• moksa

    Meeting Tonight at Moksa Restaurant

    Tonight’s meetup will be in Cambridge at Moksa Restaurant. We will not be in Jamaica Plain tonight.

    Moksa Restaurant is a perfect example of how a free market responds to customer requests; recently, they installed a Bitcoin ATM per their customers’ requests. As more and more people start requesting that Bitcoin be accepted as payment for other goods and services, businesses will respond. This is the standard response of the free market, and we support businesses that respond positively to customer requests.

    A few other reminders:

    Also, we just upgraded our CMS to WordPress 3.9.1, and as a result, our event pages are a little bit funky. All the information is still there, but the display is rather weird (moved columns, changed text color, etc.). Please bear with me through the updates. Thanks!!

  • nate-silver

    The Signal and The Noise, by Nate Silver: an Austrian review

    Nate Silver is a figure who needs no introduction – thanks to the spectacular success of his election forecasting system, he has become a household name in recent years. In late 2012 he released a book, The Signal and The Noise, which quickly became a bestseller. In it, he discusses the art of using data intelligently in order to make predictions, with illustrative chapters showing how the ideas can be applied to fields ranging from climate science to poker. It is, overall, a superb book, meticulously researched and lucidly written, and Silver’s versatility in discussing such a wide variety of real-world applications is particularly impressive.

    However, Silver conspicuously fails to ask one very important question: how do we know which disciplines are amenable to this type of empirical reasoning in the first place? Nowhere in the book does he question the assumption – so common in modern discourse – that the road to understanding always lies in data; that if a field of inquiry can conceivably be approached via study of quantitative variables, there is no question that it should. As such, it will come as no surprise to an Austrian reader that when Silver turns his attention to economics, the results are far from convincing, even when taken on their own terms. Interestingly, the economics chapter does contain a healthy dose of Silver’s typically incisive reasoning; despite the inauspicious choice of Paul Krugman as one of his primary sources, he nonetheless manages to form a perceptively critical evaluation of the profession’s status quo, astutely highlighting many of the difficulties that economists currently face. But because he stops short of questioning the central premise of modern economics – that an economy can be evaluated through statistical measurements, and that forecasting these measurements is therefore what economics is ultimately all about – he is unable to resolve these difficulties satisfactorily, and his conclusions end up ringing decidedly hollow. A later chapter in the book is devoted to the Efficient Market Hypothesis, and the particular phenomenon of bubbles; here Silver’s approach gets him into even deeper trouble, and his explanation ends up being entirely unconvincing. It may seem unfair and unproductive to criticize an economics discussion in what is primarily a book about other topics. We nonetheless find it worthwhile to do so, because The Signal and The Noise serves as a particularly vivid illustration of the importance of methodology in the ongoing debate between Austrians and mainstream economists.

    Silver’s chapter on economics gets off to a promising start, as he takes the profession to task for their woeful record of predictive success. He notes that economists are much too confident in their GDP-forecasting ability – leading them to make predictions that have proven to be “poor in a real-world sense” – and points out that in contrast with fields such as meteorology, economic forecasts have shown little improvement over the past few decades. Guided by his discussion with Goldman Sachs chief economist Jan Hatzius, Silver then offers several very insightful explanations for why this is so. To begin with, he notes that there is little stability in the cause-and-effect relationships that emerge from the study of economic variables – for example, five of the seven “leading indicators” of the 1990 and 2001 recessions failed to indicate a problem in 2007. Furthermore, economic forecasting involves not only anticipating changes in policy decisions, but correctly gauging how these changes might impact the forecasting model itself. He cites Goodhart’s Law, which tells us that the targeting of variables by policy-makers causes them to lose their predictive value – housing prices, for instance, cease to function as a bellwether of increasing prosperity when they are deliberately manipulated by government policy. As Silver explains: “Most statistical models are built on the notion that there are […] inputs and outputs, and they can be kept pretty much separate from one another. When it comes to the economy, they are all lumped together in one hot mess.” A related problem is that the economy is a complex, ever-changing entity; as such, a seemingly well-established empirical relationship can cease to hold, seemingly without warning. This phenomenon was well illustrated in 2009, when the venerable Okun’s Law suggested that 2 million jobs should have been gained – instead, 3.5 million were lost. And as if this were not enough, we are also faced with the difficulty that much economic data is simply not very good, subject as it is to official revision months or years later. As an extreme case, the initial 4.2 percent growth estimate for the fourth quarter of 1977 was eventually rewritten as a contraction of 0.1 percent.

    At this juncture, the reader is surely entitled to ask an obvious question: why are we so certain that empirical analysis is the right approach to economics in the first place? After all, we have been convincingly shown that economic data is inherently unreliable, and that even when taken at face value, it necessarily maintains only a tenuous correspondence with the real-world phenomena that it purports to explain. Surely one very reasonable conclusion would be that economics is simply a discipline that is most effectively approached through purely deductive methods – this, of course, is what Austrians have maintained all along. But amazingly, not only does Silver fail to embrace this idea, he never even seems to consider it as a possibility. While he does praise Hatzius for basing his gloomy 2007 forecast on a coherent narrative (being “right for the right reasons”) , it remains clear that he views logic merely as a guiding force toward better empirical predictions, rather than the methodological substance of good economics in its own right. The idea that one could dispense altogether with the statistical element remains an anathema.

    A particularly striking microcosm of the entire chapter occurs when Silver acknowledges that the steady GDP growth of so-called Great Moderation between 1983-2006 was “fueled by large increases in government and consumer debt, along with various asset-price bubbles.” Very true: a more compelling indictment of GDP-based economic analysis would be hard to imagine! But Silver brings this up only in order to illustrate his point that changing economic conditions make statistical analysis a difficult task in economics. And so it leads him to offer only the stunningly insipid conclusion that the Fed may have erred in their 2007 GDP forecast because they failed to adequately consider data from prior to 1983. (!!)

    This leaves Silver in something of a bind when he tries to offer a prescription for how the economics profession might improve its performance. He remains implicitly devoted to the idea that this performance must be in the form of statistical forecasting – yet he has just finished presenting strong evidence that this approach is merely an exercise in futility. So it is no surprise that the chapter ends on a feeble note: apart from the aforementioned suggestion that predictions should be based on a logical understanding of how the world works (with which, needless to say, we entirely agree) his only substantial suggestion is that economists need to be given stronger incentives to make good predictions. But surely this is hopelessly far-fetched. As Silver himself notes, the resulting implication is that there currently exist willing consumers of bad economic forecasts; this is a rather implausible notion, and Silver gives no real evidence of why we should accept it. Moreover, even if we grant that professional incentives are in some sense a problem, it remains unclear how a successful resolution would be sufficient to overcome the formidable obstacles to successful prediction that Silver has just outlined. Will the economy cease to be a “hot mess” of inputs and outputs, just because economists are more motivated to provide accurate forecasts? As a result, in stark contrast with the other sections of the book, the reader comes away from this chapter having been offered no convincing explanation of how signal and noise are to be separated in economics.

    That Silver has failed to develop an entirely sound understanding of economics is confirmed several chapters later, when he turns his attention to financial markets, and the phenomenon of bubbles in particular. This is a prime example of an issue where the logical approach to economics favored by Austrians proves its superiority. It is quite easy to identify the underlying cause of bubbles through a simple thought experiment: where is the money coming from to support these ever-rising asset prices? Is there any evidence whatsoever that they are financed by decreased expenditure on other goods and services? When the question is considered in this manner, it immediately becomes clear that inflation of asset prices, no less than of consumer prices, is always and everywhere a monetary phenomenon. On the other hand, bubbles are inherently difficult to study empirically, so it is no surprise that commentators beholden to the positivist approach have largely come to grief in their efforts to explain them.

    Unfortunately, Silver proves to be no exception. Like so many other writers in the wake of the financial crisis, he apparently believes that psychological considerations alone constitute a sufficient explanation, and his variation on this well-worn theme is no less fundamentally inadequate. He begins by blaming bubbles on the incentives of individual traders: “so long as most traders are judged on the basis of short-term performance, bubbles involving large deviations of stock prices from their long-term values are possible – and perhaps even inevitable.” But the reasoning that he offers in support of this is blatantly circular: he notes that given the empirical probability of crash in stock prices, it can take a long time for a bubble to burst, and claims (not implausibly) that anyone who prematurely calls the top during this time is likely to find himself out of a job. The problem, of course, is that the frequency of market crashes is itself the result of the aggregate actions of individual traders – it cannot be the ultimate cause as well. Silver’s attempt to ground his case in an innate psychological propensity for “herding” behavior does not fare any better. In support, he refers to a 2008 InTrade incident, where a rogue trader temporarily pumped up the market value of John McCain’s election probability, only to see the “true” price restored six hours later. But it is difficult to understand what he is getting at here. Surely this anecdote actually provides stronger evidence for the Austrian conclusion: that in the absence of sustained manipulation, the market will rapidly smooth out all misaligned prices. Why did the InTrade distortion resolve itself in a matter of hours, instead of turning into a long-term mania? (Conversely, would anyone have noticed the housing bubble if it had lasted for six hours?) Finally, as if somehow sensing that he has not quite proven his case, Silver tosses in one final attempt at an explanation near the end of the chapter: “There might be a terrific opportunity to short a bubble […] once every fifteen or twenty years when one comes along in your asset class. But it’s very hard to make a steady career out of that, doing nothing for years at a time.” This, however, is simply bizarre: why on earth should we assume that “bubble-popping” is such a specialized career niche that its practitioners are incapable of other activity during normal market conditions?

    The upshot is that bubbles prove to be an unfortunate lacuna in the context of The Signal and The Noise, just as they are for mainstream economics in general. Silver’s discussion is sadly illustrative of the hopeless muddle that invariably results once commentators fall into the trap of attempting to explain economic processes through purely psychological mechanisms. It also highlights the vital importance of methodology in the study of economic phenomena. Had Silver come to the conclusion – so thoroughly implied by his discussion in the economics chapter – that it is a discipline best approached through a priori reasoning, he would surely have found the correct answer without difficulty. As it is, having initially chosen the wrong set of tools, not even his powerful intellect was able to construct anything close to a compelling explanation.

    In The Signal and The Noise, Nate Silver offers Austrians a ray of hope, by revealing the degree of skepticism that many well-informed commentators possess toward mainstream economics. More importantly, however, he also gives us an invaluable (if inadvertent) reminder of where we must focus our rhetorical efforts, in order to take full advantage of this state of affairs. It is nothing short of astonishing that a thinker of Silver’s caliber, having marshaled such an impressive array of evidence against the mainstream data-crunching approach, should fail to even consider Austrian-style methodology as a possible alternative. This is a quintessential example of the unquestioning belief in positivism that underlies contemporary thought – “data uber alles” seems to be the credo of 21st-century epistemology. It is this methodological error that we must first seek to correct, if we ever hope to make substantial progress in converting intelligent, open-minded people – such as Nate Silver – to Austrian economics.

  • Capture

    5 Non-Idiotic Economic Reforms Millennials Should Work For

    Rolling Stone, that bastion of intellectual economic policy analysis, has recently produced the article “5 Economic Reforms Millennials Should be Working For.” Libertarians far and wide have already rebutted the nonsense in this article, and I decided to do my part by producing a sane alternative. After all, as philosopher/engineer R. Buckminster Fuller once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” So here is my attempt to make Rolling Stone more obsolete than it already is, which may be difficult, since Rolling Stone is already pretty obsolete.

    1.) No More Slavery

    During the height of chattel slavery, roughly 4 million Americans were imprisoned for a crime against no one. (1) How could such a horror take place? Could you imagine if millions of Americans today were imprisoned for a crime against no one? Well, this is precisely the situation today: In modern America, 7.3 million Americans are imprisoned (2), and 75% of prisoners are in prison for crimes against no one, meaning drug, weapon, public order, and immigration “offenses” (3).

    Offenses against the state are not crimes against a victim: The state is a concept, not a person. Offending the state is a crime against no one unless there is a real victim involved. This means that there are MORE people imprisoned for crimes against no one today than there were in 1860. President Obama, with a stroke of a pen, can pardon/free more slaves than there were at the height of chattel slavery.

    It should be noted that all of Rolling Stone’s “reforms” involve taxation i.e. forced payment under threat of imprisonment. Disobeying a tax law is a crime against the state, i.e. a crime against no one. Rolling Stone’s suggestions, then, are incompatible with the abolition of slavery.

    2.) The Legalization of Summer Jobs

    It’s getting tougher and tougher for teens to find summer jobs. “Less than a third of 16- to 19-year-olds had jobs this summer…” (4) What gives? Are teenagers a bunch of lazy bums who don’t like money? Do greedy capitalists hate teenagers and deny them jobs on purpose? One obvious culprit for the absence of summer jobs is that the vast majority of potential jobs in the US are illegal.

    Think of it this way: If the government imposed a minimum income requirement on small businesses, outlawing any small business that didn’t make the minimum income, would this help the small businesses who are currently making below the minimum income? Will consumers suddenly flock to the less successful small businesses they weren’t patronizing before, in order to help the businesses comply with the law? No, of course not, the least successful small business owners would find themselves unemployed.

    Every wage laborer is a small business owner, a capitalist in charge of his own human capital, who must convince customers/employers to buy the wage laborer’s labor. If the government makes the product too expensive through price fixing, the supply and demand won’t match: There will be a shortage, and a shortage of jobs is called unemployment. Economists nowadays are generally in agreement that price fixing for goods like gasoline and laptops would result in shortages. But for some reason many turn a blind eye to the most important price of all: Labor.

    Minimum wage laws don’t just hurt teens: They also hurt young adults and many other sets of workers trying to make their way up the career ladder. Many businesses would offer training and valuable work experience to low-skill workers as apprentices/interns, but unless the worker is producing an amount of goods/services worth at least the minimum wage, it is not economically feasible to hire them. Businesses have found a loophole whereby they can pay workers nothing and call them volunteers. Obviously making nothing is not an improvement over making a buck less than the minimum wage, and so workers are worse off due to the minimum wage law.

    But even this is becoming illegal: California and several other states have passed a law mandating college credit be attached to unpaid internships. (5) So now, anyone who isn’t in college will be shut off from opportunities to climb the first rung in the career ladder. Everyone who does get to work has to pay thousands of dollars for college credit to do so. Paying thousands of dollars to work, of course, is not an economic improvement from being paid a buck less than the minimum wage.

    Among poorer populations, minimum wage laws can be so destructive that workers threatened with unemployment will riot: South Africa workers, for instance, revolt whenever the minimum wage laws are raised. (6)

    3.) An End to the College Bubble

    This one won’t require much work from millennials, since all bubbles pop, but millennials should be demanding that it pop as soon as possible. Like the Housing Bubble, the College Bubble is the result of easy-money subprime loans, guaranteed by the federal government, that created an asset bubble. “Federal aid for students has increased 164% over the past decade, adjusted for inflation… After adjusting for differences among schools, the authors find that Title IV-eligible schools charge tuition that is 75% higher than the others. That’s roughly equal to the amount of the aid received by students at these schools.” (7)

    The Housing Bubble was very painful when it popped, but all bubbles must pop eventually. The sooner the bubble pops, the less damage it causes. The cost of an asset bubble is what that money otherwise could have been spent on: Instead of loans going for overpriced houses, loans could have gone to machinery, job training, research and development, or any number of other investments that increase real wealth in the economy. And, indeed, during the peak of the Great Recession, as housing prices were plunging, money started being used for productive uses. GDP was falling due to the housing market, but manufacturing hit an all-time high in 2009. (8)

    The money that students currently spend paying off their overpriced college loans could be invested, used to produce real goods and services instead of bloated college bureaucrat salaries. $200,000 could be lent more productively to start-up companies instead of 18-year-olds majoring in art history. If the government stopped incentivizing college loans by insuring them, you would see the price of college plummet (along with the endowments of many colleges, which will not make college administrators happy, so expect them to lobby for a bailout).

    4.) Cut Off Our Welfare-Queen Parents

    If the government neatly separated the population into two tax groups, one with an average net worth 49 times higher than the other, and then took a chunk out of the poorer group’s paycheck every week and sent it to the richer group, this would be a travesty! And it is! “Older Americans are 47 times richer than young” (9), but a hefty chunk of the young people’s salaries are stolen from the poor and given to the rich, so to speak.

    In The Simpsons, a homeless man asks Grandpa Simpson if he has any change, to which he replies, “Yeah! And you ain’t gettin’ it! Everybody wants something for nothing!” He then promptly walks into the Social Security Office and says, “I’m old, gimme gimme gimme!”

    Social Security in the US is not invested in an account that grows like the Chilean Social Security System or a 401k (10). Social Security is a direct transfer from the young to the old, and since the population demographics are getting older, young people have to pay in more than they get back. Congress set aside a Social Security Trust Fund account to ostensibly make things slightly fairer for millennials, but this Trust Fund is filled with US Treasuries (11), which are promises by the federal government to tax the young even more! And even if young people were getting back everything they put into Social Security adjusted for inflation, this would be a raw deal, since they would be losing money when they need it most (economically, you can say that the marginal utility of money for young people is higher).

    Adjusted for inflation: “A single earner couple turning 65 in 2010 and earning the average wage would have paid in about $294,000 in Social Security taxes over a lifetime — but would get about $447,000 back” (12). Again, there is no interest being earned on Social Security “investments”, they are a zero sum game: Any “capital gains” on them means increased theft from the young. And Social Security is not the only form of indentured servitude for millennials: “If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion.” (13) That’s over $700,000 in debt per American; in other words, young people are born with a mortgage and no house.

    5.) Cheaper Weed

    I was expecting to at least agree with Rolling Stone about drug legalization, but it was conspicuously absent from their “reforms”. I already covered the truly sadistic aspects of drug laws when discussing slavery, but there is another economic side to drug laws that destroys human happiness and productivity.

    Drug laws make drugs more expensive: In Canada, legal THC-free cannabis costs 45 cents a pound (14). An anonymous, confidential source I cannot possibly disclose tells me that illegal cannabis costs thousands of times more (and is sometimes awful). The two goods are not equivalent, but legal hemp does give us a window into how far economies of scale, capital investment, and a fairly deregulated market could drive cannabis prices down. If alcoholic beer were illegal and cost $20 per bottle on the black market, and legal non-alcoholic beer cost 50 cents per bottle, it would give us some cause to believe that legalization would make beer cheaper.

    If drugs were far cheaper, what would the money gained by drug consumers be spent on? This, in the words of 19th-century French economist Frédéric Bastiat, is the unseen cost of prohibition. Some consumers may currently be doing cheap, deadly drugs such as methamphetamines or krokodil (15). Were drugs legalized and prices driven down, these consumers could switch to safer drugs like cannabis. This is one hypothetical reason why, when Portugal ended its drug war, drug abuse rates fell by 50%. (16)

    But what of the new, legal markets for THC-containing cannabis in Colorado and Washington? State legislators have seen the light, told the US Supreme Court to shove it (17), and created legal “taxed and regulated” cannabis markets. The only problem: If you tax and regulate a market too much, you interfere with that market’s ability to match supply and demand. The result is that there are widespread cannabis shortages in Colorado’s legal market, legal cannabis prices have been driven sky high, and the situation is so bad most cannabis consumers have chosen to risk jail and continue using the black market. (18) Millennials should be striving for a true, free market for cannabis, not a highly regulated, state-planned faux market.

    *                                         *                                      *

    Millennials should shake off their Stockholm Syndrome and stop demanding small welfare bribes in lieu of real, meaningful reform. End slavery, don’t reform it. Legalize jobs. Fire the academic establishment’s pampered bureaucrats. Stop stealing from the poor and giving to the rich. And let us have the cheap, quality weed that only a deregulated market can provide.

     

    (1) http://economics.ucr.edu/papers/papers03/03-12.pdf
    (2) http://www.nytimes.com/2009/03/03/us/03prison.html?_r=0
    (3) Data from 2009: This statistic is actually higher than 75%, because some misdemeanors are victimless crimes, and the study doesn’t separate misdemeanors into categories, so I didn’t count them. http://www.bjs.gov/content/pub/pdf/fjs09.pdf
    (4) http://online.wsj.com/news/articles/SB10001424127887323423804579025192355931448
    (5) http://www.policymic.com/articles/50069/unpaid-internships-aren-t-the-problem-working-for-credit-is
    (6) http://www.nytimes.com/2010/09/27/world/africa/27safrica.html?pagewanted=all
    (7) http://www.marketwatch.com/story/why-college-aid-makes-college-more-expensive-1330033152060
    (8) http://www.industryweek.com/global-economy/manufacturing-index-hits-all-time-high
    (9) http://money.cnn.com/2011/11/07/news/economy/wealth_gap_age/
    (10) http://news.investors.com/ibd-editorials/092613-672776-score-another-one-for-the-chilean-model-of-private-pensions.htm
    (11) http://www.ssa.gov/pressoffice/factsheets/WhatAreTheTrust.htm
    (12) http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf
    (13) http://www.npr.org/2011/08/06/139027615/a-national-debt-of-14-trillion-try-211-trillion
    (14) http://www.omafra.gov.on.ca/english/crops/facts/00-067.htm
    (15) http://sacramento.cbslocal.com/2013/09/27/cheap-heroin-alternative-krokodil-eats-users-flesh-from-the-inside-out/
    (16) http://www.forbes.com/sites/erikkain/2011/07/05/ten-years-after-decriminalization-drug-abuse-down-by-half-in-portugal/
    (17) The US Supreme Court even told the states that they couldn’t have medical cannabis:
    http://abcnews.go.com/WNT/story?id=131034
    Luckily, 20 states and even the District of Columbia have disobeyed them on that:
    http://www.usatoday.com/story/news/nation-now/2014/01/06/marijuana-legal-states-medical-recreational/4343199/
    (18) http://business.time.com/2014/01/04/colorados-pot-shops-say-theyll-be-sold-out-any-day-now/

  • Mises-Hayek

    5 Facts that will Annoy Your Keynesian Economics Professor

    Not every college professor is a Keynesian, but there’s a good chance that yours is, or at least subscribes to part of the Keynesian mindset. If so, here are some fun facts you can bring up that desecrate the Keynesian worldview.

    1.) The Not-So-Great Depression of 1920-21

    The Great Depression (1929-1940+) was a horrible era, and it takes center stage in a lot of the current debate on economic policy. But few people mention the Depression of 1920-21. Unlike the Great Depression, which lasted one-and-a-half decades, the Depression of 1920 only lasted a year or so. During the Great Depression, massive government stimulus was used. Everyone knows that FDR was a big supporter of stimulus i.e. increasing the debt, spending money, and lowering interest rates, but it has been left out of the popular dialogue that Herbert Hoover also engaged in massive amounts of stimulus.(1) Now contrast that with the Depression of 1920, which was dealt with, as Jim Grant put it in the Washington Post:

    By raising interest rates, reducing the public debt and balancing the federal budget. Eighteen months after the depression started, it ended.(2)

    The Keynesian prescription of lowering interest rates and increasing government spending was not only ignored, but the exact opposite was done. Let 21st-century economists rub their eyes in disbelief.

    2.) The Nonexistent Depression of 1946

    Millions of Americans were employed in the armed services in 1945, and according to Keynesian logic, if they were all laid off at once and government spending was drastically cut, an enormous depression would result.

    Prominent Keynesian Paul Samuelson said:

    When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market…were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

    And indeed, the troops were all laid off, price controls ended, and federal government spending was cut by an incredible 61%. Did the worst economic catastrophe in history occur? No, the economy entered the enormous prosperity of the late 1940s and 1950s once resources were taken from the nonproductive state sector and given to the productive private sector.(3)

    3.) The Harvard Business School Study that Shows Government Stimulus Hurts the Economy

    The Keynesian theory doesn’t differentiate between good spending and bad spending: All spending in a recession/depression is good for the economy. In fact, Keynes notoriously claimed that,

    If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again…there need be no more unemployment.(4)

    So any study the shows government spending harms the economy deals a death blow to the Keynesian theory, but this is precisely what a Harvard Business School study found:

    Recent research at Harvard Business School began with the premise that as a state’s congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way. It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses…’ The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees.’(5)

    As the government spends more, it occupies a larger share of the economy: The government snatches resources up and crowds out private, productive investment.

    4.) The 1870s

    During the 1870s, prices in America were falling. The Keynesian theory says that wages are “sticky downwards.” This means that, if prices as a whole are falling, there will be high unemployment. But this simply was not the case in the 1870s:

    Historians long attributed the turmoil to a ‘great depression of the 1870′s.’ But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870′s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms.(6)

    The economy increased production faster than the amount of dollars grew. Today, in a few very fast growing industries like cell phones and laptops, prices fall, but almost every other industry grows at a slower pace than the money supply, and this means prices rise. But this doesn’t have to be the case.

    5.) Stagflation

    According to the Keynesian theory, either prices are rising and unemployment is falling, or prices are falling and unemployment is rising: A situation where prices are rising and unemployment is also rising is impossible. But this is untrue because,

    In the 1970s, however, many Western countries experienced ‘stagflation,’ or simultaneous high unemployment and inflation, a phenomenon that contradicted Keynes’s view.(7)

    To this day, macroeconomics students are taught that there is a direct trade-off between inflation and unemployment. But the 1970s show this is clearly false.

    So, What’s Going On Here?

    Despite the enormous failings of the Keynesian theory, how is it that this theory has remained the most-taught theory in the economics profession? It’s a question that’s up for debate, but I will point out this fact: The Federal Reserve is an institution that is explicitly Keynesian in its policies. The Fed lowers rates during recessions with the intent of stimulating the economy. This is also known as printing money. And what are some of the things it does with this money?

    The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession.(8)

    Now, I wouldn’t confront your professor and accuse him of corruption, he is the one grading you at the end of the day, but the Fed’s involvement in academia is an interesting fact to note.

    (1) http://www.voxeu.org/index.php?q=node/4105

    (2) http://www.washingtonpost.com/opinions/warren-harding-curing-a-depression-through-austerity/2012/01/19/gIQA5VEsEQ_story_1.html

    (3) http://econlog.econlib.org/archives/2010/07/paul_samuelsons.html

    (4) https://www.mtholyoke.edu/courses/sgabriel/keynes.htm

    (5) http://hbswk.hbs.edu/item/6420.html?wknews=052410

    (6) http://www.nytimes.com/2006/06/02/opinion/02morris.html?_r=1

    (7) http://www.britannica.com/EBchecked/topic/668896/stagflation

    (8) http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html

  • MG_6861_W

    The Intention of an “Evil” Rich Capitalist in a “Libertarian Utopia.”

    capitalism-is-evil

    I’m sure we have all heard such a premise in conversations with those that….well, those that don’t share our understanding for markets and libertarianism. For me, the best way to understand anything is to live it and use real world examples to develop, refine, or reject perspectives. A good one came my way this past Wednesday at work, when I was let in on some “Privileged” information and in the interest of trying to maintain some anonymity of my work and those that would rather keep this information more hush hush, I will say I deal in rental and commercial property in a wealthy and a ever growing desirable community in the Boston area. I will also say that the owners of said property started from very little and then made some great business decisions over the years and even though they don’t own mansions or drive around Rolls-Royces, they probably could and if they did I don’t think it would phase or surprise many people.

    Now I’m not sure if it is fear due to ignorance or envy, but any anti-capitalistic and/or libertarian strawmen arguments needs some addressing. One such common argument being: “In a libertarian Utopia, there would be no regulations and the rich could and probably would buy up all the land around them.” This assertion is two parts; one making the fallacious argument that libertarians believe in chaos and that libertarianism is about establishing a perfect egalitarian society without any rules, which is flat out incorrect. The other being capitalism is malevolent and a capitalist’s only goal is to own and control/restrict as much as the world as possible. This is debatable, (because people’s intentions are subjective) but I will explain here (using a real world example) how such an assertion is unlikely and that it is logical that any good capitalist would have greater success with more benevolent intentions.

    I will not explain to you what libertarianism is…..or isn’t, really. For that, Lew Rockwell does a great job here.  I will also not go into capitalism or market theory. I will just be discussing the capitalist accumulation of property with the only restriction being by those unwilling to sell to them. So let’s say a rich investor rolls into a town or community and get their hands on a bunch of unused public property and buys up some real estate that someone is looking to offload. He raises the rent on the existing real estate, but also slowly improves it. Yes the tenants will have to pay more, but they get a nicer/better place to live and they also have the option to live somewhere more suitable to their needs and costs if they can’t or don’t want to afford the new price of the apartment. So people are actually making value judgments and thus improving their living standards and happiness, regardless of if they move or stay. He also builds on all that unused land, in hopes to make more money and increase his total wealth (Profit). Now this rich investor just expelled a ton of his wealth buying up properties, land and building on it. Now because he/she (To be PC) is providing value to people, (tenants) he/she is slowly creating capital and making their money back. They realize this so he buys up more properties and creates more opportunity by building more, thus increasing their total ownership or stake in the community. One could say that no regulations on what this investor or group of investors can or cannot own, (because libertarianism has no real restrictions on property and the legitimate ownership of it) would create chaos and the capitalist would end up owning all the land/property. This is a non sequitur, but a common thought process and argument among those that border on anti-(private)property and/or those that think government actually protects and regulates property and without it, the rich would just usurp all the important land.
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    To entertain this absurdity though, let’s us say such a logical fallacy may not be untrue and suppose there is a possibility that small groups of or individual people would own huge amounts of property. I don’t think it would be similar to a private monarchy, where a whole town or community would be owned by one person or a few key people. However, for the sake of this argument, let’s say it would be that draconian. Let’s go down this road and pretend this happens.So What?! Do you think they are going to accumulate property the size of a community and burn it to the ground? Do you think they have a vested interest in spending their wealth, only to destroy their investment or any capital they would get from it or do you think they are going to improve the community and continue to ensure its future prosperity and desirability for everyone else? Is it better to acquire wealth through measures of control and coercion or by pleasing people and creating potential value for them through voluntary interaction? I think the latter is true, because such things are attractive to people who want a nice and safe community, which in turn also benefits them (The “evil rich” capitalist) in the long run. Logically there are very few sociopaths in this world that would go out of their way to acquire a “golden goose”, only to kill it. And I think most off of them exist within government. But for those few that cause chaos in society and negatively impact the lives of others, there would clearly be a demand for some type of arbitration to settle disputes. Any good capitalist would recognize and jump at the opportunity to capitalize off of bad actors in society, which unfortunately will always exist. Arbitration is a very important facet of society to settle disputes and transfer wealth from bad market actors to those effected by them, but dispute resolution is for another time and if you would like to learn more on the subject; this is a great Mises daily article.

    Realistically though, I don’t think a small few would end up owning all the important land absent the restrictions on the ownership of property. Remember, all legitimate transactions need to have a willing buyer and seller. (Unless you’re the first owner, but homesteading is for another time though) Some would be unwilling to sell. Others may be willing to sell, but they also have the right to discriminate. Other buyers may place greater values on the same properties and thus competition would breed ownership diversity. Also, one would reach a point where it would be impossible to properly allocate resources in their massive ownership stake and selling would eventually HAVE to be an option because of it. So there are plenty of reasons why it would be very unlikely for there to be a huge ratio to the amount of property or land owned, to those (few) that own it.  Not to say that the capitalist pursuit of property is anything like the game of Monopoly, but similar to the game, you win by everyone else making poor decisions and going bankrupt and not by who first controls the entire board.
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    Now, to use my real life example to make my insignificant and drawn-out point. My work has been putting a bunch of money into their properties; upgrades, improvements, new equipment, infrastructure….Even diversifying where they invest. This “privileged” information that I received the other day, was that they bought a small automotive repair shop, very near to a ton of other properties that they already own. At the time this didn’t make any sense to me, being they have more money than they need (I hate to use that phrase, but given their wealth and how they don’t really spoil themselves, they really don’t “need” any more capital) I now understand why someone would do something like this and shame on me for thinking only in terms of monetary value. The capitalist wants to improve and ensure the quality of his community, just the same as those who live and are a part of it! I mean if you made all the right decisions and had money burning a whole in your pocket because of it, wouldn’t you buy up assets to keep out any riff raff and to ensure the cronies don’t bring down the morale and quality of the community? Talk about literally “investing in your community” Real capitalists are conservationists. They take care of and preserve their resources and wherever possible, improve upon them.

    It turns out that is exactly what these people I work for are doing! They see value in at the very least making sure this community isn’t overran with any…..undesirables. Doing this, they are improving things for their own selfish benefit and thus creating demand for others to live there and prosper. The kicker; their investment is exponentially returned to them for the value they create for others. We don’t know what will come about with this repair shop deal, but if the last 45 years of community improvement and town desirability says anything…..this will only make it better. For a libertarian, the best part is that property and the pursuit of it did this. Not government or the guns they point at peaceful people as they voluntary interact with each other to create value for society. The simple concept of property and people being allowed to own however much of it someone else is voluntarily willing to exchange, is not a bad thing and actually makes for a better society and creates value for people. I know it did for me when I moved here.

    So the next time someone tells you that we need government to manage and control the exchange and accumulation of property, because capitalists will just buy up all the property and control and oppress people. Tell them government already does that and they don’t even legitimately own any land! The failures with this terrible idea of government are not synonymous with the unrestricted concept of ones pursuit of property and should not be compared to each other. Rules created through property rights and the respect for them, are far superior to the coercive authoritarianism of the State to dictate the free association of people and their pursuit  of and with the fruits of their labor. So whether libertarian chaos rules the day and “Evil” rich people use voluntary exchange to acquire vasts amounts of property or the more reality based scenario where they pursue just enough of it to keep out cronyism, really doesn’t matter. Both would be far better than the system we have now where government gets to decided the legitimacy of the ownership of property and then uses coercion to dictate how it’s used, while also demanding rent for said legitimate ownership of property. Not to mention the irony of then claiming it exists to protect such things.  Remember to pay your property tax so you don’t get evicted from what you thought was your property and/or thrown in a cage for failure to pay…..What seems like rent to government and how does such a perversion of property rights benefit anyone or at all legitimate?35

  • bitcoin

    Free Bitcoin for College Students

    Coinbase, a San Francisco based Bitcoin wallet company, is giving out $10 worth of Bitcoin to college students who sign up for a wallet with a .edu email address. They are attempting to increase Bitcoin awareness among college students, who are at the forefront of the cryptocurrency market.

    This is a limited-time offer that the company just announced yesterday. Click here for their official announcement, as well as instructions on how to redeem the offer. Once you confirm your email address, Coinbase will automatically add the Bitcoin to your wallet.

    Let’s help spread the word about Bitcoin and other alternative currencies!

    UPDATE: Click here for a direct link to sign up on Coinbase.com wallet. Any new wallet made from this referral link will send $1 of Bitcoin to the Boston Austrian Economics Group.

     

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    Resurrecting Lachmann

    The Boston Austrian Economics Group and the Manchester Austrian Economics Group joined forces to host the event “Who is Ludwig Lachmann?” on Wednesday, May 7, 2014. We were joined by leading Lachmann scholar Michael Valčićfor an evening of lively discussion and debate. So, who is Ludwig Lachmann, and why would anyone spend dinner discussing him?

    Murray Rothbard noted in a 1993 preface to Man, Economy, and State that: “It has indeed become evident in recent years that there are three very different and clashing paradigms within Austrian economics: the original Misesian or praxeological paradigm, to which the present author adheres; the Hayekian paradigm, stressing ‘knowledge’ and ‘discovery’ rather than the praxeological ‘action’ and ‘choice,’ and whose leading exponent now is Professor Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann, an institutionalist anti-theory approach taken from the English ‘subjectivist’-Keynesian G.L.S. Shackle.”

    Rothbard counted Lachmann not only as an Austrian economist, but an Austrian economist of high contemporary importance. Is Rothbard’s description of Lachmann in the above passage accurate? To prepare for the May 7 event, the Boston and Manchester groups got a dose of Lachmann with a few suggested readings: “The Role of Expectations in Economics as a Social Science,” “Complementarity and Substitution in the Theory of Capital,” and “From Mises to Shackle.”

    LachmannRothbard attributes nihilism to Lachmann. Rothbard is charging Lachmann with epistemological nihilism, not moral nihilism, since as a wertfrei (“value free”) endeavor, Austrian economics is not concerned with morality, just means and ends. Epistemological nihilism holds that no theory, law, or other form of knowledge can accurately describe reality.

    According to Rothbard, Lachmann has this “institutionalist anti-theory approach.” In another passage, Rothbard opines: “It must be noted that nihilism had seeped into current Austrian thought…It began when Ludwig M. Lachmann, who had been a disciple of Hayek in England in the 1930s and who had written a competent Austrian work entitled Capital and Its Structure in the 1950s, was suddenly converted by the methodology of the English economist George Shackle during the 1960s. Since the mid-1970s, Lachmann, teaching part of every year at New York University, has engaged in a crusade to bring the blessings of randomness and abandonment of theory to Austrian economics.” Is this charge of epistemological nihilism true?

    Lachmann writes: “As regards universal laws, nobody doubts that human beings are subject to them. The question we face is not whether such laws exist, but whether those which do are of much help in enabling us to understand how social situations change.” He is not an epistemological nihilist, it is clear. And his hesitance at applying economic theory to history and its data in order to verify laws is quintessentially Austrian. Correlation does not imply causation, and economics is essentially about causation, about what humans cause to happen through their actions. Only experimentation can prove causation. And on experimentation, Rothbard himself wrote: “In the sciences of human action…it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the ‘facts’ of human history are complex ones, resultants of many causes.”

    That is not to say there is no disagreement between Lachmann’s economics and Rothbard’s economics. Rothbard is comfortable with statements such as: “Any increase in capital goods can serve only to lengthen the structure, i.e., to enable the adoption of longer and longer productive processes.” (MES 8.4).

    Capital and its StructureLachmann, on the other hand, decries any quantitative reference to capital as a whole, such as “increase in capital goods.” He says in Capital and Its Structure (the book Rothbard claimed to approve of): “…we cannot add beer barrels to blast furnaces nor trucks to yards of telephone wire…Where [the economist] has to deal with quantitative change he needs a common denominator. Almost inevitably he follows the business man in adopting money value as his standard measurement of capital change. This means that whenever relative money values change, we lose our common denominator…In equilibrium, where, by definition, all values are consistent with each other, the use of money value as a unit of measurement is not necessarily an illegitimate procedure. But in disequilibrium where no such consistency exist, it cannot be applied.” And to Lachmann, we live in perpetual disequilibrium: “We are living in a world of unexpected change; hence capital combinations, and with them the capital structure, will be dissolved and re-formed.”

    Both the Boston and Manchester groups were receptive to Lachmann’s ideas on the inherent problem with quantifying capital. After all, do breweries represent capital goods to the temperance promoter? Does a brewery constitute more capital than, say, a tow truck? Breweries are not even goods to the promoters of temperance: Breweries are bads and detract from total capital goods. Because valuations differ and there is no homogenous/equilibrium valuation in terms of money, the very concept of an objective “increase in capital goods” seems faulty.

    So where is Lachmann’s paradigm today in Austrian thought? Other than Jaime’s restaurant in North Andover, Massachusetts, it is conspicuously absent. Most of Lachmann’s works are out of print, cost a small fortune to purchase, and are not viewable anywhere online. To compare with the other paradigmatic leaders in Austrian thought that Rothbard named: Hayek is commonly taught in economics classrooms around the world, even at the undergraduate level. Rothbard is dear to hundreds of thousands of anarcho-capitalists, constitutionalists, and even the Communist Party secretary of Shanghai is getting into him. Lachmann has inspired no such mass adoration, but perhaps he should. Is it time to resurrect Lachmann? Whether the answer is yes or no, it can’t hurt to learn about him.

  • abstract

    No Meeting This Week

    In order to allow for more time to prepare for the Introduction and Preface to Man, Economy, and State with Power and Market, we are taking this week off!

    We also have heard that Tom Woods will be speaking in Boston on June 2nd. We hope to see you there!

    In other news, our website has officially gone live this week! We’ve got a few articles up already, and we have a few more in progress with our many writers. Not a writer yet? Find anyone on the Leadership Team at one of the Meet-Ups, and we’ll get you set up with a contributor account.