Austrian Economics in the WSJ … Again

Monday, June 28, 2010
Posted in category Economics

Russ Roberts of George Mason University has another solid piece in the Wall Street Journal: “Why Friedrich Hayek is Making a Comeback: With the failure of Keynesian stimulus, the late Austrian economist’s ideas on state power and crony capitalism are getting a new hearing.”

This is a nice rundown on Hayek for beginners, and even Mises gets a mention. My only complaint about the article is that Roberts refuses to acknowledge that, yes, centralizing power within the federal government does lead to totalitarianism. Roberts also states, “I don’t know if we’re on the road to serfdom….”, and my response is that we are already well down that road, and it’s ludicrous to say otherwise. But then again, the piece was edited for mainstream eyes that would shudder at this candid confession.

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11 Responses to Austrian Economics in the WSJ … Again

  1. S.M. Oliva says:

    June 28th, 2010 at 8:23 am

    If only GMU Economics could do something about GMU Law…

  2. liberranter says:

    June 28th, 2010 at 12:39 pm

    Roberts also states, “I don’t know if we’re on the road to serfdom….”

    With that single moronic statement, Roberts obliterates any credibility he might ever have had in the eyes of any conscious human being, whether or not they subscribe to Austrian economic theory. Still, as you point out, it’s encouraging to see an academic start to “get it” and even the proverbial stopped clock is right twice a day.

  3. Iluvatar says:

    June 28th, 2010 at 2:19 pm

    I am too much an econ dummy to provide any useful guidance from my part (it is a work in progress).

    However, I can tell you that today’s econ blogs exhibited a level of frustration that I have never seen before. And it isn’t just Austrians, it’s also the Austrian/Post-Keynesians! I can’t speak to the neo-Classicals (Friedman) or Keynesians since I don’t read them. But here is one:

    And while I believe that you must make the losers lose (in a very structured and time-phased way – keep in mind that the toxic “assets” are mongo huge!), I am concerned and confused regarding the full implications of an Austrian technique.

    I am unsure how this would work when we have a Central Bank (the Fed) w/ monopoly control over the world reserve currency & on top of that, the currency system of our fiat is a nonconvertible, floating exchange rate system (e.g., you can’t swap it or “peg” it to gold).

    And now with the completion of the last stimulus, and the recent housing data (33% hit in new home sales), along with our absolute refusal to perform redress to what is a balance sheet recession for Main Street?

    I am thinking this may be a really, really long summer…

  4. clark says:

    June 28th, 2010 at 9:41 pm

    What the heck is an Austrian/Post-Keynesians?

    That’s two groups, not one, right?

  5. Iluvatar says:

    June 29th, 2010 at 12:41 am

    @ clark: Yes & No – this is a partial response; there are key contributors in this area that are a mix; and then there are the latter like Richard Koo, Steven Keen, Bill Mitchell, and Warren Mosler.

    Trust me, these guys will blow your socks off!

    Gold-standard thinking as regards our debt is truly a fear-mongering strategy just to make the gold prices rise – especially in our new reality of debiting/crediting accounts from the Trsy to the Fed accounts.

    But IMHO, I still don’t quite get their arguments although I am beginning to get stock/flow macro consistent models from Mitchell.

    The real surprise is Steve Keen’s Debtwatch #31 which blows my mind away and proves that credit creates money as opposed to the other way around (money creates credit)! In other words, he totally blows away the theory of MMT (money multiplier theory) due to the Fractional Reserve Lending (FRL) policy (if the fractional reserve is 20% then the the money creation is 1/20% = 5 times the original money stock).

    He makes his case in a heuristic manner using Home Equity Loans as an example – wherein credit creates money…

    (He should not be ignored by the Austrians who have been criticized for not having math skills.)

    I am only 1/2 the way through it and am still digesting it.

    But one thing that must be understood is that this country ain’t going broke and becoming insolvent tomorrow! That is irresponsible fear-mongering. And it is quite hurtful to our economy.

    Can we go broke in 10 years? Only if we choose to do so – we own our currency!

    The bigger issue is how to become a good steward to our currency and our debt in the near future.

    And therein lies the key questions in light of the currency system that we live in and the situation that Main Street is in (balance sheet recession due to debt).

    And we need to pay attention to credit, to the degree that Mish does. Trust me, this is a tail that can wag a dog!

    But I am getting a bit frustrated w/ Gary North & the Mogambu Guru in this regard. They have been hollering for hyperinflation due SOLELY to the increase in the money stock w/o realizing that velocity of money matters. And the velocity of money has been about zero.

    So where is the inflation/hyperinflation? Nowhere!

    So, all that QE that allowed the banks to re-capitalize, netted a PRICE inflation that was nil.

    Banks are still broke – they can’t lend b/c they can’t meet capital requirements. And the demand from Main Street is zilch/cipher as well – they are broke too@!

    As Mish points out the banks are not reserve requirement constrained – they are capital constrained. B/c they are STILL flat busted broke that’s WHY!

    That’s why a rinsing of the system both at the Main Street level (through better personal bankruptcy laws), as well as at the corporation level, is still so needed in order to get the correct price adjustments in.

    Man this is frustrating!@

  6. clark says:

    June 29th, 2010 at 1:36 pm

    in·sol·vent [in sólvənt]
    1. bankrupt: unable to pay debts

    2. California and cities who’ve gone broke like the one on Will Grigg’s blog recently.


    The part about the U.S. not going broke, I thought we were past that, for awhile now, we are already broke, yesterday!

    “Gold-standard thinking as regards our debt is truly a fear-mongering strategy just to make the gold prices rise”

    That’s kind of funny, I doubt it.

    “…proves that credit creates money as opposed to the other way around”

    Uhh-hhuh, but that’s Only when things are successful, or corrupt? True only in the Summertime? As long as the bubble is being pumped? Excuse me, I think that’s kind of funny too.

    This may be helpful, money is not real wealth. Try some Frank Shostack?

    Where’s inflation? Maybe you don’t grocery shop or buy gasoline? Nothing I buy has stopped going up in price. Hyperinflation is currently being exported, like a wave in a pool 0- will it come back?

    Lots of bank lending going on in my area.

  7. clark says:

    June 29th, 2010 at 3:03 pm

    And, thanks for answering my question.

    Seems like sheep-wolves?

  8. clark says:

    June 29th, 2010 at 3:37 pm

    Some math in this article from last year:

    How Deflation Is Inflation

    “Let’s squash the debate between deflationalists and hyper-inflationalists. Here follows the math that shows how we get the equivalent effect of price inflation (and skyrocketing gold price) when there is deflation on a debt money standard.”

    In the article, End Game, a gold standard can be a scary thing to holders of gold and potential holders of gold… if word got out, would the gold price drop?

    “Gold investors (myself included) are trapped at the end game, and they do not even realize it yet. No physical confiscation is needed to wipeout the gold hoarders. It is much simpler than that.”

  9. Iluvatar says:

    June 30th, 2010 at 11:50 am

    To clark:

    Hey thank-you very much for those links, I scanned them and then bookmarked them for harder scrutiny. Thanks again!

    Wrt to our solvency issues, I was speaking of this article (he claims to be a mix between Austrian/keynesion (and I think Post-Keynesian since he refers to Bill Mitchell and Warren Mosler frequently):

    There is (apparently, I am still trying to figure this out) a real difference between pegged vs. non-convertible currency systems that changes the game (somehow). There is at least a new degree of freedom allowed by the latter system. I am still studying the systems and the problems that led to our closing the gold window in `71 (when the Bretton Woods agreement was dropped). Doesn’t mean I agree, just means I want to (better?) understand.

    But if you look at the short term Trsy’s, you can see that we are not in an inflationary period – yet. Bid to cover ratios are well above unity (~3.2 in last one).

    Now to answer your question on how credit creates money, you can find it here (it is a bit dense):

    I think the only point that I am trying to make here, is that maybe some of our prior thoughts about money (e.g., MMT/FRBS/FRL) are not quite complete and could make use of augmentations? Mebbe, just mebbe it is a mix of both types of events?

    And maybe this matters in terms of determining best strategies for solving this economic crisis?

    Maybe the best mix of strategy is a combined (modified) Austrian/Post-Keynesian approach? (And remember, that was an interrogative, NOT a declarative…)

  10. Iluvatar says:

    June 30th, 2010 at 12:05 pm

    Oh clark, I am sorry; I missed your last question there! My apologies.

    Yes we have indeed seen (price) inflation in certain areas (food, ~gas (went up then came down too though)).

    But we have also seen asset classes (housing) and commodities (corn, lumber) some crashing down.

    Furthermore, there is a huge housing inventory glut (+ a huge shadow inventory behind it), the manufacturing capacity utilization is showing 40-60% of capacity (lots of margin), unemployment is high, Trsy’s rates are in the bowels, the ECRI indicator has gone further south than it has ever been before, and the Baltic Dry Index (BDI) rolled over (some months ago?) despite a recent surge in rail tonnage (sensitive to inventory “bare shelf” distortions).

    It is those signals that lead to most econ blogs calling it a deflationary period.

    You know? I hate these back-forth arguments between these blogs on what inflation/deflation is?

    Why not just define something we can all agree on? Example” (monetary) inflation is an increase in the money stock (like QE), (price) inflation is an observed cost increase in consumer goods (like food!), (commodity) inflation is a measured increase in a basket of commodities (sweet crude, corn, lumber, and maybe PMs although they maybe should have there own category?).

    Something like that p’haps? Worth a thought…

  11. Iluvatar says:

    June 30th, 2010 at 12:50 pm

    To clark:

    Check this out – deflation definition and role of credit:

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