get us back to full employment.

Murray Rothbard has already refuted this notion in his treatise Man, Economy, and State by pointing out  that if wages can't fall legally because of minimum wage regulations, this is due to government intervention. On the other hand, if it is due to voluntary labor contracts, then any unemployment that results is not involuntary because workers and labor unions could always renegotiate a lower wage.

It turns out that this is exactly what is happens during times of economic downturn. For example, performing arts unions worked together with Broadway production companies and agreed to be paid lower wages for a period following the 9/11 terrorist attacks in New York City which caused the tourist trade to fall off for awhile.

Now it is reported that a number of labor unions are doing the same thing in response to the Great Recession. These workers and their unions recognize that sometimes one has to agree to a lower wage to keep one's job when the demand for labor falls. This is precisely how markets clear and one important way malinvestment is resolved in a recession.