Live Stream with That Guy T

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This week I have been attending the ‘Mises University’ summer programme, the Mises Institute’s week-long crash course in Austrian Economics, for the second year in a row. It’s always an incredibly fun and intense week of learning, which brings together around 150 students each year from all over the world, and teaches them more economics in one week than most of them have learned in years of university study.

For more info about attending MisesU in future years, as well as about other Mises Institute events, follow this link: https://mises.org/events

One of my fellow MisesU attendees this year is Taleed Brown, better known as ‘That Guy T‘, an infamous libertarian/alt-right social media personality, whose YouTube channel has over 100,000 subscribers. Last night, he invited Tho Bishop, the Mises Institute’s social media director, and me to do a YouTube live stream with him, to talk about the importance of the Mises Institute, as well as other more general topics.

There were a lot of questions about immigration and… *sigh* “ethno-states”, as well as other ultra-edgy alt-right topics which are apparently of considerably greater interest to Taleed’s audience than they are to me. But we managed to get a few bits of economics in there too, as well as raising some very generous donations to the Mises Institute, so that’s what matters.

If you’re interested in watching, I’m attaching the recording of the stream below.

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Anarchists for Elizabeth? A follow-up

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Yesterday I published an article on Mises.org defending the Queen from the misinformed faux-outrage of British leftists, who have recently been complaining about the pay rise she will enjoy next year. I argued that it was wrong to view the Queen’s income as a form of welfare from taxpayers’ money, as she is actually paid from the profits of the land she owns, known as ‘the Crown Estate’. I further argued that the world would be a better place from a libertarian perspective if she used her power to veto laws by ‘withholding the royal assent’ more frequently.

However, I then went on to claim that the Queen was a hero of liberty for having vetoed a few laws and that she was a victim of state oppression because the profits from her £12 billion worth of land go to the Treasury before she gets her 15% cut. I then finished the article by demanding that all principled libertarians should join me in an impassioned “God save the Queen”.

These latter remarks were obviously tongue-in-cheek, as was the article in general, a fact that should have been clear from the accompanying picture of a monarch posing in front of an anarchist flag. The not-entirely-serious nature of the article would have been made even more obvious had it been entitled ‘Why Anarchists should Support the Queen‘ as I had initially hoped. However, the editor decided to run it under the less obviously humorous title ‘For Libertarians, The British Monarchy is the Least of our Worries‘ in order to broaden the appeal, which threw people off the fact that it was intended as something of a joke. The irony was even further lost after the article was later shared under the title ‘A Libertarian Defence of the British Monarchy‘.

An increasing number of readers who completely missed the joke began leaving angery comments on the article, accusing me of being an idiot, the Mises Institute of being neo-feudalist sellouts, and so on. Such humourless people can be expected to come out of the woodwork whenever anything is posted on the internet, and it was abundantly clear that many of them had not read the article to begin with, so for me to waste my energy trying to persuade them of my opinion would be folly.

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However, there was a second group of commenters who had clearly read the article and agreed with it for the most part, but who kept making the same objection. Their comments tended to go along these lines: “Given that the Crown lands came into the possession of the monarchy unjustly, how can you lament that the Queen suffers from state encroachment into her property? Shouldn’t we take all her land away from her, seeing as it’s unjustly acquired?”

Putting aside the ironic aspects of my original article, I actually tend to agree with this objection. To the extent that the Crown lands were acquired by conquest and coercion by the state, mostly after the invasion by William the Conqueror, it is true to say that the monarchy acquired them unjustly. However, even if we assume for the sake of argument that all the lands the Queen currently owns were originally acquired unjustly by previous monarchs during previous centuries, does this mean that the Queen’s ownership of them now is unjust? I don’t believe that logic necessarily follows, and to explain why it will be helpful to engage in a thought experiment.

What would happen to the Queen’s land under a Rothbardian legal system?

In his book The Ethics of Liberty (1982), the great Austrian economist and anarcho-capitalist philosopher Murray N. Rothbard devoted a considerable number of pages to explaining how just property claims would be preserved and distinguished from unjust property claims in a legal system based on the Non-Aggression Principle: the central moral precept of libertarianism. For example, Rothbard outlines a scenario wherein his NAP-based propertarian legal system would have to determine what would happen to a person, A, who inherited a piece of property from B which, unbeknownst to A, had been stolen by B from its previous owner, C. A has done nothing wrong in this scenario, but how would an NAP based legal system deal with this?

We can apply Rothbard’s solution to this problem to our own issue with the Queen and the Crown lands. Let’s assume for ease of argument that all of the Crown lands that the Queen now owns were acquired for the Crown unjustly by William the Conqueror, 1000 years ago. How would the NAP based legal system solve this problem, according to Rothbard?

Let’s say that Mr. Jones believes that a given parcel of the Queen’s land once belonged to his ancestor 1000 years ago and would belong to him now if it hadn’t been unjustly expropriated by William the Conqueror, and then eventually passed down through inheritance to the Queen. Mr. Jones would therefore take the Queen to the NAP-based court, alleging that she is in possession of stolen goods which rightfully belong to him. Firstly the court would have to determine whether the parcel of land really had been acquired unjustly by William the Conqueror. Assuming that they did determine this, it would therefore be assumed that the Queen’s claim to ownership of the property was unjust, and her claim to the property would no longer be legally recognised or upheld. Then it would be the prerogative of Mr. Jones to prove in the court that the property right in the land was rightfully his. If he was capable of doing this, the land would become his, and would therefore have been restored to its rightful owner. However, in the specific case of the Crown lands, there is an unusually long distance of time between the original expropriation and the present day, making it extremely unlikely that Mr. Jones, or anyone else, would be able to prove in court that they were the rightful owner of the property. If neither Mr. Jones nor the Queen is deemed to have a right of property in the land, then the court would declare the land unowned. The unowned land would then become the property of whoever first homesteaded it by mixing their labour with it; in other words, the person who was using the land most recently, the Queen. Therefore a libertarian, propertarian legal system would most likely determine that the Queen is indeed the just owner of most of the Crown lands, given that the original expropriation was so far back in history that it would be impossible to restore the land to the heirs of its rightful owners, meaning that the Queen has technically homesteaded it from an effectively unowned state.

Therefore, just because the monarchy first acquired the Crown lands unjustly, hundreds of years ago, it does not necessarily follow that the Queen is not the rightful owner of that land today. Assuming that she is the rightful owner of at least part of the Crown lands, it cannot therefore be argued from a libertarian perspective that she deserves to have the land taken away from her or out of her full control.

So in conclusion, upon further impartial investigation into this matter, I have determined that I was right all along, and everyone else is a idiot.

God save the Queen!

 

My Successful Mises Fellowship Proposal

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This summer I have had the privilege of spending two months at the Mises Institute as a Fellow in Residence. The Institute’s Fellowship programme offers the opportunity for independent study and research, along with access to the Institute’s libraries and on-site academics, to around a dozen students each year, allowing them to either work on a chapter for their dissertation, an article for an academic journal, or some other such thing.

Most of the Fellows this year are Masters, PhD, and post-doc students in their 20s to early-30s, although admittance to the Fellowship programme is by no means exclusive to this age range, and I myself am a mere second-year undergraduate. I am currently around half way through my time at the Institute for 2017, which is the first time I’ve been a Fellow here, and it’s been the absolute time of my life; I’ve already made some great friends and wonderful memories, aside from getting some seriously good work done and improving my CV all at the same time.

However, when I was going through the application process a few months ago, I would have been grateful to have had a better idea of what sort of thing they were looking for in a successful application, as I hadn’t applied to this sort of thing before.

For anyone else out there who’s thinking about applying, but would feel more certain of their application if they were able to see a successful one first, I am including my research proposal for this year below, which formed the biggest part of my application. Obviously you won’t get far by simply copying my proposal, but it should at least help to give you an idea of the sort of thing they’re looking for in a successful application.

For more info about the Mises Institute’s summer Fellowship programme, go to https://mises.org/about-mises/fellowships

 


 

George Pickering

Mises Institute Fellowship in Residence 2017 Research Proposal

Competing views on the Origin of Money: A Critical Review of the Literature since Menger

I am applying for this 2017 Fellowship in Residence at the Mises Institute in the hope of conducting research on the topic of the origin of money; specifically on whether and to what extent the Mengerian/Austrian explanation of this topic could be complemented by, or is incompatible with, subsequent theories. My aim is not necessarily to conduct a comprehensive review of the literature, but rather to consider the major competing theories which have appeared since Menger’s On the Origin of Money, and assess the extent to which they are or are not compatible with Menger’s conclusions and methodology. While Menger’s explanation demonstrated that state intervention is not necessary in order for money to originate, I feel that an assessment of subsequent ‘State Theories’ of the origins of money might allow for a more full theoretical explanation of the process by which monies develop in cases when states do intervene. In particular, I am interested to consider the possible distortive effects of the institution of taxation on this process, a topic which I feel has not yet been fully explored in pre-existing Austrian literature on the origins of money.

In order to assess the compatibility of subsequent theories with the Mengerian/Austrian explanation, I intend to primarily use Menger’s own deductive methodology, (except, of course, in cases when comment is required on questionable empirical points raised by other authors.) I feel that this is an important and worthwhile topic of research not only due to the great importance of the concept of money to the study of economics, but also due to the ongoing significance of the economic forces which Menger identified as having led to the development of money. Menger’s explanation of the origins of money is not framed as a historical account of a series of events which took place by happenstance, but rather as a description of how still existing characteristics of human action could logically be expected to lead to the development of monies. As Menger’s himself stressed, inquiry into this topic is essential to a proper understanding of “not only the origin but also the nature of money” (Menger 2009, p.18). Indeed, a proper understanding of the origin of money is not only necessary to understand monetary history, but also to understand the forces still influencing monies and their related institutions in the present.

 

Annotated Bibliography

While the number of citations will undoubtedly increase before the paper is completed, the list included here is intended to present a selection of those sources which will be most central to the argument I anticipate making, either as key selections from the literature under review, or as important supporting documents. For this reason, I have grouped them here in a way that relates to their places in the structure of the paper, rather than listing them alphabetically.

i) Menger’s Theory of the Origin of Money:

I intend to begin by presenting the theory of the origin of money out of barter, as laid out by Menger (2009). Due to the central place of Menger’s explanation in the framework of Austrian economics, not to mention its early date and great influence on later theories of the origins of money, I plan to consider these subsequent theories in the context of how far they are compatible with or contrary to Menger’s explanation and methodology. The later adumbrations of Menger’s explanation by Mises (1998 and 2009) and Rothbard (2009), will be considered as complements to Menger’s theory, particularly given the development of the terminology surrounding this field by Mises (2009). Luther (2014) and Latzer and Schmitz (2002) will be used to provide context to Menger’s explanation, both in terms of its consistency with Menger’s methodology, and by highlighting a selection of its subsequent iterations and extensions.

  • Menger, Carl. [1892] 2009. On the Origin of Money. Auburn, Ala.: Ludwig von Mises Institute
  • Mises, Ludwig von. [1949] 1998. Human Action: A Treatise on Economics, The Scholar’s Edition. Auburn, Ala.: Ludwig von Mises Institute
  • ——. [1912] 2009. The Theory of Money and Credit. Auburn, Ala.: Ludwig von Mises Institute
  • Rothbard, Murray N. 2009. Man, Economy, and State with Power and Market, Scholar’s Edition, second edition. Auburn, Ala.: Ludwig von Mises Institute
  • Sennholz, Hans. 1992. “The Monetary Writings of Carl Menger”. in The Gold Standard: Perspectives in the Austrian School. edited by Llewellyn H. Rockwell Jr. Auburn, Ala: Ludwig von Mises Institute
  • Luther, William J., 2014. Preface to On the Origins of Money by Carl Menger, Available at SSRN: https://ssrn.com/abstract=2446645
  • Latzer, Michael, and Stefan W. Schmitz. ed. 2002. Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money, Edward Elgar Publishing Ltd

 

ii) The State Theory of Money:

Having outlined the Mengerian/Austrian explanation of the origin of money, I plan to contrast it with literature which emphasises the role of the state in that process. As well as addressing the theories presented in the literature, I hope to consider whether and to what extent the existing, non-Austrian descriptions of the influence of the state on the development of money might complement the Austrian theory. To the extent that the ‘State Theories’ can provide insights into how state action can influence the development of monies, while still accepting that Menger’s theory correctly describes characteristics of human action which propel that process, the question then arises of which of those two forces tends to exert the greater influence, and whether that is a matter for theoretical or empirical enquiry. Furthermore, how much can be said from a theoretical perspective about the necessary outcomes of state intervention per se, into the process of the development of a monetary commodity out of media of exchange, or is this an empirical question dependent upon the specifics of each given intervention? The literature on this subject is naturally extensive, but I anticipate that the history of these ideas presented by Wray (2014) will provide a very valuable aid in the writing of this section.

  • Knapp, George Friedrich. 1924. The State Theory of Money. London: Macmillan & Company Limited
  • Lerner, Abba P., 1947. Money as a Creature of the State. The American Economic Review, Vol. 37, No. 2
  • Desan, Christine A., 2013. Creation Stories: Myths About the Origins of Money. Harvard Public Law Working Paper No. 13-20.
  • ——. 2014. Making Money: Coin Currency and the Coming of Capitalism. Oxford University Press
  • Wray, L. Randall. 2014. From the State Theory of Money to Modern Monetary Theory: An Alternative to Economic Orthodoxy. Levy Economics Institute of Bard College. Working Paper No.792

 

iii) The Effect of Taxation on the development of a Money out of Media of Exchange

During my assessment of the state theories of the origins of money, I am particularly interested to consider the influence of the institution of taxation, when introduced to the chain of events described in Menger’s theory. It is true to say that the economic forces described in Menger’s framework are logically sufficient to explain the development of monies (i.e. generally accepted media of exchange). However, given that states stand to benefit by restricting the number of commodities accepted in payment of taxation, they can thus be expected to accelerate and influence the process by which a single money eventually develops out of media of exchange. This is so because, if a state stipulates that taxation must be paid in a particular commodity, citizens who expect they will be forced to pay those taxes will tend to wish to acquire that commodity more strongly than would otherwise be the case. To the extent that this increases the valuation of that commodity by a large part of the population within that state’s borders, and therefore makes that commodity more saleable, the desirability of using that commodity as a medium of exchange would also increase, other things being equal. For this reason, the institution of taxation can be expected to distort the process by which a money develops out of media of exchange, away from what would have taken place if that process had developed along exclusively Mengerian lines. The selection of chartalist literature outlined by Wray (2014) could provide valuable insights into the impacts on the development of money when states restrict the number of commodities accepted in payment of taxation. Furthermore, Tilly (1982) provides an interesting illustration of the process by which taxation likely developed in early societies, through the nature of coercion and obligation.

  • Tilly, Charles. 1982. Warmaking and Statemaking as Organized Crime. University of Michigan CRSO Working Paper No.256

 

iv) The Credit Theory of Money:

I also hope to consider a range of theories which emphasise the importance of credit in pre-monetary societies, to the development of money. Wray (2004) collects several interesting contributions to this literature, including by A. Mitchell Innes and Geoffrey W. Gardiner, (as well as chapters relevant to the state theory of money.) However, I am particularly eager to consider the chapter “The Myth of Barter” by Graeber (2011), which directly and forcefully attacks theories such as that of Carl Menger (whom Graeber apparently confuses with Karl Menger, the mathematician). Concerningly, Graeber seems to take issue with the very idea that economists should use hypotheticals or thought experiments in their analysis of this issue, and therefore dismisses descriptions of barter in his opponents’ explanations as “faraway fantasylands” (Graeber 2011, p.25). Given the lengths Graeber goes to in his attempt to dismiss barter theories of the origins of money, it is less clear whether credit theories such as his own would be at all compatible with Menger’s explanation.

  • Wray, L. Randall. ed. 2004. Credit and State Theories of Money. Edward Elgar Publishing Ltd
  • Graeber, David. 2011. Debt: The First 5000 Years. New York: Melville House Publishing
  • Watson, Michael V. Szpindor. “A Cheer for Innes: Incorporating Inter-temporal Barter into Menger’s Account on the Emergence of Money.” Presented to the Austrian Economics Research Conference, March 10-11, 2017. (Due to the very recent date of this paper, I have not yet been afforded the opportunity to fully consider how closely it will relate to my own line of inquiry. However, I suspect that my work on this topic will be benefitted by an assessment of Watson’s insights.)

 

Other sources of interest:

  • Galbraith, John Kenneth. 1975. Money: Whence it came, where it went. London: André Deutsch Limited

While it does not necessarily present a systematic theoretical explanation of the causes of the development of money, Galbraith’s work nevertheless provides an interesting account of the history of the development of money.

 

Conclusion

While Menger’s pathbreaking work brilliantly demonstrated that state intervention is not necessary in order for money to originate, he himself nevertheless recognised the distortive influence which “state recognition and state regulation” (Menger 2009, p.51) could have on the process by which monies develop. I feel that a sound assessment of the competing theories of the origins of money since Menger, particularly of the extent to which they are compatible with the praxeological method, could prove to be a valuable resource in the development of a theoretical explanation of the impacts of state intervention on the origins of money. Not only would such an explanation expand the scope of sound, Austrian economic theory, but it would also provide valuable insights into the nature of the forces which still influence the monetary landscape of the world today. In the event that I am fortunate enough to be offered the opportunity to pursue this topic as a Fellow in Residence at the Mises Institute, it is my hope that the resultant research might go some way toward developing a better understanding of this important topic.

Could the Next Crash Happen This Month?

In late August of this year, Federal Reserve chair Janet Yellen began hinting that the Fed might raise interest rates some time in September. Speaking at the annual meeting of central bankers in Jackson Hole, Wyoming, Ms Yellen said that “in light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe that the case for an increase in the federal funds rate has strengthened in recent months.”

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Fed chair Janet Yellen recently hinted that the Fed Funds Rate might be raised in September.

While there was a stock market reaction to the announcement, it was fairly mild, with the S&P 500 falling by just 0.16%. Tellingly however, the bond market was much more severely hit, with yields on two-year US government bonds rising by 6.8%, and on 10-year US government bonds rising by 3.6%. This speaks to the way in which the easy money policy which the Fed has been pursuing since the last crash, has inflated a bubble in the value of government debt, particularly in the current low-rates climate, where it’s seen as one of the few safe ways to see a return on your savings. (For more about how central banks have been inflating a dangerous government debt bubble, see my recent article for the Mises Institute.)

So why might a Fed rates hike start the next crash? Essentially, the low interest rates, quantitative easing, and general “money-printing” which central banks have been pursuing since the last crash, has allowed investors to bid asset prices higher than they otherwise would have been, and governments to borrow at lower cost. As illustrated by the Austrian Business Cycle Theory, not only does the cheap cost of borrowing enabled by artificially low interest rates allow for the inflation of unsustainable asset bubbles, but it also encourages businesses to borrow money to invest in more risky projects. The problem with this is that it gives the illusion of profitability to projects which would not have appeared profitable if interest rates had been allowed to naturally reflect the state of real resources in the economy.

When a central bank, such as the Federal Reserve, forces interest rates lower than they otherwise would have been, it distorts the signals businesses have available to them, concerning the state of real resources the economy has at its disposal. An artificially low interest rate signals that the economy has more saved up resources than it actually does. This makes certain, long-term investments appear as though they’re going to be profitable, when actually there aren’t enough real resources in the economy to see them all through to completion. Eventually, in order to avoid hyperinflation, the central bank will have to cease its money printing and allow interest rates to rise again, at which point a whole host of these projects across the economy are suddenly revealed to have been unprofitable all along, with the resources invested in them having been wasted. Bankruptcies ensue, and the crash begins.

Furthermore, to illustrate the way in which central bank money printing has created a bubble in the stock market, I have stolen this graph from Lara-Murphy.com, which shows a clear correlation between the rate at which the Fed has been increasing the money supply, and the value of the S&P 500.

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The blue line approximates the total amount of money in the US economy, as controlled by the Fed, and the red line shows the value of the S&P 500.

The graph shows quite a striking correlation. Whenever the Fed has stepped on the gas and ramped up its quantitative easing – such as can be seen here between late-2012 and late-2014 – the stock market has boomed with it, and whenever it has hung fire the stock market has stuttered, as can be seen on the graph in late-2011. The extraordinary thing about this is that throughout almost this entire time period, Fed interest rates were close to 0%. The fact that, even during a time when borrowing was forced to be so cheap, so much of the stock market growth still seems to have been nothing more than a result of inflation, hints at just how little the US economy really has recovered from the Great Recession, even to this day.

A taste of the calamity we have in store for when this bubble finally bursts, was provided in December of 2015, when the Fed raised interest rates for the first time since 2006. Even that interest hike of a mere 0.25%, caused a dramatic downturn in the stock market, as can be seen on the graph above, and widespread speculation in January of this year that we were about to plunge into another recession. The massive downturn caused by such a modest rates hike then, gives an insight into the enormous degree of malinvestment which must be lurking under the surface of the economy, a bubble teetering precariously on the edge of bursting, kept there by low interest rates alone. When the Fed finally does have to raise rates more, and this stock market bubble finally bursts, I suspect that the similar bubbles throughout the economy – government debt, house prices, auto-loans, etc – which will come crashing down with it.

Even the mere suggestion of another possible rates hike has already caused a wobble in the economic house of cards the Fed’s easy money has propped up. The S&P 500 fell by 2.45% on Friday, its biggest decline since the Brexit shock, whilst the Dow Jones Industrial Average fell by 2.13% and the Nasdaq fell by 2.54%. The fact that these key economic indicators were so bludgeoned by even the faintest hint of a rates rise, lays bare the unstable, low rates fuelled bubbles which have been the source of so much of their apparent recent “growth”, and which now appear close to bursting.

So will the rates hike and crash really arrive this September?

While Ms Yellen’s remarks did initially spark concerns that this could be the case, prediction markets have now quieted down somewhat about the possibility of a September rates hike. According to the CME Group fed funds futures, the likelihood of a rates rise in September has fallen to just 27%. The consensus at this point is that the Fed will wait until after this year’s election before contemplating any further action, with the likelihood that a Fed Funds Rate hike will be agreed upon at the Fed’s final meeting of the year placed at 46%.

However, as much as I suspect a crash will follow any rates hike they do pursue, this delay is actually not necessarily good news. The longer interest rates are held low, the more malinvestments will be made before the crash comes, and consequently the worse the crash will eventually be. With interest rates having been at extraordinary lows since the start of the Great Recession, there’s no way of completely avoiding the fact that such a long period of low rates means malinvestments have already been made, the bubble has already been inflated, and so the crash is inevitably coming. It’s not within our power at this point to avoid the next crash altogether, because the mistakes which will cause it have already been made. But an early rates hike would at least get the recession out of the way before the bubble could inflate any further.

Sadly though, high rates in 2016 are scarcely more popular at the Fed than they are at the Bank of England. The likelihood that policymakers will be bold enough to raise rates enough to give us the short, sharp shock needed to rid us of this bubble and get the inevitable recession out of the way quickly, are rather slim.

My First Published Article

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So this past Monday I had my first ever article published. It was put out by Mises Wire, the daily online publication of the Mises Institute in Auburn, Alabama, where I recently spent a week studying Austrian Economics at their ‘Mises University’ summer programme.

In the article, I discuss the little clues which have come to the surface in the British economy since the new Bank of England interest rates cut, and what they might point to for the future of the world economy.

You can read the full article at this link:

https://mises.org/blog/bank-england-turns-more-easy-money

More to come soon, on both this blog and hopefully over on Mises Wire again. Stay tuned…

Could post-Brexit Credit Downgrades save Britain from the next Crash?

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After last Thursday’s decision by the British public to leave the European Union (a decision which I endorsed and stand by), reports emerged in the press almost immediately of the imminence of a downgrade in the UK government’s perceived creditworthiness. And sure enough, several downgrades have occurred in the days since the referendum. First to act was ratings agency Moody’s, who assigned a negative outlook to Britain’s Aa1 rating on government debt the day after the referendum. Shortly afterwards, Standard & Poor’s downgraded the British government’s creditworthiness from AAA to AA+, while Fitch went even further, downgrading the government’s credit rating to AA. Significantly, S&P has also, in the past few hours, downgraded the credit rating of the EU itself from AA+ to AA.

Grim sounding stuff, upon a cursory glance, and certainly perfect headline content for the many doomsayers and pro-EU commies of the fourth estate. However, the long-term implications of such downgrades might not be as negative as we’re all being led to believe. Indeed, increasing doubtfulness of the government’s creditworthiness could help to cushion the blow for Britain somewhat, when the next crash inevitably arrives.

First of all, these downgrades theoretically make it more difficult for the British government to sell bonds to private investors, and hence more difficult for it to borrow money, which to me at least makes the downgrades a positive, almost regardless of their other consequences. With UK public sector debt at over 80% of GDP and Osbourne still failing to achieve even his own lax targets for reducing the deficit, I’m pretty sure that if fire rained from the sky and Beelzebub ascended from hell to eat Mark Carney’s legs, I would still hail the event as a positive if it made it more difficult for the government to borrow money. One might argue that the downgrades actually won’t affect the total amount that the government can borrow, because even if they dissuade private investors from buying government bonds, the Bank of England can theoretically pick up the slack by simply buying government bonds with money created out of thin air. However, with interest rates at record lows since 2009, the threat of high inflation might prevent the bank from completely offsetting a reduction in demand for government bonds, and so it’s possible that the total amount of money the government can borrow may indeed decrease.

However, far more important is the fact that these downgrades may help to deflate the government debt bubble which we are currently living through, and which will in all likelihood be the cause of the next crash. In the aftermath of the Dot-com crash of 2000-2001, central bankers’ pursuit of artificially low-interest rates encouraged speculation and a scramble to borrow and invest, during a time in which the economy should have been allowed to readjust and learn the lessons of the crisis it had just been through. Instead of allowing the Dot-com bubble to fully deflate so that the economy could start building on a solid foundation again, they merely rolled the bubble over into another section of the economy: housing. The reason why housing became the area of the next bubble was because it was seen as an extremely safe area of the economy, with  relatively predictable rates of expected return, and only a small chance of failure. When the housing bubble finally did burst, central bankers made all the same mistakes again that they had in 2000, sledgehammering interest rates into the earth’s mantle and consequently causing a scramble to invest in the area that had replaced housing as the universally accepted “safest” investment in town: government debt. However, with Puerto Rico facing an historic debt default just this very week, and many other countries not far behind, the signs are beginning to emerge that the government debt market of today is just as “safe” as the housing market of 2006 was.

If the above is true, and if we really are on the verge of a government debt crash that will dwarf the housing crash just as much as the housing crash dwarfed the dot-com crash, then we should all be thanking the ratings agencies for trying to steer UK investors away from becoming more heavily invested in government debt. Will it completely shield us from the effects of the crash? Absolutely not. But we can at least assume that, come the crash, the British public and its institutions will likely find themselves at least somewhat less heavily invested in the failing government bonds than they would have been, had they retained their unimpeachable AAA ratings.

So thank you again to the British public for voting for Brexit, and thank you to Moody’s, Fitch, and S&P for downgrading your assessment of our government’s creditworthiness; in exchange for a little short-term uneasiness, you may have put Britain in a stronger position to weather the coming storm, perhaps without even having realised it.

Why Austrian Economics?

The other day someone sent me a question over on my Tumblr blog: “Why Austrian economist? I thought you were English. Aren’t you a British national?”

The question highlights the fact that, despite its resurgence and speedy growth in recent years, the “Austrian School” of economics is still seen by many as part of what Keynes would have called the economic “underground”. Indeed, the Austrian tradition lies so firmly outside the mainstream of economic thought that, for the inaugural post on this blog, perhaps I should repeat here a somewhat expanded version of the answer I gave to that confused Tumblr follower. What is “Austrian” economics? Why is it unique? And why is it so vital that it’s message be understood in these troubled economic times?

As I highlighted in the “About” page of this blog, I’m still a relative newcomer to Austrian ideas, and my hope is that the level of understanding displayed on this blog will increase as time goes on. So the reader should temper their expectations somewhat for this very first post, as it likely won’t be the most exhaustive or masterful exposition of Austrianism ever. Nevertheless, it should still serve to single out some of the most fundamental ideas in the Austrian tradition, as well as those which strike me as most important to the state of economics today.

So first thing’s first, forget about the “Austrian” part. Austrian economics doesn’t refer to supply and demand in Vienna, or inflation in Salzberg, and too many people get confused thinking it must have something to do with the actual country of Austria itself. In fact, most “Austrian” economists today live and work in North America and, as the great economist Murray Rothbard quipped, “there are very few ‘Austrians’ left in Austria.”  Austrian Economics is rather a school of thought, a body of ideas and theories, which were first explored by Carl Menger in the 1860s.

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Carl Menger (1840-1921)

During his time as a financial journalist in central-Europe, Menger noticed that the received wisdom of Classical Economics did not match-up with how he observed prices being formed on real-world markets. This prompted him to write his Principles of Economics (1871) which demolished the archaic “labour theory of value” favoured by Adam Smith, David Ricardo, and Karl Marx, and ushered in the “Marginal Revolution” of the 1870s. (Incidentally, its genesis in Menger’s 1871 work makes Austrian Economics the oldest continuously-existing school of economic thought in the world.) For about a decade after the publication of the Principles, there was no “Austrian school”, there was only Menger. However, in the mid-1880s Menger came under attack by the dominant school of economic thought in the area at that time, the so-called “German Historical school”. The Germans disdained Menger’s abstract theorising, instead favouring pragmatism and reference to historical knowledge as the correct approach to the economy. At this point in history, Germany was considered the cultural and intellectual centre of Europe, and so adherents to the German Historical school began referring to Menger and his ideas as mere “Austrian economics”, in an attempt to brush them aside as unrefined and parochial. Despite being intended as an insult, the name stuck and, as Menger’s ideas gained an increasing following throughout the 1880s, including brothers-in-law Eugen von Böhm-Bawerk (1851-1914) and Friedrich von Wieser (1851-1926), the “Austrian school” of economics was born.

From that time until this the Austrian school, despite its ostracism from most of academia, has nevertheless developed a host of key economic ideas, some of which have even been accepted into the corpus of acceptable mainstream opinion. These include Menger’s subjective marginal utility theory of value, Böhm-Bawerk’s positive time-preference theory of interest, and Wieser’s concept of opportunity cost. Other adherents to the Austrian tradition, whose names might be more familiar to the lay reader, include: the extremely eminent economist Friedrich von Hayek (1899-1992), whose political writings, such as the famous Road to Serfdom, influenced British Prime Minister Margaret Thatcher; Murray Rothbard (1926-1995), economist and founding father of the political ideology now known as anarcho-capitalism; and three-time US Presidential candidate Ron Paul (1935- ).

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Ludwig von Mises (1881 – 1973)

However, I’m many ways, the central figure to the modern Austrian tradition was the brilliant economist Ludwig von Mises (1881-1973). Although he made extraordinarily important and extensive contributions to the theories of money and credit, the problem of economic calculation in planned economies, and our understanding of the business cycle, perhaps Mises’s most important contribution to economic thought was in the rarely-traversed field of methodology. Mises devoted a large part of his career to explicating and systematising the method which had been implicitly used by previous Austrian economists, as well as by proto-Austrian figures such as J.B. Say and A.R.J. Turgot.

Looking at the academic world around him in the early- to mid-20th century, Mises became increasingly concerned by what he saw as the grave methodological bankruptcy of modern economics. Ever greater numbers of economists, particularly those in the penumbra of the logical positivist movement, were beginning to believe that the best way to gain insights into the economy was simply by  measuring and gathering its empirical data, and then discerning the mathematical relations between the various variables. While this is undoubtedly a fruitful way to approach the natural sciences, such as Physics, Mises believed that its use in the distinctly human science of economics introduced an unacceptable element of error, in particular due to its inability to account for two factors which he called “finality” and “ideas”.

What he means by “finality” is the understanding that human action, unlike the movement of atoms or the reaction of chemicals, takes place in the pursuit of individually chosen goals. Because people chose the outcomes they would like to achieve, this means the range of different behaviours they exhibit in the face of external forces is much wider and less predictable. Not only are the goals people aim at as numerous and varied as the human race itself, but any person or number of people in the economy could change the goals they’re aiming at at any time, in any way, and any number of times, and could do so for reasons completely unknown to anyone but themselves, least of all to the economist and his calculator. This peccadillo of human nature and (apparent) free will, leads to a potentially infinite number and variety of future changes in the economic system, which severely restricts the predictive power of mere data-gathering and mathematical methods.

What he means by “ideas” is the fact that different people have very different ways of looking at the world, which cannot be empirically measured or modelled for. These different world-views, beliefs, and constellations of abstract concepts which exist within each individual mind, cause different people to react in unforeseeably different ways when confronted with the same external circumstances.

Mises argued that the failure of (what is now) the mainstream economic method to account for these two human factors, finality and ideas, as well as the impossibility of truly controlled experiments in economics, renders the empirical/mathematical method useful only as tools of economic history, able to blandly state what happened in the past, but little more. For the purposes of devising economic theories, on the other hand, to actually explain the past and predict the results of future changes, Mises had to create an entirely new field of study: Praxeology.

Praxeology is the value-free, objective science of human action, of which Economics is the most well-developed branch. In order to overcome the extreme variety and unpredictability of human action, Mises sought a few core statements about it which are undeniably true under all circumstances: axioms. The most important praxeological axiom is the Action Axiom: the statement that human beings select particular outcomes which they would like to achieve, and then pursue those outcomes by chosen means. In a word, humans “act.” This is axiomatically true, because any attempt to disprove it would be to select a preferred outcome, and then to pursue it by chosen means. That might seem banal, but because these axioms are undeniably true under all circumstances, that must mean that any statement that can be correctly deduced from them logically must also be true under all circumstances. Any economic statement correctly deduced in this way, would therefore also be universally true, and hence would have overcome the obstacles of finality, ideas, and the sheer complexity of the economy.

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Six key “Austrian” Economists, and some of their notable ideas and works.

Therefore, Mises argued that a priori logical deduction from axioms about human action was the only method by which undeniable economic truths could be discovered. Misesian Austrians argue that this method equips the economist with the ability to make a narrower range of predictions, but to do so with absolute certainty. An Austrian economist doesn’t believe they can predict what the price of crude oil will be in a year, or by how much a certain tax hike will raise government revenue. Rather they believe their system allows the economist to make absolutely certain statements, like “Other things being equal, people will always value acquiring the ‘n’-th unit of a good, more than they value the ‘n+1′-th unit of the same good”,  or “Other things being equal, a rise in the price of a particular good will always cause people to prefer buying a smaller amount of that good than they otherwise would have.”

Mises further understood that, if an economic law really is true under all circumstances, as a result of having been correctly deduced from praxeological axioms, that law would therefore be invulnerable to supposed empirical evidence against it. Indeed, if economic laws can be deduced aprioristically in this way, asking to prove or disprove them with empirical evidence wouldn’t even make sense; to compare economics to another purely aprioristic science, it would be like asking a mathematician to go out into the real world and gather empirical evidence to prove that the 2 is never the same number as 7. Naturally, their complete rejection of supposed empirical evidence, as well as their increasingly unfashionable lack of interest in mathematical analysis, has made the Austrians extremely unpopular in academic circles, and they have consequently been relegated to well outside the mainstream since at least the Keynesian devolution of 1936 onward.

However, there has been a somewhat increasing level of interest in the Austrian school in recent decades, and certainly since the Great Recession. It didn’t go unnoticed that a disproportionate number of the people who accurately predicted the 2008 financial crash in advance were Austrians, and this has led to growing interest in perhaps the most important Austrian theory for our times: the Austrian Theory of the Business Cycle.

I’m conscious that this post is already so long that it could easily be mistaken for the average modern-day cinematic release, and with a roughly equivalent proportion of the audience proffering unanswered pleas to God for mercy at this point. Furthermore, I’m sure I’ll have many other chances to relay this elegant theory in future posts, so I won’t go into it in any great depth here. But basically, the absolute bare bones of the Austrian business cycle theory, which was first outlined by Mises and then fleshed out by Hayek, is the idea that interest rates coordinate production across time. If the interest rate is high, it will be more expensive to borrow money for a long time, so businesses will tend to invest more in enterprises which will yield profits quickly, i.e. consumers’ goods. Conversely, if the rate is low, it will appear more profitable for businesses to invest in producers’ goods and other projects which won’t yield profits for a long time. On a free market, the rate is determined by supply and demand of credit, i.e. how much people are saving. This coordinates things beautifully, because banks will offer high rates (and hence stimulate investment in consumers’ goods) when people are saving least (and hence demonstrating their desire to consume now), and banks will offer low rates (and hence stimulate long-run investment) precisely when people are saving most (and hence demonstrating their preference for spending in the future.) However, the Austrian theory shows that the business cycle is kicked-off when the interest rate is pushed artificially low, usually by a government central bank. The artificially low rate incentivises consumers to save less and spend more in the present, while at the same time incentivising businesses to produce less in the present and invest more in long-term projects. This disco-ordination leads to lots of spending, lots of construction, lots of investment, and outwardly that all looks great, but under the hood it’s merely the boom or “bubble” that precedes the crash. When the government eventually has to raise interest rates again, to avoid severe inflation, all these long-term projects which had the illusion of profitability at the artificially low rate, will be revealed to have actually been unprofitable all along. Therefore all the resources businesses sunk into such projects are shown to have been wasted, resulting in economy-wide losses, the bursting of the bubble, and the resulting inevitable crash.

I understand that that’s an extremely oversimplified version of the Austrian theory, which is actually quite a lot more complex and nuanced than most other explanations of the business cycle, but hopefully I’ll be able to do it a little more justice in future posts.

Anyway, I should probably finish this utter behemoth of a first post here. Hopefully though that will have given pretty good outline of why I think the Austrian school stands so far apart from the crowd, and why I consider its method and business cycle theory so important to the current state of economics today. If you’d like to learn more, I’d heartily encourage you to check out the absolute wealth of educational materials that the Mises Institute puts out, both on their website and on YouTube. They, in their extraordinary generosity, have made practically every major work of Austrian economics available as free PDFs, and sometimes even as free audiobooks, alongside all sorts of other goodies they offer on their website, so you’ll do yourself an immense favour by checking them out. In general though, if you want to learn more I hope you’ll continue to follow the output on this blog in the future, as I certainly look forward to writing more on this fascinating subject, as well as on libertarianism and current events in general.