By J.D. Seagraves, on January 14th, 2009
To partisans of the Austrian theory of the business cycle, the cause of the current financial crisis is as plain as day — and that’s why we’ve been predicting it for years. You would think that the neo-Keynesians, monetarists, and Marxists who made fun of us Austrians in 2006 and 2007, and said we’d never have a housing meltdown and financial crisis exactly like the one we’re having now, would come over to our way of thinking — or at least acknowledge that we were right in this one case. But instead, they continue to make fun of us and deride the gold standard as “quackery.” Have they no shame?
Apparently not. And it shouldn’t be surprising. After all, followers of non-Austrian schools are practitioners of non-reality based economics. To them, economics is a religious faith. Since everything is make-believe, they can just pretend that the Austrian school didn’t predict this crisis years ago and that they weren’t poo-pooing those predictions. They can pretend that the Phillips Curve has validity and that stagflation is impossible. They can even delude themselves into thinking that Herbert Hoover was a laissez-faire “do-nothing” and FDR’s New Deal “got us out of the Depression” — or worse yet, that war is good for the economy!
Believing in any of these bogus ideas is akin to medieval doctors practicing the humoural theory of medicine. It was the official doctrine of the church, and therefore, it was accepted even when it was clearly false. Today, the state has replaced the church and Keynesianism is the official state religion.
Why don’t more economists recognize the reality staring them in the face? Well, for one, they’re educated in government-controlled schools. Only two universities in the entire United States do not accept federal money, and as central banking and fiat money are vital tools of Big Government, little else is going to be taught. What’s more, over 50 percent of professional economists in the United States work for the government, with 32 percent working directly for the feds. How can we expect economists to be objective on the question of central banking when their paychecks are monetized by the Federal Reserve? Heck, a huge share of the world’s economists are employed directly by central banks!
So it’s no surprise that “respected” economists — propagandists, really — are pro-Fed. Only one central-banking critic has ever won the Nobel prize: F.A. Hayek of the Austrian school. The greatest economists of the 20th century — Ludwig von Mises and Murray Rothbard — never got the recognition they deserved. But as the predictions they made continue to come true, one has to wonder how long the general public will maintain its faith in the high-priests of economic voodoo that dominate the economics profession.
By J.D. Seagraves, on October 15th, 2008
On October 13, it was announced that controversial New York Times columnist Paul Krugman had been awarded the “Nobel” prize in economics. Yes, “Nobel” appears in quotes for a reason. That’s because, unlike the other Nobel prizes which were established by inventor and philanthropist Alfred Nobel, the “Nobel” prize in economics was established (and funded) by the Sveriges Riksbank – the Swedish central bank.
Not surprisingly, critics of central banking – such as the great Ludwig von Mises and his protege Murray Rothbard – were never tapped by the selection committee. In fact, in the nearly four decades since the first “Alfred Nobel Memorial Prize for Economics” in 1969, the Swedish central bank has only awarded its top honor to one critic of central banking – Austrian economist Friedrich von Hayek – and he had to share the 1974 award with a Swedish socialist.
That the Swedish central bank awards the “Nobel” prize in economics is not well known, but it’s hardly a secret. Wikipedia states plainly: “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is not a Nobel Prize. However, the nomination process, selection criteria, and awards presentation are conducted in a manner similar to the Nobel Prizes.”
So, if I used a “similar nomination process, selection criteria, and awards presentation,” could I establish my own awards for YouTube videos and call them Oscars? Maybe, if I had the power to create money out of thin air like the Sveriges Riksbank.
But what of Krugman? Does he deserve recognition as a great economist? Not according to the Austrian school. Dr. William L. Anderson, an Austrian who teaches economics at Frostburg State University in Maryland and is an adjunct scholar of the Ludwig von Mises Institute, says Krugman isn’t an economist at all: “Yes, Krugman has a Ph.D. from MIT in economics,” says Anderson, “but his writings, both popular and academic, demonstrate that he does not believe in laws of economics.”
Why does Dr. Anderson feel this way? Well, Krugman is described as an “unreformed Keynesian,” meaning a follower of the economist John Maynard Keynes, whose theories were largely the basis for the massive ramp-up of the U.S. welfare state beginning with the New Deal and lasting through the mid-70s. The problem with Keynes’s theories: they’ve been positively refuted.
For example, Keynesianism teaches there’s a “trade-off” between unemployment and inflation. When there’s low unemployment, says the Keynesian Phillips Curve, there will be high inflation, and vice versa. Therefore, if employment is too high, we can “fix” the problem by expanding the money supply – or so thought Keynes. The problem is that, in response to the gross excesses of the Johnson and Nixon administrations, we had “stagflation” in the late 1970s: high unemployment and high inflation. And we’re likely headed there again, particularly if we follow Krugman’s favored policies.
Krugman is more well known for his criticisms of the Bush administration and Iraq War than for his economics. Bush, of course, deserves as much criticism as any president in history, and the war in Iraq deserves even more. But Krugman, who made his name as a polemicist and now has new gravitas as a “Nobel” Laureate, will likely have a prominent role in the nearly inevitable Obama administration. Sadly, this could make us pine for the good ol’ days of Bush/Cheney.
By Stephan Zimmermann, on October 14th, 2008
At a most appropriate time, Sukrit asks:
What is the difference between the Austrian business cycle theory and monetarism, and which one do you think is a more accurate description of how the economy works?
The first part is fairly easily explained, since much material is written on both. The second part is much more difficult and subjective.
By way of background, the Austrian school is generally based on the economic theories of Ludwig von Mises (1881-1973) and Friedrich A. von Hayek (1899-1992). The latter received the Nobel Prize for economics in 1974.
Monetarism, on the other hand, is primarily based on the seminal works of Dr. Milton Friedman (1912-2006) in the Chicago school who received his Nobel Prize in 1976.
All three economists were avid defenders of freedom and capitalism.
In brief, the Austrian schools’ business cycle theory describes fluctuations in an economy based principally on intervention in the country’s money supply, resulting in inflation or deflation. In turn, this occasions recession or growth. Interference in the money supply is reflected in the level of interest rates and directly affects the level of borrowing in the economy. That level of borrowing reflects “rational economics.” Rather than relying on inductive reasoning, the Austrian school depends on deductive thought and a continuous cycle of business. The cycle, however, is not steadily predictable.
Both schools view monetary theory in the maintenance of full employment, inflation, growth and stability.
However, Milton Friedman elaborated further and suggested that money growth should be limited to a relatively stable increase of roughly three to five percent per annum. This directly contradicts the Keynesian assumption that monetary policy should be demand driven, therefore insinuating a direct political solution.
The quantity of money, then, can reasonably predict the growth of production or inflation in an economy according to Friedman. He did not, however, stipulate the Federal Reserve, often opining that central banks err regularly in their attempts to control money supplies.
The key difference between the two schools is that the Austrian school believes in cycles of business and prefers to adjust its monetary policy accordingly. Friedman, on the hand, believes that adherence to steady monetary growth without constant adjustment creates better results on a macroeconomic basis.
Unfortunately, during the last two decades – and especially during the current crisis – the U.S. Federal Reserve failed to follow Dr. Friedman’s theory of monetary aggregates. Instead of following his prescription of stable growth in the neighborhood of three to five percent per year, money was allowed to fluctuate throughout the period. It reached as much as 19% earlier this year, then slowed rapidly to two percent.
The results were pre-ordained and inevitable. Yet responsibility cannot simply be laid at any one individual’s feet.
Alan Greenspan served as chairman of the Fed from 1987 – 2006. Despite his popularity under four successive presidents, from Reagan to George W.Bush, Greenspan – and now successor Ben Bernanke – is largely blamed for the current worldwide liquidity crisis.
Certainly low cost of money and credit fueled both growth and speculation under his chairmanship. However, unforeseen circumstances like the Savings & Loan crisis, the Enron and WorldCom scandals, the World Trade Center attacks, and finally an administration that fostered the wars in Iraq and Afghanistan were destabilizing influences on Fed policy and contributed heavily to the eventual burst of speculative “bubbles.” Greed and fear were as responsible as government policies.
The main fault of Greenspan’s administration of monetary policy was to focus more on growth and inflation rather than on stability. Instead of bowing to the federal and private sector’s headiness for growth and “easy money,” a strict adherence to Friedman’s guidelines might not have led to the spectacular growth achieved. On the other hand, it might have avoided the excessive borrowing or speculation underlying today’s liquidity crisis.
It is hard to envision the Austrian school’s reliance on business cycles as performing any better than simple adherence to Friedman’s monetary policy recommendation. Even with a hard-asset economic base such as gold, speculation and suspension of convertibility during times of war can result in similar dislocations. See a fuller discussion of potential modern gold standard applications in the analysis by Cato Institute’s Lawrence White.
The trouble with both systems – and with economics in general – is that the theories for stability, growth, inflation, currencies, not to mention social issues, assume a fairly strict adherence to established guidelines and principles.
More honored in the breach rather than the observance, those guidelines or principles of an economic theory all too soon fall prey to the vagaries and convenience of politicians and the public will.
Politicians, of course, are generally more concerned with votes than with the correctness of an applied theory.
This election year is no different. The international liquidity crisis makes it a more difficult one, especially with uninformed, acrimonious candidates and an electorate bathed in ignorance and fear. The class division engendered by the euphemisms of “Main Street” versus “Wall Street” would cause a devout Communist to smile with delight! Unfortunately, it reluctantly calls into question the very principle of freedom and democracy, its costs, and its responsibilities.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. Read his full bio at and submit your economics-related questions to his post “Got an Economics Question?”
By J.D. Seagraves, on September 24th, 2008
To the surprise of most observers, Ron Paul – who claimed he would stay neutral between the presidential candidates of the Constitution and Libertarian parties – endorsed the Constitution Party’s Chuck Baldwin in a blog post made on September 22. Baldwin acknowledged and accepted the endorsement the following day.
Paul, whose candidacy brought together people from diverse ideological backgrounds, is taking a lot of heat for endorsing a man who cites the divisive Jerry Falwell as a hero and mentor. However, where Paul and Baldwin differ most greatly is on the issue of international trade – a subject of particular interest to economics buffs.
Ron Paul, love him or hate him, is one of the world’s most prominent advocates for pure laissez-faire. In fact, many supposed capitalists think Paul goes too far, so it’s important to note that in opposing NAFTA, the WTO, and other “free trade” deals, Paul does so because they put too many rules and regulations on trade.
Baldwin and other right-wing populists – as well as many left-liberals – oppose NAFTA because they’re against international trade. They are protectionists, and as such, they believe in “protecting American jobs.” Paul thinks the best way to create jobs is through real free trade – the exact opposite position.
The Constitution Party’s platform calls for tariffs on all foreign imports to cancel out any price advantages. Baldwin says he favors a 10% across the board tariff on all foreign imports. Ron Paul says that tariffs are “simply taxes on consumers” that “protect politically-favored special interests…while lowering wages across the economy as a whole.”
Baldwin and Paul could not possibly be more different!
You might say, “Yeah, but this is just one issue. Free trade isn’t really that big of a deal, is it?” Well, Ron Paul is a long-time student of the Austrian school of economics, and as a fellow adherent, I’d say that devotion to free trade is perhaps the defining issue – as big as abortion is to Republicans and Democrats.
So why would Ron Paul endorse a candidate who goes against him on a core issue? There are three reasons:
- The Libertarian candidate, Bob Barr, made Paul angry by refusing to participate in the press conference he set up for the four leading “alternative” presidential candidates.
- Ron Paul cares deeply about issues of “national sovereignty,” on which he and his good friend Chuck Baldwin are of the same mind.
- There is one other core economic issue of the Austrian school and the Paul campaign: opposition to the Federal Reserve, and on this issue, Baldwin scores.
If asked to sum up Ron Paul’s campaign in two words, I’d say “anti-war, anti-Fed” (or is that four words?). Baldwin passes that litmus test for Paul, but it’s up to the Congressman’s million-plus followers to decide if Chuck Baldwin makes the grade for them.
By J.D. Seagraves, on September 10th, 2008
Economically speaking, the Democratic and Republican conventions were exercises in massive self-delusion. Barack Obama and his party acolytes bragged about how they would spend money we don’t have (we’re $10 trillion in the hole, by the way), and McCain and the Republicans promised to balance the budget, strengthen the dollar, and close the $70 trillion Medicare/Social Security shortfall, all without a tax hike or fundamental changes to the monetary system.
Yeah, right.
Neither party talked about the Federal Reserve. The “debate,” if it can be called that, is between a top tax rate of 39.5% (Obama) or 35% (McCain). On economic matters, there is considerably more agreement between the two, supposedly competing American political parties than between factions within the Communist Party of China – and the ChiComms are considerably more economically literate, too.
But ten miles down the road from the Republican Party’s Orwellian big-government love fest, Ron Paul’s Rally for the Republic drew more than 10,000 economically educated patriots, who stood and cheered at the mention of the “Austrian theory of the business cycle,” and repeatedly broke out into impromptu chants of “End the Fed!” Imagine asking John McCain what he thought of the Austrian theory – “we might as well be speaking Chinese,” said author and historian Thomas Woods.
The speakers at Ron Paul’s Rally were a little more diverse than those at the GOP’s official convention, from which Paul – a Republican congressman – was banned. There were arch-conservatives such as Howard Phillips, the founder of Constitution Party, and John McManus, president of the John Birch Society; there were “paleolibertarians” such as Lew Rockwell and the aforementioned Thomas Woods, both of the Ludwig von Mises Institute; and there were fairly mainstream Republicans, such as former New Mexico Governor Gary Johnson and a pair of former Reagan aides, who have come to believe that their party has been hijacked by a dangerous cabal known as the neocons. Oh, and there was the unpigeonholeable Jesse “The Mind” Ventura, who railed against the two-party system for giving us our national debt and also floated some questions about 9/11.
Yes, it was a bit of a motley crew assembled in St. Paul, but that’s what’s great about America: it’s not the land of the lame and home of the homogeneous but the land and home of the free and brave. The conformist conventions of the duopoly, with all of their rules and restrictions, represent an America I don’t want to visit, let alone live in. But if you want diversity, look to the Ron Paul movement: there are pro-lifers and pro-choicers. There are Christian fundamentalists and gay-rights activists. There are border hawks and free-immigration libertarians.
What the heck could unite all these people?
The answer: a sound understanding of economic reality. The Paul crowd is not agitating for an income tax of 35% or even 25% but zero percent. Why? Because they know that the power to tax is the power to destroy. And they don’t pay lip service to “strengthening the dollar” without specific proposals; they know what must be done: the Fed must go the way of Enron, for it is just as corrupt and infinitely more destructive; and gold must be restored to its proper status as monetary base.
Sure, there are “mainstream” economists who would debate these radical proposals. But at the Democratic and Republican national conventions, there was no debate. Four and a half percentage points cannot possibly distinguish a “conservative” from a “liberal” if those terms are to have any meaning. And that the banking and currency system of the U.S. is above reproach – even in light of the recent bubbles, busts, and bailouts – is a black mark against American “democracy.”
A hundred years ago, the people of America were smart enough to debate economic issues. William Jennings Bryan built an entire presidential campaign on silver coinage. The Rally for the Republic showed the American people are still smart enough to consider issues of money and banking.
By J.D. Seagraves, on July 16th, 2008
Since I wrote my most recent article about the economic and fiscal views of the “third-party” presidential candidates – Ralph Nader, Cynthia McKinney, Chuck Baldwin, and Bob Barr – I thought I’d use my blog to highlight a U.S. Senate candidate with an Austrian economics-friendly platform. His name is Scotty Boman, and he’s a Libertarian from Michigan.
Boman’s issues page is divided into three categories: Peace, Liberty, and Prosperity. This triumvirate of topics will be familiar to fans of Ron Paul, the most famous popularizer of Austrian economics of all time, and that’s because Scotty Boman was a grassroots leader of the Ron Paul campaign in Michigan. In fact, Boman voted for Paul not only in 2008 but also in 1988 when Paul was the Libertarian Party’s nominee for president.
Since this is an economics blog, I’m concerned here with the candidate’s views on “Prosperity.” On the downside, Scotty doesn’t paint a very rosy picture when discussing the Federal Reserve System, the income tax, and Social Security. This is a common knock against Austrians, who are often said to be even more pessimistic than Communists! But hey, we see the direction the U.S. is headed, and we refuse to put on the rose-colored glasses. Sorry!
Boman points out that the U.S. dollar has lost 95% of its value since the 1913 debut of the income tax and Federal Reserve System. Of the income tax, he says he supports “repealing it and replacing it with nothing” and makes a mostly moralistic argument against taxation in general. While I agree, the view has little to do with economics. Boman’s views on the Fed are more suitable for discussion here.
Boman says the Federal Reserve System has been “absolutely ruinous” to our country. He points out the ridiculousness – so eagerly regurgitated by the financial media – that the Fed exists to “combat inflation” when, in reality, only the Fed can cause inflation in the first place!
“They do this by expanding the money supply. Each time the Fed creates new money, it diminishes the value of your dollar-based financial holdings. It thus imposes a hidden tax – the ‘inflation tax’ – and redistributes wealth from the poor and working class to the rich and politically connected.”
This is a hardcore Austrian view in line with the “principled populism” of Dr. Murray Rothbard.
As for a solution, Boman supports the revolutionary idea of free market competing currencies. This would take the power of determining “what is money” out of the hands of the government and put it into the hands of the people. The core of this philosophy rests on the Austrian “Theory on the Origin of Money,” which states that money arose naturally as the most commonly accepted means of exchange during the course of prehistoric barter. Gold and silver became “money” for a variety of reasons but basically because they were widely accepted and easily transportable. Once you see that the government doesn’t need to declare anything money, that the free market can do that, then the Federal Reserve System’s theft is demystified. You can see the Man Behind the Curtain and find out that the Emperor has no clothes. It’s not a pretty sight.
Of Social Security, Boman’s solution isn’t nearly as well defined. He basically throws his hands up in the air and admits there is no good solution, or at least, he doesn’t have one. This is refreshing from a politician. But he does offer one reform: make Social Security voluntary and allow young people to opt out. I know I would.
Author’s note: Since writing this article, I have become involved with the Boman08 campaign.
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