Wednesday, October 31, 2012

2% Economic Growth: Real or Apparent?

That's the question I tackle in my latest article at The piece is largely based on a previous blog post. The short answer is: more apparent than real. As I conclude:

The bottom line is that increases in GDP statistics caused by monetary and fiscal stimulus signals an economic expansion that is more apparent than real. Any economic expansion that does not result from increased voluntary saving and investment cannot be sustained. The minute the government slows the rate of government spending or the Federal Reserve slows the rate of growth in the money supply, the economic lie is exposed and economic law once again asserts its authority. Capital malinvestment and the misallocation of factors of production no longer can be covered over as the official statistics catch up with reality.

Tuesday, October 30, 2012

Price Gouging Saves Lives in a Hurricane

That is what David M. Brown says. In a world in which sellers who raise prices in response to demand spikes are routinely derided and scorned, Brown's analysis provides a much needed antidote. Brown's essay originally dates from August 17, 2004 drawing on his own immediate experience with Hurricane Charley. In his essay, Brown makes the important and much needed theoretical point:

Nobody knows the local circumstances and needs of buyers and sellers better than individual buyers and sellers themselves. When allowed to respond to real demand and real supply, prices and profits communicate the information and incentives that people require to meet their needs economically given all the relevant circumstances. There is no substitute for the market. And we should not be surprised that command-and-control intervention in the market cannot duplicate what economic actors accomplish on their own if allowed to act in accordance with their own self-interest and knowledge of their own case.
He also explains why this point is of supreme practical importance when responding to a natural disaster.

If we expect customers to be able to get what they need in an emergency, when demand zooms vendors must be allowed and encouraged to increase their prices. Supplies are then more likely to be sustained, and the people who most urgently need a particular good will more likely be able to get it. That is especially important during an emergency. Price gouging saves lives.

Saturday, October 27, 2012

U.S. Economy Grows at 2%?

That is what the GDP statistic published by the US Bureau of Economic Analysis (BEA) says. However to better understand how the economy changed during the past quarter, as is always the case, we must drill deeper into the numbers. It turns out that the deeper we go, the less rosy things appear. This quarterly release in particular demonstrates the danger of looking to aggregate macroeconomic statistics as a guide for how an economy performs.

 It turns out that the main reason GDP increased at a rate larger than forecast was a significant increase in government spending. Real federal government expenditure increased 9.6%. National defense spending itself increased 13% over the third quarter. These increases at the national level contributed to an overall increase in all government spending (federal, state, and local) of 3.7%. Government spending is what drove this increase.

Unfortunately, we cannot rely on government spending to result in sustainable economic expansion. The economy is not a machine that is ailing from a dead battery. Alas, modern macroeconomists and policy makers often talk and act like it is. They speak of "jump-starting" with a little government spending or monetary inflation or both. Such actions, however, do not generate wealth. They surely cause a redistribution of wealth, benefiting some while harming others, but they do not provide any general social benefit. Neither government spending nor monetary inflation results in more production of more goods that are able to satisfy the subjective ends of people in our social economy.

Economic expansion and development is the happy consequence of people participating in an extensive market division labor made possible by the accumulation of capital that is wisely invested and directed by entrepreneurs. It is voluntary savings and investment--not government consumption--that generates economic expansion in an economy free enough to utilize it.
A look at third quarter investment numbers are nothing to feel excited about. Gross private domestic investment increased an anemic 0.5%. Net Private Domestic Business Investment, while positive, declined for the second quarter in a row.

Economic expansion that does not result from increased saving and investment is more apparent than real and cannot be sustained. The minute the government slows the rate of government spending or the Fed slows the rate of growth in the money supply, the economic lie is exposed and economic law once again asserts its authority.

Another thing we should keep in mind is, as the BEA press release reminds us, "the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency." Last quarter's data were revised downward--twice. This resulted in one commentator quipping that they hoped there were no more revisions because pretty soon GDP growth for the 2nd quarter would turn negative.

Thursday, October 25, 2012

A Gold Standard Can Save Us from Economic Disaster

So says Steve Forbes. It turns out that discussion about the gold standard has entered polite company after all. In his excellent article he notes that
The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated. An unstable dollar is wreaking havoc on our capital markets, depriving us of money for productive enterprises and future enterprises while subsidizing government debt on a scale never before seen in U.S. history.
A positive step toward a solution would be to adopt a free market gold standard. He says "The gold commission advocated by the Republican platform would be an excellent start."

We should not forget, however, that we had one of these back in the early 1980s and the Commission's majority opinion were against the gold standard. The minority report was authored by Ron Paul and Lewis Lehrman, but the idea did not gain any political traction. Political realities may be different now, however, with massive government deficits and lending financed in large part by new money created by the Fed, perhaps the political time is right for the sort of positive monetary reform we do desperately need.

There is always the danger, however, that politicians will attempt to co-opt the gold standard and turn it into a phony standard that merely masks their inflationary devices. It would be best not to settle for a dollar that is "as good as gold," A true gold standard would be one in which the dollar was gold. For more on this issue, I recommend Joseph Salerno's "Gold Standards: True and False."

At the very least, Forbes notes, the government could allow for the free competition of different currencies or monetary commodities, another idea sponsored by Ron Paul. Forbes' entire essay is worth reading.

Saturday, October 20, 2012

When a Money Stock Independent of the State Was at Least Discussable

Two days ago I came across an item that makes an interesting followup to John Cochran's response to Krugman and DeLong. As Cochran notes, DeLong's post is a long meandering post that ostensibly tries to explain what Mises was getting out in his monetary theory. It turns out that not everyone who has read Mises' monetary theory has had difficulties in understanding.

Upon the publication of the English translation of Mises' The Theory of Money and Credit, a reviewer in the January 21, 1935 Manchester Guardian had this to say:
Austrian ideas are increasingly affecting economic thought at London and elsewhere; and many of the conceptions round which controversy rages to-day (and will rage tomorrow) derive from Mises. Both in the treatise itself and in the introduction written for this English edition that author sets down his views boldly. He holds that one of the worst fates that can befall a community is that its money should become the plaything of politics. Hence he is for gold against paper, for the currency school against the banking school, for the restrictionists against the expansionists. And he sees in the extension of fiduciary media by the banks a danger only less menacing than the inflationary tendencies of Governments.
Note that the reviewer tosses out phrases like "gold against paper," "the currency school," and "the banking school" as if his readers know of which he was speaking. The review "gets it." The reason Mises argued for gold and currency school theories is that he understood the dangers and destructive consequences of state control of money. That makes Mises' work as timely as today's headlines. The reviewer even picked up on Mises' conviction that fiduciary money issued by private banks is only marginally less dangerous that state controlled inflation.

There is absolutely no indication that Mises' arguments are obtuse, hard to follow, or otherwise in need of special gnostic gifts to divine their meaning.There was once a time, it seems, when economists and indeed intelligent citizens could understand basic monetary theory instead of wallowing in willful ignorance.

Those interested can read a host of reviews of The Theory of Money and Credit and all of Mises' other works in the Annotated Bibliography compiled by Bettina Bien Greaves, a long-time participant in Mises' New York seminar.

Tuesday, October 16, 2012

Cochran Responds to Krugman and DeLong

John P. Cochran
Readers should be made aware of this thoughtful response by John P. Cochran to attempts to dismiss and/or discredit Austrian monetary theory by Paul Krugman and Brad DeLong. Always the gentleman, Cochran recognizes that too often academics, and in this case especially De Long,  are not. Cochran gets to the heart of the problem when he identifies that Krugman's and DeLong's attacks read, at best, willfully ignorant, and at worst, seemingly downright misleading. As he notes:

Given the major works by Mises (and Hayek) are now readily available in English translations (or were written in English), Delong and Krugman have no such excuse for their straw-man presentations, which exhibit laziness, intentional lack of scholarly effort, and a deliberate misrepresentation to make their case to discredit appear stronger. 
Cochran then explains key features of Mises' monetary theory, showing that "Mises's framework is 'so so so so so so so so so' [here Cochran is quoting DeLong, SR] believably correct and most relevant to today's economy and should be the basis for a current policy that would lead to a sustainable recovery and long-needed monetary reform to better prevent future depressions." In doing so, he provides a valuable service by pointing interested parties to investigate the development of Mises' monetary theory by numerous contemporary economists. The entire article repays careful reading.

Friday, October 12, 2012

My student John Dellape's review of Foss and Klein's Organizing Entrepreneurial Judgement continues at Today's offering examine Foss and Klein's explanation of the real nature of capital goods and the connection between the theory of the entrepreneur and that of the firm.  As Dellape concludes:
[T]ying together entrepreneurship and the firm allows for a dynamic and realistic understanding of how the internal organization of the firm is established and the effects it has on performance. The internal organization determines how derived entrepreneurial judgment will be exercised by employees as circumstances change. The owner-entrepreneur exercises original judgment in determining the amount of discretion his employees will have. Thus, entrepreneurship is exercised in some way at every level of the firm. The owners should not be mistaken as passive bystanders to the actions of the firm, for they are the ones who ultimately establish and adjust over time the structure for how entrepreneurship is to be exercised by firm employees.

Thursday, October 11, 2012

Cochran on the Latest Evidence Supporting an Misesian Interpretation of Our Recent Economic Past

One of the criticisms of Austrian business cycle theory that many continue to make is that the it is merely an "armchair theory" with little or no empirical data to back it up. One can immediately rebut such charges because the Austrian literature does contain several contributions that puts empirical meat on the theoretical bones. Murray Rothbard's America's Great Depression and The Panic of 1819 quickly come to mind, as does the historical discussion in Chapter 6 of Jesus Huerta de Soto's Money, Bank, Credit and Economic Cycles.

Writing at the Circle Bastiat, John P. Cochran provides some excellent analysis of median household data that provides empirical support for an Austrian interpretation of 1995-2012. As Cochran notes,

While one should always be careful using median income figures, the data is consistent with and can be best understood when combined with a capital-structure macro model of the economy.

He cites several recent articles by Roger Garrision, Frank Shostak, Adrian Ravier, and Joseph T. Salerno that bear this out. Cochran packs a lot into a relatively brief post that is well worth reading.

Friday, October 5, 2012

Salerno on The Fed, the FDIC and Other Problems

Here is an excellent introduction to the source of the financial meltdown that ushered in our current economic woes. Salerno builds on the monetary theory of Ludwig von Mises and Murray Rothbard. He rightly notes the dangerous brew of Federal Reserve central banking, fractional reserve banking, and federal deposit insurance.

Salerno delivered his lecture at the most recent Mises Circle held in Manhattan. The theme of the event was "Central Banking, Deposit Insurance, and Economic Decline."

Tuesday, October 2, 2012

Dellape on Klein and Foss on Entrepreneurship

My former student and Grove City College Economics alum, John Dellape has written an excellent chapter by chapter review of Peter Klein and Nicolai Foss' new book, Organizing Entrepreneurial Judgement: A New Approach to the Firm. Dellape is currently a fellow with the Pittsburgh Fellows Program and employed at Net Health Systems, Inc. He also writes for

The book and Dellape's review are as timely as today's headlines. As Dellape says in the introduction of his review:
The book's aim is to integrate the study of entrepreneurship with the theory of the firm under economic analysis. Nationally and globally we are at a pivotal moment in which people need to understand how businesses function and the entrepreneurial abilities necessary for continued economic progress.