Biblical Foundations of Economics

As noted previously, I am lecturing at the Institute for Principles Studies' Civics Summit that starts today. My first lecture is on "The Biblical Principles of Economics." This is not a lecture of "dos and don'ts" but rather an explanation of the relationship between Biblical doctrine and economic law.

I explain how the Scriptural doctrine of general revelation and the cultural mandate provides an ultimate purpose for economics. I also outline how the fact that God created the universe with natural regularities and created man as a rational actor implies that there are natural economic laws we are able to discover. In fact, Christian Anthropology is crucial for a proper understanding of economics. Because man is being gifted with volition and purposeful behavior, we must beware following the siren songs of historicism, positivism, and mathematical modeling, if we want to pursue economic truth. Finally, we do want to recognize that sound policy analysis requires taking account of the Christian ethic of private property.

If you are unable to attend this year's Civics Summit, but would like to explore these ideas in more detail, I humbly recommend my book Foundations of Economics.

Bernanke Is Flexible on How Much to Hamper the Market

Ben Bernanke yesterday told Congress that he had no set time table about when to increase or decrease its bond purchases. What that means is that the FED remains untethered by sound economics as it seeks to promote economic recovery. Of course, Bernanke is not completely  flexible. He would never, for example, argue for a gold standard or for ceasing and desisting open market operations. On the contrary, given the FED deflation phobia, Bernanke's statement implies more of the same: an inflated monetary base, money pumping, and the audacious hope that massive excess reserves can be unwound without making price inflation worse or interest rates seriously increase.

What needs to happen, of course, is what I told the Sound Money Institute: Drastically cut government spending, reduce regulation, including Obamacare, stop subsidizing financial  institutions, stop inflating, and allow market participants to sort out which assets are productive and which are not, so they can be directed toward their most valued use, as determined by people in society.

Stunning Analysis from Time!

Stunning for its insight that is. With the exception of the all-too-common equating spending with consumption and not spending with saving, Rana Foroohar gets it just about right.

In a nice post noting the importance of saving for economic progress, Foroohar highlights several points that bear repeating. Namely that low savings are correlated with low investment and growth and can inhibit risk-taking. This is because all investment, research and development and entrepreneurial activity are all funded by savings.

As Foroohar explains:

Consumer spending today may bolster the economy in the short term, but it can actually cut into growth over the long haul if it depletes funds available for investment in the economy. Individuals’ savings, deposited in banks or poured into asset markets, gets funneled back into the economy via loans and capital purchases that allow companies to grow and expand and hopefully to hire better skilled workers, ultimately increasing GDP growth.

I would also note that, unfortunately, Foroohar still remains somewhat captivated by the modern macro view of the social economy. The last phrase in the preceding paragraph reveals a common fallacy of equating GDP with the economy. More important that increasing GDP growth is the fact that economic expansion funded by actual savings is sustainable, real prosperity, not merely a paper increase in official GDP.

Economics Matters

. . .for social stability. If you do not believe that, you should ask Egypt's former President Morsi. As Steve H. Hanke explains Morsi never had a consistent and sustainable economic policy which therefore resulted in recession, unemployment, and social disintegration. Bad economic policy necessarily hampers the market economy, constraining the division of labor and inducing relative poverty.

As Ludwig von Mises often noted, the fundamental social phenomenon is the division of labor. In his mind, it was one of the important things that distinguishes us from the animals.

It is by virtue of the division of labor that man is distinguished from the animals. It is the division of labor that has made feeble man, far inferior to most animals in physical strength, the lord of the earth and the creator of the marvels of technology (Liberalism, p. 18).

In fact the rise and maintenance of civilization is dependent upon the division of labor.

Civilization is a product of leisure and the peace of mind that only the division of labour can make possible (Socialism, p. 271).

As I explain in my book, Foundation of Economics, a functioning, well-developed division of labor requires entrepreneurial coordination so that saved capital is not squandered in wasteful and destructive activity which thereby impoverishes a society. Such successful coordination requires monetary market prices, because such prices alone provide economic decision makers a way of calculating profit and loss in a common unit. The beauty of it all is that free market money prices are not only in a common unit, but the prices themselves are manifestations of subject value. The market price system provides a way for entrepreneurs to make objective decisions about subjective preferences that are demonstrated by action.

When the market price system is hampered, however, by price controls, government largesse, monetary inflation, and economic regulation, the result is relative economic chaos and the inefficiency that follows. It is a short trip from there to political unrest.

Ritenour on Sound Money

I was recently interviewed by F. Peter Brown at the Sound Money Institute on my interest in Austrian economics and my views on our current economic situation and monetary policy. Those interested can read the brief interview by clicking here.

When asked “What are some other ways the U.S. could get out of its economic problems?” readers of this blog will not be surprised at my answer.

“The steps to do so are simple. Drastically cut government spending, reduce regulation, get rid of Obamacare, and get rid of the idea that there are any firms, including banks, that are “too big to fail.”

Bagus, Howden, and Block on 100% Reserve Banking in a Free Society

Many economists, such as George Selgin and Lawrence White, argue that in a free society with a necessarily free banking system fractional reserve banking would be both legal and efficient. Philipp Bagus, David Howden, and Walter Block have authored a new article that argues otherwise. In in a new article "Deposits, Loans, and Banking: Clarifying the Debate," they make the case that fractional reserve banking would be illegal in a free society.

The article abstract reads as follows:

The relationship between banking deposits and loans is contentious. While the defense of a 100 percent reserve clause to eliminate fractional reserves has commonly been asserted on economic and ethical grounds, Huerta de Soto (2006) arguments are largely ignored. Rozeff (2010) is an example. We show that treating a loan and a deposit interchangeably is impermissible due to both established and a priori legal principles. At best, fractional reserves may be considered an aleatory contract but this is incompatible with the reason individuals hold money—mitigating uncertainty. Deposit and loan contracts are distinct, and may not be contractually melded together.

The Federal Reserve, Income Tax, and More

I will be speaking at the Civics Summit in Modesto, California on July 19th and 20th. The event is hosted by the Institute for Principle Studies. The summit promises

everything you were never taught about government and economics. This year’s special emphasis is on the three significant 1913 policies: the income tax, direct election of senators, the Federal Reserve, and how they changed the century. Learn the fundamental principles of government and economics, and how they apply to these important public policies.

The Institute's president, Mike Winther will be giving several lectures on the nature of government and I will be lecturing on topics such as the Biblical foundations of economics, economic policy, monetary theory and policy, and the income tax and the Federal Reserve after 100 years.

Interested parties can register here.

Unhappy Prospects for Future Fed Chairman

President Obama's recent remarks that Ben Bernanke has spent more time at the FED than he wanted has prompted much speculation about who might be his successor. The folks at Money Morning, have developed a short list of likely candidates, none of them very good. They include Timothy Geithner, Lawrence Summers, Janet Yellen, Christina Romer, and Roger Ferguson. Ferguson I know very little about, but the rest are all Keynesian-style inflationists of one stripe or another. Janet Yellen, who many see as the favorite to win the appointment, is Bernanke-like in her affection for inflation. All of this serves as further evidence that our political elites either do not understand or do not care about sound money and that we should have no confidence that our current set of politicians will be able to make necessary reforms to our current monetary system, back-stopped by the FED. Put not your faith in princes.