Showing posts with label F. A. Hayek. Show all posts
Showing posts with label F. A. Hayek. Show all posts

Friday, April 20, 2012

How the Fed Benefits Those Who Get the New Money First

Mark Spitznagel
Mark Spitznagel, founder and chief investment officer of the hedge fund Universa Investments L.P., knocks the ball out of the park in today's Wall Street Journal. With the precision of a Henry Hazlitt, Spitznagel explains exactly "How the Fed Favors the 1%."

The Federal Reserve benefits its favored class in the method it uses to push new money into the economy. The Fed does not increase everyone's cash balances simultaneously in the same proportion. It injects reserves into commercial banks and they then lend new money to borrowers. This injects money into the economy at specific places at specific times. As I said this morning in my conference presentation,
Increasing the money supply merely increases the amount of money being spent on the same quantity of goods, so overall prices increase and the purchasing power of the dollar falls. Those people who receive the new money first benefit while those people on fixed incomes are harmed. However, there is no general social benefit from inflation.
This point was made in the middle of the 18th century by Richard Cantillon and was also noted by the 20th Century's greatest economist, Ludwig von Mises.

The contribution of Mises is likewise recognized by Spitznagel. He writes,
In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke seems capable of) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.
Spitznagel cites Mises' students Rothbard and Hayek in explaining the pernicious effects of monetary inflation then hits the nail on the head has he explains the specific beneficiaries of our current inflationary monetary regime.
The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.
This has to be one of the greatest commentaries to appear in the Wall Street Journal in a long time.

Friday, December 9, 2011

Cochran on Hayek and the Great Recession

F. A. Hayek
The most recent issue of The Quarterly Journal of Austrian Economics is out and features, among other work, a new article by John P. Cochran, professor of economics at The Metropolitan State College of Denver. Cochran's piece, "Hayek and the 21st Century Boom-Bust and the Recession-Recovery" examines Hayek's thoughts on business cycles in light of our most recent recession. I saw Cochran present this paper at last year's Austrian Scholars Conference and highly recommend it. The article would make helpful instructional reading for Paul Krugman and J. Bradford DeLong. Cochran determines that Hayek was incorrect to abandon his criticism of price stabilization policy in the 1970s. The abstract of the article reads as follows:
ABSTRACT: Hayek’s writings on business cycle theory; the seminal work of the 1930s and 1940s and the modifications he made in the 1970s after he received the Nobel Prize, are useful starting points for understanding the cycle phenomena in the U.S. between 1995 and the present. Hayek in the 1970s abandoned his earlier condemnation of price stabilization as a goal of monetary policy. In his judgment, such a policy might be the best that could be achieved under existing monetary arrangements, and the misdirection of production resulting from such a policy would be minimal. A careful review of the writings, lectures, and interviews by Hayek in this period show that Hayek did not abandon, but consistently retained the basic elements of his “monetary theory of the trade cycle.” The period clearly exhibits a pattern of production over time consistent with the pattern predictions of Austrian business cycle theory, especially as extended by Garrison (and others). The severity of the recent crisis reinforces Hayek’s call for a significant reform of monetary institutions, a denationalization of money, to better prevent future monetary shock caused boom-busts. The current crisis illustrates that Hayek was premature in his assessment that the effects of money creation intended to keep prices stable [inflation targeting] in a growing economy would have impacts on the structure of production “too small to worry about.” Further work, both theoretical and historical, needs to be done to assess his 1970s claim that a monetary authority needs significant discretion in time of crisis to prevent a secondary deflation.

Wednesday, December 7, 2011

Krugman's Intellectual History is Found Wanting Again

There has been much notice on Paul Krugman's dismissal of the importance of the work of F. A. Hayek in macroeconomics. Excellent responses can by found by Peter Klein and Robert Wenzel

When I read of Krugman's non-dealing with Hayek I was reminded of Ronald Reagan's favorite quip against Jimmy Carter in their presidential debate, "Well, there you go again."  The first piece of writing by Krugman I ever read was a column by Krugman, written for Fortune magazine. That was back in 1998 and the piece was "Why Aren't We All Keynesians Yet?" In the piece, Krugman not surprisingly sings the praises of Keynes essentially for being the great prophet and founder of macroeconomics.

Back then, referring to Keynes, he said,
But however eventful his resume, only one item on it really matters: his 1936 publication of The General Theory of Employment, Interest, and Money, which was to depression economics what The Origin of Species was to biology. Before the General Theory, economists could not explain how depressions happen or what to do about them. (I've tried going through the pre-Keynesian business-cycle literature; it's a vast wasteland.) After 1936, they could.
Of course, part of the "vast wasteland" of pre-Keynes business-cycle literature included the work of Hayek. I wrote a letter the the editor of Fortune, which they never published. An extended version was, however, published in The Free Market with the title "Keynes the Great?" To get a picture of Krugman's level of scholarship as a historian of thought, I encourage to you read the whole piece. About pre-Keynesian business cycle theory I said the following:
Additionally, Krugman's claims regarding Keynes' General Theory are repeatedly in error. Krugman states that he "tried going through the pre-Keynesian business-cycle literature" and found it to be "a vast wasteland." If he did, he did not try hard enough. In 1912, Austrian economist Ludwig von Mises's The Theory of Money and Credit, was published. Among other things, Mises did explain, more coherently and correctly than Keynes did, why depressions occur and what should be done about about them.

Keynes cited "insufficient aggregate demand" stemming from unstable business investment as the cause of depression. He offered no explanation for why an economy should suddenly experience insufficient aggregate demand. Mises, on the other hand, explained that the business cycle is due to credit expansion stimulated by the central banking authority. Such expansion lowers the interest rate below the market rate, encouraging investment that will not be met by future demand. Such investments are bound to fail. The only way back to economic prosperity is to allow market forces to liquidate unwise investments. Further credit injections will only start the process over again.

Keynes wrote a generally favorable review of Mises's book but criticized it for being unoriginal. He later admitted that he could not understand German well enough to understand original ideas. Such was the integrity of Mr. Keynes.

Mises followed his first great work with two monographs and an article in 1923, 1928, and 1931, respectively, that more fully described the cause and nature of, and the remedy for, economic crises. In 1931 his student F.A. Hayek published his Prices and Production outlining and developing Mises's theory. Hayek then followed in 1941 with The Pure Theory of Capital. Hayek's contributions to Krugman's "vast waste-land" were rewarded with a Nobel Prize in economics in 1974.

Tuesday, October 11, 2011

Hoppe on Hayek as Social Democrat

While it is not uncommon for members of the media to classify F. A. Hayek as a classical liberal, Hans-Hermann begs to differ. In his recent article "Why Mises (and not Hayek)?" he seeks to explain why Hayek receives so much attention as a free market thinking while Mises receives very little. As Hoppe sees it:
My thesis is essentially the same one also advanced by my friend Ralph Raico: Hayek is not a classical liberal at all, or a "Radikalliberaler" as the NZZ, as usual clueless, has just recently referred to him. Hayek is actually a moderate social democrat, and since we live in the age of social democracy, this makes him a "respectable" and "responsible" scholar. Hayek, as you may recall, dedicated his Road to Serfdom to "the socialists in all parties." And the socialists in all parties now pay him back in using Hayek to present themselves as "liberals."
Anything written by Hoppe is worth considering and this provocative piece is no exception.