Sunday, October 31, 2010

Acts 2 and Socialism

42 And they devoted themselves to the apostles' teaching and the fellowship, to the breaking of bread and the prayers. 43 And awe came upon every soul, and many wonders and signs were being done through the apostles. 44 And all who believed were together and had all things in common.45 And they were selling their possessions and belongings and distributing the proceeds to all, as any had need. 46 And day by day, attending the temple together and breaking bread in their homes, they received their food with glad and generous hearts, 47 praising God and having favor with all the people. And the Lord added to their number day by day those who were being saved. ~ Acts 2:42-47
In the middle of the above passage we find verses 45 and 46 that speak to the unity and charity believers had one for another following Pentacost. It is not uncommon, however, for socialists to find moral justification for socialism in these verses. The facebook page of the Society of Christian Socialists, for example appeal specifically to this passage and others as the foundation for their ideology. They assert that "Christian Socialism has its foundation in the New Testament book of Acts, 2:44-45 and 4:32-35, and draws inspiration from the myriad historical movements within the development of Socialist thought and Christian theology."

Well actually this passage does not provide a foundation for socialism, Christian or otherwise. As Ludwig von Mises explained in his great work Socialism, at most the early Christians in Jerusalem practiced a socialism of consumption and not production. In actuality there was not even socialism of consumption if by that we mean that all of their consumable property was owned collectively. Notice that in verse 45 they were selling their own property and then distributing the proceeds.

Additionally, as was explained noted in a recent Sunday School class by one of our church's elders, who also holds a PhD in ancient history, from verse 43 to the end of the chapter, the language becomes descriptive and not proscriptive. In other words, this was Luke writing history without saying that all Christians must do exactly the same. Of course the diaconal ministry was instituted later to satisfy the very needs that were being satisfied by individual church members described in Acts 2. While the early Christians in Jerusalem do serve as excellent examples of Christian charity, such charitable sharing and giving away our own property is a far cry from socialism as an economic system.

As Matthew Henry explains in his commentary on Acts 2:42-47,
The greatness of the event raised them above the world, and the Holy Ghost filled them with such love, as made every one to be to another as to himself, and so made all things common, not by destroying property, but doing away selfishness, and causing charity.

Saturday, October 30, 2010

William Graham Sumner (1840-1910)

William Graham Sumner
On this date 170 years ago, sociologist and economic historian William Graham Sumner was born. Sumner was an intriguing thinker who trained as an Episcopalian clergyman who sadly seemed to lose his faith in Christ and went on to teach at Yale for decades. Among his students were economists Irving Fisher and Thorstein Veblen. As a promoter of social darwinism, he certainly was not perfect, but who is? He was a classical liberal who favored economic liberty, free trade, and a gold standard, and advocated an anti-imperialist foreign policy, publicly opposing the Spanish-American War.

I have always had a soft spot for Sumner because his essay "The Forgotten Man" made a great impression upon me after I first discovered it by accident as an undergraduate student in my college's library. In this essay, written in 1883, Sumner lays bare the problems of income redistribution. In the third paragraph Sumner sets up the issue of his investigation.
As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, 'but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.
Later in the same essay Sumner makes the key economic observation that capital expended one way cannot be expended in another. Capital is scarce and its use incurs an opportunity cost. With this in mind, Sumner proceeds to explain the consequences of unwise philanthropy by looking at how its consequences fall on the Forgotten Man.
Now who is the Forgotten Man? He is the simple, honest laborer, ready to earn his living by productive work. We pass him by because he is independent, self-supporting, and asks no favors. He does not appeal to the emotions or excite the sentiments. He only wants to make a contract and fulfill it, with respect on both sides and favor on neither side. He must get his living out of the capital of the country. The larger the capital is, the better living he can get. Every particle of capital which is wasted on the vicious, the idle, and the shiftless is so much taken from the capital available to reward the independent and productive laborer. But we stand with our backs to the independent and productive laborer all the time. We do not remember him because he makes no clamor; but I appeal to you whether he is not the man who ought to be remembered first of all, and whether, on any sound social theory, we ought not to protect him against the burdens of the good-for-nothing. In these last years I have read hundreds of articles and heard scores of sermons and speeches which were really glorifications of the good-for-nothing, as if these were the charge of society, recommended by right reason to its care and protection. We are addressed all the time as if those who are respectable were to blame because some are not so, and as if there were an obligation on the part of those who have done their duty towards those who have not done their duty. Every man is bound to take care of himself and his family and to do his share in the work of society. It is totally false that one who has done so is bound to bear the care and charge of those who are wretched because they have not done so. The silly popular notion is that the beggars live at the expense of the rich, but the truth is that those who eat and produce not, live at the expense of those who labor and produce.
"The Forgotten Man" is very provocative and caused me to do some hard thinking about the nature and consequences of  true charity as well as the welfare state. Sumner expanded the theme of this essay into a book titled What Social Classes Owe Each Other, which Murray Rothbard said was the first libertarian book he read. He also wrote the highly regarded, A History of American Currency in which he documented the problem paper money in U.S. History through 1874.

Friday, October 29, 2010

Inflation Cannot Undo the Effects of Malinvestment

A common policy suggestion in times of financial crisis is for central bankers to pump large sums of money into the economy. The hope is to fix the problems associated with recession through increased aggregate spending. Quantitative easing, however, never fixes the problems resulting from malinvestment, because the problem is a capital structure that is out of balance. Inflation certainly does not undo the depression in those markets where malinvestment was the worst. Look at the some of the effects of monetary inflation undertaken by the Fed at the end of 2008.

Everyone knows that the housing bubble made up a large part of the inflationary boom that brought about the Great Recession. As the housing bubble burst, mortgage backed securities began to lose value and the financial crisis was on. The effects of quantitative easing on the housing market has been negligible.

Meanwhile, the new money that has been created by the Fed is being invested wherever their is a pulse of positive yield. One of this year's popular investments are in emerging market bond funds, as shown in this chart from Business Insider.

The moral of the story is that reflation is inflation and new inflation does not undo the negative consequences of past inflation. It results in further wealth redistribution and further malinvestment.

Thursday, October 28, 2010

Pre-Keynes Keynesianism in the Work of Frank Capra

In his essay, "Lord Keynes and Say's Law," Ludwig von Mises explains that the so-called Keynesian Revolution was not that revolutionary. Mises cogently notes, "The policies he [Keynes] advocated were precisely those which almost all governments, including the British, had already adopted many years before his 'General Theory' was published." Keynes' theories did not really provide a breakthrough in economic understanding, but rather merely provided intellectual cover for what politicians were eager to do already. Keynesianism was "in the air" so to speak.

An interesting example of such Pre-Keynes Keynesianism shows up in a lesser known film directed by the great Frank Capra. In the midst of the Great Depression, Capra directed American Madness (1932). Advertised as "The Great American Picture of Today," it is the story of a bank president fighting off both his conservative board of trustees and a bank run stimulated by rumors following the robbery of his bank.

In one of the pivotal dramatic scenes (shown below), the bank president, Tom Dickson (played by Walter Houston) is responding to the bank's board of trustees that are seeking to get him to sell his shares so they can replace him as bank president. Their concern is that he has been too liberal in making unwise loans. During this scene Dickson provides a concise bit of Keynesian policy analysis.  Can you detect the Keynesian fallacy?

Wednesday, October 27, 2010

Economic Expansion and Development: To What Extent a Mystery?

William Easterly has a noteworthy post on his excellent blog Aid Watch in which he links to a New York Times article arguing that "Development is an unpredictable business." Consequently policies that seemed to work in one time and place did not work in others. The author the the Times piece notes:
For all its temptations, however, the search for a policy toolkit toward development is fraught with pitfalls. Over the last 60 years or so, the international development community has come up with model after model, theory after theory, in search of just such a toolkit.
While it is certainly true that one state plan after another has failed, Easterly is also right to warn that, when analyzing economic policy as it relates to economic development, we don't want to ignore fundamental economic principles merely because of a seeming lack of rhyme and reason.

As I explain in the last chapter of Foundations of Economics, economic theory has a lot to teach us about the engines of prosperity. Sustained economic expansion and development is the result of increased productivity. To achieve increases in productivity, we need to take advantage of the market division of labor, capital accumulation, and wise entrepreneurship. Such activity requires an institutional framework of private property. Economic law, consequently, constrains us from achieving lasting prosperity through state intervention and central planning.

The tricky thing about economic development, however, is that even an environment of private property will not guarantee economic development. In a free society people are not forced to save and invest in capital accumulation or to undertake entrepreneurial activity. Private property only allows for the operation of the engines of prosperity; it does not guarantee that they will operate. Whether they do so ultimately will be decided by people acting on their subjective preferences. 

That explains the mystery. The very freedom required for economic development also allows for the possibility that economies will not develop. Different people may act differently in the same institutional environment. Changing the rules will not necessarily change outcomes exactly like we want. What economic expansion and development requires is not that mysterious. The uncertainty that remains stems from personal values.

Tuesday, October 26, 2010

Will There Be Krugman versus Murphy?

That's the question asked by the folks at CNBC (HT: Jeff Tucker). I certainly hope so. Murphy is an excellent economist who knows how to clearly and winsomely communicate sound economic theory and policy. He has written excellent work on the Great Depression and the New Deal and also on economic theory and policy that is both accessible and substantively contributes to the economic literature. His new introductory text aimed at the young reader looks good as well. You can donate to the cause here.

Monday, October 25, 2010

Philip Wicksteed (1844 - 1927)

On this date in 1844, British economist Philip Wicksteed was born. Wickteed has been referred to as the "British Austrian" for his price theory and his contributions to the theory the tmarket process. In Human Action Mises positively cites Wicksteed on the nature of preference. Israel Kirzner drew on Wicksteed's view of market competition, while Rothbard was influenced by Wicksteed's value theory, price theory, monetary theory.

Those who wish to read about the relationship between Wicksteed and Austrian economics can read Kirzner's brief essay "Philip Wicksteed: The "Austrian" Economist," from the book Great Austrian Economists. Those wanting to read the work of Wicksteed himself should go to The Common Sense of Political Economy, Volumes One and Two. It is his Magnum Opus.

Sunday, October 24, 2010

Basil Manly on Property and the State

Basil Manly, Sr. (1798-1868)
A while back I wrote about the views of Francis Wayland as they related to the Christian ethic of property. Another noteworthy Protestant who advocated the ethical imperative of private property was the important Southern Baptist pastor and educator, Basil Manly. The authoritative biography on Manly is the excellent work, by A. James Fuller Chaplain to the Confederacy.

Manly understood that private property was instituted by God. A God-ordained social order, therefore, necessitates the defense of the right to private property. In a Fast Day sermon he preached at the request of the Governor of Alabama, Manly instructed his congregation that “the rights of property are established by the Creator; respect for them is essential not only to the well being of society, but to its very existence.” Owning a farm himself, he had a practical understanding  that land and agriculture was the basis of his personal economic prosperity. Theology and personal experience, therefore, combined to convince Manly of the importance of property and its social implications.

As president of the University of Alabama, Manly taught political economy as part of “mental and moral philosophy,” a capstone course for graduating seniors. He used Wayland’s Elements of Political Economy as a text and his lectures closely followed Wayland, with the exception that Manly was even more skeptical of subsidies for perceived public goods such as canals and railroads. Manly certainly thought that maintaining private property rights was crucial for social stability. Like Wayland, Manly believed that private property was “coeval and commensurate with any step in social progress.”

Unlike too many Christians today, Manly did not put his faith in the state as the great social benefactor. In a paper I wrote many years ago about Manly’s view of the state, I note that
A distinctive characteristic of Manly’s view of the state is his placing no confidence in it as the savior and protector of society. The key to protecting property is not the state, but having a nation peopled with individuals that possess wisdom and knowledge. Manly’s sermon, on “National Stability” had Isaiah 33:6 as its text. “In wisdom and knowledge shall be the stability of thy times and the strength of salvation.” In this sermon, he contrasts nations that rely on “power, cunning, and violence,” with those “who serve and wait on God.” Strong nations are not the product of the state, but instead relied on “moral and intellectual purity and elevation as their glory and defense.”

Saturday, October 23, 2010

The Used Book Seller: Social Benefactor or Pariah?

Slate features a heart-felt memoir of a used book seller. The writer, Michael Savitz, explains his feelings of shame and embarrassment he experiences as he attends used book sales looking for good prospects to buy and re-sell. Instead of feeling emotionally beaten down, he should be satisfied at a job well done. He and used book sellers like him should be celebrated for the service they provide for the vast book-reading public.

When explaining the nature of voluntary exchange both in my introductory economics courses and in my book, I explain that in order for a voluntary trade to occur, both parties must value the respective goods in reverse order. In other words, both parties must value what they receive in exchange more highly than what they give up. If either party values what they already have more than what they would receive in exchange, they would not trade to begin with.

Additionally, each party must own the good in question. Each must have ultimate control over the good to the extent that they can trade it away if they wish.

Finally, both parties must know of the others existence. Even if two parties owned books they valued in reverse order, they would not be able to benefit from exchange unless they knew of the other person. If someone in Glasgow, Scottland owned a copy of Treasure Island and really wanted to trade it way for a copy of The Last of the Mohicans, while at the same time, someone in Cooperstown, New York with a copy of The Last of the Mohicans was willing to trade it for a copy of Treasure Island, the fact of reverse preferences does neither any good if they are unaware of their potential trader.

It is this need for knowledge of other trading partners that opens the door of profit opportunity for the one everyone wants to cut out--the much maligned middleman. Middlemen such as retailers and real estate agents provide the very productive service of making it easier for potential traders to know of each other by reducing search costs. Far from being a parasite leeching off the economic system, middlemen bring people together and in doing so allow each to satisfy more highly valued ends.

This is precisely what Savitz the used book seller does. He serves both book seller and book buyer by providing money to the seller and help channeling the books to those readers who value them the most. What is not to like?

Friday, October 22, 2010

Time to Put the Japan Deflationary Depression Canard to Rest

Doug French has a very timely post responding to a New York Times piece documenting Japan's descent from "Dynamic to Disheartened" all supposedly due to a prolonged deflationary spiral following their inflationary boom of the 1980s.

Most of the following is from a comment in reference to an earlier post about the similarities between the U.S. policy response to the credit crunch ushering in the Great Recession and Japan's response to their downturn in the early 1990s. I think the issue so important, however, that it deserves its own post.

The author of the NYT piece about Japan's loss of vigor asserts:
For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.
Later the author writes:
The classic explanation of the evils of deflation is that it makes individuals and businesses less willing to use money, because the rational way to act when prices are falling is to hold onto cash, which gains in value. But in Japan, nearly a generation of deflation has had a much deeper effect, subconsciously coloring how the Japanese view the world. It has bred a deep pessimism about the future and a fear of taking risks that make people instinctively reluctant to spend or invest, driving down demand — and prices — even further.
The misery and human costs however are not the result of deflation. They are the direct result of Japan's failure to allow the liquidation process to occur. The Japanese government has kept unprofitably invested capital in place with fiscal and monetary stimulus as well as central bank policy that continues to keep bad debt frozen on the books of zombie banks.

Recessions as the necessary consequence of capital consumption via malinvestment resulting from artificially low interest rates. In both Japan and the US, entrepreneurs were led astray by central bank credit expansion to undertake too much investment at higher stages of production and not enough investment at lower stages. The end result is that a large number of investment projects were begun at stages farther away from the consumption that were simply not sustainable. These projects must be liquidated if we do not want to continue to consume capital and make the situation even worse over time. Recession is the beginning of the necessary restructuring of capital toward its most highly valued uses.

Additionally, whatever the cause of the misery in Japan, it is not due to deflation. The claim that there has been a generation of deflation in Japan is simply wrong. As French notes, in 1989 the annual CPI in Japan was at 91.3. In 2009, it was 100.3. There have been ups and down along the way, but prices are higher now than they were in 1989. The monetary base of Japan is now more than 244 times what it was in July of 1991. M1 in Japan almost trippled from 1990 to 2002 and then increased every year after until 2009. In no way can this be construed as deflation.

We should also not forget that liquidation does not have to cause prolonged misery. That is the lesson of the recession of 1920-21 that followed the inflation of the war years. Historian Tom Woods documents that during 1920 unemployment increased from 4% to 12% and GDP fell by 17%. Warren Harding's response was to cut government spending, cut taxes, and reduce the national debt and the Federal Reserve did not act to inflate in an attempt to forestall deflation. Unemployment was back down to 6.7 by the end of 1922 and fell to 2.4% in 1923. The reason we did not have two decades of misery following the recession of 1920-21 is that the government by-and-large allowed the malinvestment to be liquidated and for the necessary capital restructuring to commence.

Thursday, October 21, 2010

Garrison on Bernanke and What to Expect from the Fed

Two days ago I discussed some of the implications I took from Ben Bernanke's recent speech at a monetary policy conference at the Federal Reserve Bank of Boston. The same day Roger Garrison, professor of economics at Auburn University had an excellent article explaining his take on what Bernanke said and what it all means. I'm happy to see that Garrison agrees with me while his treatment is more exhaustive. Garrision hits the nail on the head when he notes
Ironically, Bernanke argues in favor of deliberately creating a 2 percent inflation rate in order to be able to respond in conventional ways should a recession threaten. There seems to be no recognition that a Fed-engineered inflation and the resulting market distortions, especially the interest-rate distortions, are precisely what cause a recession to threaten. Or that true price stability might entail a pattern of prices, wages, and interest rates brought about by the market in the absence of monetary manipulation by the central bank.

Wednesday, October 20, 2010

Miller on the Lack of Free Lunch for Health Care

My friend and colleague Tracy Miller has another excellent blog post on the implications of reality for health care provision. The facts of life are such that all economic goods, including health care, are scarce and therefore producing and obtaining them necessarily incur costs. This fact is due to the nature of the created order and can not be wished away by policy makers by fiat.

Miller received an email from the daughter of our Congresswoman who voted for ObamaCare. 

In the email she explained that because of Health Care Reform, which her mother supported, she no longer had to pay a $25 co pay for each prenatal appointment. This will save a family “that lives paycheck to paycheck” over $500 per year. Such savings makes healthcare reform sound like a wonderful gift until you stop to reflect- who pays the $25 that the consumer no longer has to pay each time she visits the doctor? The answer: for those who have health insurance, the elimination of copayments will mean higher premiums. In other words, paychecks will become smaller as insurance rates rise to cover this new government mandate.

The point is that whenever a good is provided, someone has to pay the cost. No scarce goods are ultimately free.

Tuesday, October 19, 2010

Ben Bernanke, Inflationist

I have previously commented on Ben Bernanke's views of monetary theory and policy here, here, and here, noting that his forecasting track record is less than stellar, his troubling (indeed dangerous) monetary policy follows from bad economic theory, and that his overarching vision is driven by a fear of deflation.  His remarks Friday at a monetary policy conference at the Boston Fed, however, reveal that his deflation phobia has progressed to the point that he is no longer merely worried about deflation, but also about insufficient inflation.

 His comments reveal the extent of Bernanke's commitment to inflation and also the problems faced by a central money creator charged with a dual mandate that is often internally in conflict. As Bernanke notes in his speech, the Fed is charged by Congress to work to maximize employment and price stability. Over the course of the 2000s the Fed repeatedly held interest rates too low as a means to keep unemployment low. It appeared to work for awhile as unemployment did stay relatively low and at the same time there was not much increase in the CPI. Notwithstanding the tremendous increase in the prices of equities and houses, it appeared to many that the Fed had successfully continued the Great Moderation.

Unfortunately, as Misesian economists predicted, massive inflation of the money supply via credit expansion leads to massive capital malinvestment, which necessarily results in a recession, the effects we are still painfully enduring. Bernanke has responded as expected by pouring tremendous amounts of reserves into commercial banks to the extent that the Federal Funds rate remains at an all time low.

Bank Reserves Increased to an All-time High

The Federal Funds Rate is Still at an All-time Low

Now, however, Bernanke is concerned he has inflated himself into a corner, because rates are so low, he is worried that he may have hit a limit in how effective conventional monetary policy can be. Never mind that the prices of stock equities and commodities are on the rise as well as important sectors of producer prices. The fact that the CPI is not rising fast enough to create inflationary expectations so that an inflation premium is not being added to market interest rates constrains the effectiveness of expansionary monetary policy. The way to combat the scourge of prices not rising enough is to pour more money into the economy. Bernanke is no longer merely a deflation-phobe. He is a not-high-enough-inflation-phobe.

Monday, October 18, 2010

What Malinvestment Looks Like: Aerial Photo Edition

Thanks to Greg Ransom for posting a link to these stunning photos of Florida real estate malinvestment on the Mises Economics Blog. They provide literal pictures of capital consumed in projects that could not be completed due to entrepreneurs being led astray by the strange woman of artificial credit expansion. As the original post states:

The images of half finished (and barely started) developments are strangely beautiful, with a geometric symmetry that belies the state of human misery these developments represent: Lost deposits, bankruptcy, mis-allocated capital. 
Appropriately, Ludwig von Mises used the analogy of a builder to explain the fundamental nature of the malinvestment that causes the business cycle. Entrepreneurs are led astray by artificially cheap credit to undertake investment projects for which there is not enough real capital goods to bring all of them to completion. Many of these projects will fail, with some ending in bankruptcy. In Human Action Mises likened the situation to a builder who tries to build a building with too large a foundation, only to realize much later that he does not have enough bricks to complete the building.
The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.

These pictures illustrate one hundred and eight words.

Sunday, October 17, 2010

Who Benefits From Inflation? Those Who Get the New Money First

In my op-ed on the immorality of inflation I explain that one of the ethical problems of state increases in the money stock is that it redistributes wealth. Those who receive the new money first are able to use their higher real incomes to purchase more goods. However, over time overall prices rise so that those who get the new money later find that the amount of new money does not offset the rise in prices. Additionally, those people on fixed incomes do not see a dime of the new money, but must pay the higher prices nevertheless.  Those who get the new money first benefit at the expense of those who get it later or not at all. In our current system, those who get the new money first are those closely connected to the banking system and the state.

The Federal Reserve creates cash reserves that serve as assets for commercial banks. Much of this new money is presently being spent on treasury bonds. This demand for Treasury bonds makes it easier for the government to borrow this new money to cover its spending above tax revenues. That is why one of the only sector where hiring is on the rise is the government.

This analysis helps explain why Manhattan, Kansas is weathering the Great Recession in relatively fine fashion. It is home to Army base Fort Riley. Therefore there is a lot of new money floating around. The result is that per capita income in Manhattan rose 4.8 per cent in 2009. As Business Week explained it,
Wealthy individuals remain concentrated near large cities with business and finance hubs, but William H. Frey, a Brookings Institution demographer, says state capitals, military towns, and college towns also often have higher-than-average incomes due to their ability to survive economic downturns, as their main industries are buffered by government-related funds.

This comes, of course, at the expense of people who live elsewhere and, hence, get the new money later or not at all.

Saturday, October 16, 2010

On World Food Day: Desrochers and Shimizu on the Local Food Activist's Dilemma

Today is World Food Day. In reference to this year's theme "United Against Hunger" Pierre Desrochers and Hiroku Shimizu have written an excellent blog post documenting the problems associated with the "food miles" fetish of many locavores. They write:
. . .in a world where no good deed goes unpunished, the individuals most responsible for producing ever-growing amounts of food at ever more affordable prices – from large scale farmers, professional plant breeders, synthetic pesticide and fertilizer manufacturers to agricultural equipment manufacturers, commodity traders, logistics industry workers and packaging manufacturers – have increasingly been demonized as poor stewards of the Earth, if not outright public health threats.
I've written about this before and am happy to see I am in agreement with these experts who have written extensively on this topic.

Friday, October 15, 2010

Thomas Woods on Warren G. Harding and a Forgotten Depression

Historian Thomas Woods has written an article that everyone should read. In "Warren Harding and the Forgotten Depression of 1920," Woods tells the story of how Warren G. Harding responded to the economic depression of 1920 in such a way so that we never hear of the Great Depression of the 1920s.

Instead of Harding and Congress heavily intervening the the economy via government spending and borrowing, the market was, by and large, allowed to liquidate capital malinvested during the previous decade. Woods draws upon speeches by Harding documenting the economic cogency of Harding in the face of a sharp recession. Along the way, Woods provides one of the best, most concise, explanations of the business cycle according to Misesian economic theory. Woods concludes:
Harding’s inchoate understanding of what was happening to the economy and why grandiose interventionist plans would only delay recovery is an extreme rarity among twentieth-century American presidents. That he has been the subject of ceaseless ridicule at the hands of historians, to the point that anyone speaking a word in his favor would be dismissed out of hand, speaks volumes about our historians’ capabilities outside of their own discipline.

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.
Woods' piece is indeed an excellent tonic for those who presume that an economic contraction requires a state-induced activist solution. All who wish to better understand the economic history of the 1920s and business cycles in general should avail themselves of this outstanding contribution.

Thursday, October 14, 2010

What Malinvestment Looks Like: Forever Empty Office Buildings

Mark Thornton has justly received notoriety for his work on the Skyscraper Index as a harbinger of recession following an inflationary boom. His thesis is that record-breaking skyscrapers are most often undertaken toward the end of an inflationary boom and the beginning of their construction is a good sign that recession is not too far around the corner. He provides empirical evidence as well.

Well, Bloomberg News just published a piece about the Dubai commercial real estate scene that corroborates Thornton's theory. The global boom fueled massive office construction, including the newly-christened tallest building in the world, The Burj Dubai. Presently office space in Dubai is only 40% occupied with another 20 million square feet of space that is scheduled to be complete over the next four years. There is so much office space available that some buildings will be vacant forever. Ladies and Gentlemen, THAT's malinvestment.

Wednesday, October 13, 2010

Responding to Economic Recession: Like Japan, Like the United States

Last week, markets zoomed upon receiving the news that Japan was committed to "quantitative easing" or what we used to simply call inflation. What should give everyone pause is the reminder that we've been through this all before. 

In a very accessible article, "U.S. Recession Policies: Nothing New Under the (Rising) Sun" in the Fall 2009 issue of The Intercollegiate Review, Benjamin Powell expertly compares and contrasts the response of Japan to their earlier recession that led to the infamous "lost decade."

Powell documents that the central banks of both Japan in the late 1980s and the U.S. in the 2000s increased the money supply and greatly lowered interest rates. In both situations housing and stock bubbles were inflated and then burst leaving a plethora of economic devastation in their wake. He uses Austrian business cycle theory to rightly identify the massive capital malinvestment that is at the root of the economic problems of both Japan and the United States.

Powell notes that the response in the U.S. has been both monetary and fiscal stimulus. He does an expert job explaining why it was just this sort of monetary and fiscal intervention that prolonged Japan's recover into what became known as the lost decade. Powell's article is an excellent piece of economic history documenting how not to recover from the Great Recession. 

Tuesday, October 12, 2010

Nobel Prize in Economics

This year's Nobel Prize in Economics has been awarded to Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides for their work extending the concept of search costs to labor markets.

The press release includes the following explanation of the award winning contribututions:
This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
Incidentally, that last observation is similar to something I've said on this blog before about unemployment.

Perhaps the best take I've read so far about this year's prize  is by Peter Klein:
It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.

Monday, October 11, 2010

Government Regulation of Business Reduces Mutually Beneficial Exchanges

It is shocking what details of our lives the government regulates. They have already fined four companies for doing the unspeakable--producing shower heads that are too big. This has prompted John Steigerwald to warn us all to "beware the shower police."

The idea that we need the state to regulate the size of shower heads in order to control how much water people use smacks of economic fascism. The reason the state feels compelled to regulate the quantity of water used through draconian shower and toilet regulations is that it refuses to allow water to be allocated rationally via the price system. If so, when the demand for water increased relative to supply, its price would increase, creating the incentive to economize and voluntarily conserve usage. No one would have to send the state's regulatory apparatus into our bathrooms. No one would be fined, sent to jail for not paying the fine, or shot escaping from jail.

Additionally, this sort of regulation always reduces the number of mutually beneficial exchanges and thus leaves more citizens worse off compared to how they would be without the state intervention. As I put it in Chapter 17 of my book Foundations of Economics:
. . .the free market tends to maximize the satisfaction of society. Intervention in the market, however, hinders this process and necessarily creates conflict. Instead of an exchange which is mutually beneficial, one party benefits at the expense of another party.

I end the chapter pointing out the legitimate way Christians can work to regulate economic behavior:
The Christian ethic of private property does not allow them to use the coercive state to achieve their ends for a better society. Instead Christians are called to evangelize and disciple converts in the paths of righteousness. As the church does what it is called to do, people will change their preferences. They will begin to be more loving and kind to their neighbors. If Christians really want different market outcomes, they should be obedient in their calling and have faith that God can transform the hearts and minds of men and women.

Sunday, October 10, 2010

Wilhelm Röpke: A Humane Economist

On this date in 1899 German economist Wilhelm Röpke was born. I've always had a soft spot for Röpke because of his insistence on calling attention to some of the bigger issues such as how a society's moral fabric is related to its political economy. He was a great critic of fascism, Soviet-style socialism, and mass society fostered by statism. Over a decade ago I contributed  a chapter about Röpke to the book Great Austrian Economists, edited by Randall Holcombe. The chapter begins with the following paragraph:

Wilhelm Röpke devoted his scholarly career to combating collectivism in economic, social, and political theory. As a student and proponent of the Austrian School, he contributed to its theoretical structure and political vision, warning of the dangers of political consolidation and underscoring the connection between culture and economic systems. More than any other Austrian of his time, he explored the ethical foundations of a market-based social order.

As he explained in the first chapter of his most famous work, A Humane Economy, his ethics were rooted in the Christian tradition.
My picture of man is fashioned by the spiritual heritage of classical and Christian tradition. I see in man the likeness of God; I am profoundly convinced that it is an appalling sin to reduce man to a means (even in the name of high-sounding phrases) and that each man's soul is something unique, irreplaceable, priceless, in comparison with which all other things are as not. I am attached to a humanism which is rooted in these convictions and which regards man as the child and image of God, but not as God himself, to be idolized as he is by the hubris of a false and atheist humanism. These, I believe, are the reasons why I so greatly distrust all forms of collectivism.
These ethical convictions are what led him to stridently oppose both Soviet and National socialism. He was well aware of the dangerous attraction centrally planned economies had for Mid-Twentieth-Century Christians who did not like some aspects of free markets. In the same book he wrote
People may be led by Christian and humane convictions to declare themselves in sympathy with socialism and may actually believe that this is the best safeguard of man's spiritual personality against the encroachments of power, but they fail to see that this means favoring a social and economic order which threatens to destroy their ideal of man and human freedom.
Röpke was in some ways a complicated thinker. In his book The Social Crisis of Our Time, for example, he tried to distinguish between state intervention that is compatible with the market  and what he called incompatible state intervention in the market economy. Calling for a "third way" between socialism and laissez-faire capitalism, he had a sentimental streak that longed for a way to intervene in the economy to produce more humane results.  At the same time, however, he was too good of economist not to recognize that, like it or not, any intervention in the market brought with it costs that cannot be avoided.

For some of the best of Röpke's economic work, I recommend his Economics of a Free Society and Against the Tide.

Saturday, October 9, 2010

Women, Wall Street, Work, and Compensation

Here we go again. Bloomberg News has a story by Dawn Kopecki on how the Great Recession has heightened pay disparities between men and women on Wall Street. It is the financial industry version of the "76 cent statistic." As Kopecki tells the story:
Women managers in finance, a group that includes bank tellers as well as executives, earned 63.9 cents for every dollar of income men earned in 2000, based on median salaries, according to Government Accountability Office statistics analyzed by Bloomberg. In 2007, the last year for which data are available, the figure was 58.8 cents. The 41-cent gap was the biggest in any of 13 industries surveyed by the GAO, and only two others had a widening disparity.
Kopecki then goes on to provide a number of various possible explanations for the persistent disparity. The first cited is, not surprisingly, the supposed male-dominated sexist culture inside the financial industry. Susan Estrich, law professor at USC in LA, is quoted as saying
“In the old days, the problem was conscious, explicit discrimination -- the doors were literally closed and we had to put our heads against them and pound them in. . .[now] people who are doing the judging unconsciously prefer people they’re comfortable with, people they know, people who look like them, people whose experience they recognize.”
Joan Williams, another law professor from Hastings College of Law says:
“The gender bias faced by female traders is open, dramatic and pervasive compared with other professionals. . .It’s all about masculine signaling -- mine’s bigger than yours. But in this case, it’s measured by salary and fueled by risk.”
 There is a LOT of psychologizing going on here. As the end of the Estrich quote suggests, however, their may very well be rational economic reasons for such disparity. There is good reason to hire someone who you know and whose experience you recognize.

Williams offers another explanation that makes most sense--the consequences of motherhood.
Studies have found that mothers are less likely to be hired or promoted and receive lower pay for similar jobs, Williams said. Becoming a mother is one of the leading reasons women leave Wall Street, she said.
I've written on this issue as it relates to the entire economy many years ago in an article "Women and Work." As I explain it
The big difference between men and women is how they react to marriage and child-birth. Marriage tends to increase men's participation in the labor force and decrease women's. The hours men work tend to increase with the birth of a child. Hours that women work tend to decrease when a child is born. Mothers tend to work less overtime and take fewer jobs that will require that they work long hours in return for high pay than fathers do.
I conclude with the following:
Whether egalitarians like it or not, for the "average" woman her family life trumps other concerns on the margin. Employers and employees are merely recognizing this fact of nature: women and men are not equal in the sense of being identical. They are different and have different comparative advantages when it comes to work outside the home versus child rearing.

Friday, October 8, 2010

Vienna and Her Children

Recently, my review of Guido Hulsmann's great biography of Ludwig von Mises was published on

Jason Jewell, who writes a wonderful blog The Western Tradition, has posted his thoughtful review essay discussing Guido Hulsmann's Mises: Last Knight of Liberalism published by the Ludwig von Mises Institute and Robert Weldon Whalen's Sacred Spring: God and the Birth of the Modern in Fin de Siecle Vienna published by Eerdman's. It was originally published in the Spring 2008 Journal of Faith and the Academy.

Jewell summarizes Whalen's work, noting that the book
. . .is a refreshing look at the fin de siècle period from a perspective Christians will appreciate. Whalen does not announce any Christian presuppositions affecting his analysis, despite having Eerdmans as his publisher, but the subtext of his work seems clear enough. The Viennese avant-garde for the most part lived a tormented existence characterized by ennui, alienation, adultery, and suicide. Their quest for spiritual rest is presented sympathetically despite its unsatisfactory conclusion.
He then proceeds to discuss the importance of Mises, explaining
Fin de siècle Vienna produced not only edgy artists but also level-headed, no-nonsense economists who profoundly altered the received wisdom in their field. Had Ludwig von Mises (1881-1973) been an apologist for socialism, his gripping life’s story would have long since been made into a Hollywood film starring Warren Beatty and Barbra Streisand. A decorated war hero who almost singlehandedly saved his native Austria from economic ruin through his influence on policymakers, he astounded his friends and enemies alike with his path-breaking contributions to economic theory before fleeing from the Nazis, arriving in America with no connections or support at age fifty-eight and, undaunted, going on to publish what some consider the twentieth century’s greatest treatise in the social sciences, Human Action. However, Mises was an advocate of laissez-faire classical liberalism, a fact which made him an outcast among fashionable intellectuals throughout his life and denied him numerous career opportunities open to lesser men.
The entire essay is worth a thoughtful read and is an outstanding example of how Christians should respond both critically and charitably to great modern thinkers.

Thursday, October 7, 2010

Voluntary Exchanges and the Free Market

Grove City College sociology professor Steven L. Jones and myself have co-authored a new white paper that has just been published by the Center for Vision and Values. It is entitled "Voluntary Exchanges and the Free Market" and explores the nature and extent of voluntarism in exchange in a free society. The following is from the paper's introduction:
This paper began as a series of conversations between myself and Dr. Shawn Ritenour of the Department of Economics at Grove City College. On the broadest level, Dr. Ritenour and I are both interested in the relationship between social conditions and human action. We are both advocates of free markets, believing that they contribute more to human thriving than other arrangements. We also agree that there is a moral dimension to human action, and that the system of exchange established in any society is, thus, a moral issue as well as a pragmatic one. Within that common ground, however, there is still much to discuss. In particular, this essay examines what it means for an exchange to be voluntary.
The paper begins with a section by me analyzing the nature of voluntary exchange followed by a section in which Dr. Jones argues that, due to extenuating circumstances some exchanges could be less than fully voluntary even in the absence of physical coercion. We both then offer brief responses to one another. In my response to Jones I conclude by saying
[T]he key to getting at the nature of voluntary exchange is to recognize that a person’s preferences are not a cosmic wish list, but a subjective ranking based on everything he thinks relevant to his choice at the time. Instead of concluding that this existential fact implies that exchange is less than voluntary, I suggest we better view free exchange as constrained, yet voluntary.

Wednesday, October 6, 2010

Does Fast Food Contribute to Obesity?

Peter G. Klein, in his excellent, Organizations and Markets, cites a new paper that says, perhaps not.

The paper is an empirical study published in the July 2010 issue of American Journal of Agricultural Economics. Klein has this to say about the paper:
Previous research finds links between the number and density of fast-food restaurants and health problems, but has difficulty identifying cause and effect (fast food could make people overweight, but fast food restaurants could be put in areas where people are overweight anyway). Dunn uses the number of interstate exits as an instrument for restaurant location to tease out the causal relations, and finds little overall effect of fast food on obesity — none at all in rural areas, a bit in medium-density areas, and only among women and minorities.

Tuesday, October 5, 2010

Ambrose Pritchard-Evans: END THE FED!

Unfortunately still a Friedmanite concerning deflation, Ambrose Pritchard-Evans has at least come around to the fact that the Fed serves not to "stabilize prices" but, as I wrote last week on, the Fed is committed to all inflation all the time. He has issued a mea culpa  of sorts and now says he wants to end the Fed! Speaking of, here's THE book on the topic.

Monday, October 4, 2010

Income Inequality: The Rich Get Richer and the Poor Get Poorer

That's the news anyway. Recently published statistics indicating that income inequality has increased over the past couple of decades have been given a lot of press. Many blame tax cuts for the rich, while others blame laissez-faire capitalism run amok (as if we have a free market in this country).

After lecturing to my Money and Banking class about the consequences of monetary inflation, it occurred to me that such Federal Reserve induced inflation very likely explains part of the increasing income inequality. This is because while monetary inflation never provides a general social benefit, because more monetary units do not increase the quantity of producer or consumer goods at our disposal, it does provide private benefits for those who get the new money first. As such, monetary inflation redistributes wealth, leaving some richer while others are left poorer.

This could be especially true given the shift toward compensating CEOs in stock options. I have no problem with CEOs making absolutely as much as the market will bear, because the market will bear only as much as the CEO contributes in value. If a CEO gains more than his contribution to the firm, the firm will be less profitable to their own hurt. However, as shown on Seeking Alpha during the 1990s much of the new money the Fed created was quickly poured into the stock market and then asset backed securities.

Therefore, those CEOs compensated with stock options benefit from being closer to the new money. Their compensation packages greatly enhance in value from monetary inflation, resulting in a shift in income distribution. I am not sure this is THE explanation, but it is an plausible explanation the needs to be more fully researched.

Sunday, October 3, 2010

Private Property Means Exclusive Use

In my Principles of Microeconomics class, I explained last week that all economic policy has an ethical component, so to get policy right it behooves us to understand the ethics of property. While explaining my take on the Christian view of property as it applies to economic policy, one point I like to stress is that private property means exclusive use. The property owner is able to use his property as he sees fit (as long has he does not try to use it to agress against someone's property).

As I explain on page 82 of my Foundations of Economics, this principle of exclusive use is taught in the Bible in the account of Peter's rebuke of Ananias and Sapphira found in Acts 5:1-11. As I explain
In Acts 5, Luke documents the demise of Ananias and Sapphira for lying to the Holy Spirit. and his wife sold a piece of property and asserted they were giving all of the proceeds to the Church in Jerusalem, all the while holding back some of the revenue for themselves. The Apostle Peter confronted saying, “While it remained unsold, did it not remain your own? And after it was sold, was it not at your disposal? Why is it that you have contrived this deed in your heart? You have not lied to men but to God” (Acts 5:4). Peter expressly says that their property was theirs to do with as they saw fit.

Saturday, October 2, 2010

The Costs of Socilized Health Care: Evidence from Canada

Yesterday I alluded that we should expect a centrally planned health care system to be less efficient and hence more costly than a decentralized health care industry characterized by voluntary exchange. Predrag Rajsic, PhD candidate at the University of Guelph in Ontario, Canada, explains the often hidden costs of the socialized Canadian health care system. It turns out that time is not on their side.

Friday, October 1, 2010

What Do We Get When the National Government Controls a Cemetery?

6,600 mixed-up graves. Really. Now try to imagine how a centralized health care bureaucracy will coordinate services for billions of people who are still alive. Not a pretty mental picture.

Those who would like to more fully explore the economics of bureaucracy should read Ludwig von Mises' Bureaucracy. I read it during my time as economist at the U.S. Bureau of Labor Statistics and can tell you that while doing so I was seeing the theory practiced every day.