C.S. Hayden's Blog

Austrian Economist Walter Block on the Financial Crisis

• Austrian economics has nothing to do with the economics of the country of Austria, anymore than Chicago economics has to do with the economics of the city of Chicago. Rather, the progenitors of Austrian economics were from Austria -- men such as Menger, Böhm-Bawerk, and Mises. Austrian economics is considered a "cult"* by the mainstream because it is not empirical. Austrians view economics as a branch of logic, believing that we cannot verify economic truth through experimentation. We can observe quasi-controlled experiments in North Korea vs. South Korea and East Germany vs. West Germany that might be said to "prove" the utility of relatively-free market systems as against communism, for example. But even these observations do not yield economic truth because not all factors can be controlled as in a true empirical scientific experiment.
  
• Dr. Block summarized his political philosophy: "If it moves, privatize it. If it doesn't move, privatize it." He describes himself and was introduced as an "anarcho-capitalist," which he admitted was a little radical.
  
• Dr. Block cited NY Times headlines regarding layoffs and asked why we are in an economic crisis and how we can get out of it? He said that Obama is the new FDR and that the government has created all the problems.
• The mainstream is all Keynesian now, meaning most economists believe the solution is to spend our way out of the downturn. Samuelson, on the left, once said that "we are all Keynesians now." Dr. Block asked Milton Friedman if this was true, and Dr. Friedman said that his policy recommendations were different from leftist Samuelson's, but their tools of analysis were the same. Dr. Block pointed out that policy recommendations flow directly from analysis, which in turn is reliant on tools. Thus, Dr. Block's assertion that all of the mainstream is Keynesian.
  
• The mainstream believes the market cannot be trusted to self-regulate. Dr. Block, however, asserted that Adam Smith's concept of self-serving cooperation among members of a free economy leads to a self-regulating economy.
  
• The only difference between the Monetarists (Friedmanites) and Keynesians is their recommendations of monetary vs. fiscal policy as the remedy for economic crises. They both have government intervention in common, yet government is always the problem. Not to mention, statist action is coercive. The state is nothing more than a robber gang with good PR, using the tyranny of the majority through "democracy" and so forth, according to Dr. Block.
• Dr. Block drew a diagram with a triangle widening from left to right with time on the X-axis (horizontal) and money on the Y-axis (vertical). From left to right on the time horizon, a complex economy undertakes activities such as the following: mining, producing basic goods and infrastructure, manufacturing, wholesaling, retailing, and consumption. As goods make their way through these stages and value is added, the money value increases. A complex economy requires capital goods for such "round-about" methods of production.
• Austrians point out that capital goods toward the beginning of the stages of production must correlate with the products that will come out of the system as consumable finished goods. The mainstream, on the other hand, lumps all capital goods into the "k" variable of their formulas and assumes that capital is malleable. In contradistinction, Austrians assert that capital is heterogeneous rather than homogenous, so wise capital investments must be chosen and undertaken among various alternative uses of capital long before finished goods can be produced in the "round-about" method of production.
  
• The low capital-intensive economy can be described with the following words: impatient, high interest rate, 6-year-old economy (e.g., preference for one chocolate bar today rather than ten chocolate bars tomorrow), consumption now, and no saving. Because few are willing to save and lend but many wish to borrow, interest rates are naturally high. In such an economy, long-term investment is hard to justify because the high interest rate requires a higher discount rate for time value calculations and leads to a lower PDV (present discounted value) of potential capital investment projects.
• In an environment with lower interest rates, which arises naturally when savings rates are high, long-term capital projects are discounted at a lower rate, which encourages capital investment in long-term projects.
  
• This is where Greenspan and Bernanke come into play. Greenspan, France's Sarkozy, Germany's Steinberg, and many others think that laissez faire economic policy is dead and that it was the problem all-along. But they must be on a different planet because we have a Fed and fiat money. We have not had laissez faire for quite some time.
• In laissez faire (free market economics), we have real money because of the problem of double coincidence of wants. Bartering is difficult because the person with whom you trade must want what you have. But if we did not trade, we would have to be self-sufficient, could not specialize, and would be much less efficient -- a recipe for death for much of the world's population. Money comes about spontaneously in a free economy as an intermediary or facilitator of trade. Gold has emerged throughout history as the preferred commodity for money, as well as silver and copper for smaller trades. Gold as money handcuffs the rascals in the state because government can only finance itself through 1) taxation, 2) borrowing, or 3) inflation. With fiat money, it can inflate and blame rising prices on the unions or the "greedy capitalist pigs." But with gold as money, the state must resort to taxation -- and it hasn't yet figured out how to blame taxation on the market -- or to borrowing, which just displaces private borrowing.
• When Bernanke and Greenspan artificially lowered the interest rates, the economy changed such that there was too much investment in heavy industry and other capital goods on the left side of the triangle. But the government could not keep inflating (increasing the money supply) without creating German or Zimbabwean-style hyperinflation in a crack-up boom. So, the Fed shut off the easy money, which caused companies such as Microsoft, Catepillar, Home Depot, home builders, and others in long-term, capital-intensive industries, to suffer.
  
• Our present crisis was caused by previous government intervention, specifically easy monetary policies under Greenspan followed by tightening under Bernanke to prevent a crack-up hyperinflationary boom. All of the malinvestments under easy money are now coming to light. The crisis is not specifically Bush or Obama's fault, as the politicians in power are all just the same -- they all go along with the system that creates fiat money, artificially low interest rates, malinvestments, bubbles, and depressions.
• There are many parallels between now and 1929-1946 (the Great Depression actually ended after WWII, according to some economists' research). FDR lengthened and increased the severity of the Depression. After the Fed began in 1913, economic cycles oscillated more wildly than before the Fed. Even now, looking at charts of the money supply and interest rates causes us to conclude that these factors are controlled by drunkards.
  
• In the 1930s, the government tried to keep wages up, but of course, this only kept unemployment high. In addition, the government cut off foreign trade through the Smoot-Hawley tariff. Obama wants to repeat these errors because he wants us to be "self-sufficient" as a country, which will lead to trade barriers.
  
• The Community Reinvestment Act was brought to us by the evil Boston Fed, which observed that blacks were getting fewer loans. NINJAA (no income, no job, address, or assets) loans were not popular, and for various reasons, whites were getting more loans. There was also red-lining among banks, a practice of refusing to extend loans to home buyers in certain neighborhoods notorious for deliquency in repayment. The Boston Fed wanted to end this, so it required banks to make NINJAA loans in order to renew banking licenses.
  
• The new lexicon became: liar loans, zero down-payment loans, ATM loans, etc. Much more housing came about in this environment than otherwise would have come about. Now, the government is in the process of simply bailing out the mistakes they encouraged long ago.
• The "Mediocre 3" in the rust belt (Detroit's automakers) are in trouble because they are not satisfying consumers. There is an automatic feedback mechanism in the market, but propping up failures is like subsidizing unemployment. It leads to economic depredation.
  
• Obama wants to just continue Bush's bailouts, as all these Keynesians think we can get out of the depression simply by spending. But if you could pick members of your economy and chose between slugs who could only consume vs. producers, which would you choose? You cannot consume your way out of a depression, so we must encourage savings.
  
• Government is the bad guy morally and economically. It caused the Great Depression and our current economic crisis. We must embrace laissez faire capitalism.
  

posted by C.S. Hayden @ 9:40 PM