Mises Wire |
- Rising Interest Rates May Blow Up the Federal Budget
- War Spending Gives MMTers and the Left a Strong Talking Point
- The Austrian Economics Meeting Europe Got a Taste of Cancel Culture
- Nine Ways Debt and Deficit Spending Severely Harm African Societies
- Inflation IS Money Supply Growth, Not Prices Denominated in Money
- The Epistemological Case for Capitalism
- Why the US Should Default
| Rising Interest Rates May Blow Up the Federal Budget Posted: 10 Jul 2022 06:15 AM PDT Congress enjoys exorbitant political privilege in the form of cheap deficit spending—but it may soon come to an end. Original Article: "Rising Interest Rates May Blow Up the Federal Budget" This Audio Mises Wire is generously sponsored by Christopher Condon. |
| War Spending Gives MMTers and the Left a Strong Talking Point Posted: 09 Jul 2022 12:15 PM PDT When conservatives applaud unlimited war spending, they not only harm our economy and body politic, but they give the Left a powerful talking point. Original Article: "War Spending Gives MMTers and the Left a Strong Talking Point" This Audio Mises Wire is generously sponsored by Christopher Condon. |
| The Austrian Economics Meeting Europe Got a Taste of Cancel Culture Posted: 09 Jul 2022 07:15 AM PDT Many think cancel culture is an odd particularity of the Anglosphere. Unfortunately, it raised its ugly head at this year's Austrian Economics Meeting Europe held in Lithuania. Original Article: "The Austrian Economics Meeting Europe Got a Taste of Cancel Culture" This Audio Mises Wire is generously sponsored by Christopher Condon. |
| Nine Ways Debt and Deficit Spending Severely Harm African Societies Posted: 09 Jul 2022 04:00 AM PDT Systemic debt and deficit spending are intrinsic features of today's economic system. Unlike classical economics, where markets play the leading role and governments the supporting one, the existing economic model, driven by Keynesian theory, has inverted the roles. Keynesian economics, like other statist economic theories, is distrustful of (free) markets, thus making the state, an inherently bureaucratic and coercive institution, the captain of economic and social life. African countries emerged as "independent" nation-states in this context of state-centered economic thinking and a debt-based fiat monetary system. Consequently, African politicians chose state-led economic development (and maintain this approach to date). However, after fifty years of that approach, Africa is in a very precarious economic situation. Still, Africa's decision-makers are accumulating dangerously high debt levels to soldier on with the failed state-led development model. This is a recipe for disaster. As discussed elsewhere, high inflation, high debt, and high taxation constitute a triple-barreled gun that is destroying African economies. This article takes a closer look at the second barrel of this damaging weapon: government (i.e., public) debt. Africa's Detrimental Debt BuildupMany African governments are repeating past mistakes of accumulating excessive debt. This is despite the fact that this approach has never transformed poor societies into prosperous ones anywhere in recorded history. Yet present politicians seem to believe this time is different and that debt-driven spending will finally lead to the long-awaited and much-discussed African economic development. Alternatively, one could argue that African politicians know that excessive debt accumulation is an unsustainable and destructive approach but do not care because the money provides short-term relief that disproportionately benefits the few (i.e., themselves and their associates). At the same time, the resulting harmful consequences (e.g., heavier taxes, unemployment, and distress, among other hardships) are borne by the many. The International Monetary Fund (IMF) has warned in its latest Regional Economic Outlook for sub-Saharan Africa that the pandemic has worsened most African countries' fiscal situation, "pushing public debt to its highest level since the beginning of the century." Needless to say, but worth noting, Africa's debt problems precede the war in Ukraine and the covid-19 crisis. Business Insider Africa compiled a list of the twenty African countries with the highest debt-to-GDP (gross domestic product) ratios. Here are the ten most indebted countries:
The situation is not so different in North Africa. Debt levels have also been rising, with Egypt leading the pack with a debt-to-GDP ratio above 90 percent, followed by Tunisia with 87 percent. Moreover, one cannot help but notice that the World Bank's heavily indebted poor countries list is populated with African countries. Africa's current wave of debt buildup may well be an economic tsunami in the making. This is baffling because it should be clear by now that systemic debt and government spending will not create free and prosperous African societies. So, why do politicians insist on this ruinous model even as living costs are significantly rising, food insecurity is worsening across the continent, and the overall economic situation is deteriorating further? In short, self-interest—but, of course, sugarcoated in public interest rhetoric. Politicians, not just in Africa, tend to prioritize their interests and agendas, so they gravitate toward the policies that best serve their interests. Whether fueled by debt, heavier taxes, or money printing, government spending serves politicians and their associates very well. It enhances government power and control over people's lives. It also props up established big business interests. In his article "A Time for Reckoning," economist Antony Davies pointed out:
Ultimately Africa's politicians undermine their economies and the continent's economic development by insisting on systemic debt and the state-led development approach. A Destructive Model, IndeedIt is worth reiterating in more detail the nine ways in which debt-fueled government spending cripples African economies and makes poverty worse:
In ClosingSome African countries might be sleepwalking toward a Sri Lanka–style stagflationary crisis or some other type of economic ruination if the current cocktail of economic policies drags on. Indeed, by insisting on debt-fueled spending and the state-led development approach in times of crises, and despite today's very precarious economic situation, Africa's governments further hurt their economies, maintain the economic repression, keep their countries dependent on aid, impoverish their people, and weaken economic fundamentals, thereby leaving their economies even more vulnerable to external shocks. This posting includes an audio/video/photo media file: Download Now |
| Inflation IS Money Supply Growth, Not Prices Denominated in Money Posted: 09 Jul 2022 04:00 AM PDT In the recent Wall Street Journal article "Inflation Surge Earns Monetarism Another Look," Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven't gone away. The head of the monetarist school, the late Milton Friedman, held that inflation is always and everywhere a monetary phenomenon. Friedman and other monetarists believed that the key driving factor for general increases in prices is increases in money supply. This viewpoint has come under scrutiny since the early 1980s because the correlation between inflation and money supply disappeared. According to Ip in 2020, Alan Detmeister, an economist at UBS Group AG and formerly of the Fed, found inflation's correlation to M2 since the early 1980s was weak and its correlation to both the monetary base and M1 was negative. Most economists have stopped using money supply as an indicator for inflation since the early 1980s. Many mainstream economists have attributed the breakdown in the correlation between the money supply and inflation on the unstable velocity of money. What is it? According to the famous equation of exchange, MV = PT, where: M stands for money, V stands for the velocity of money, P stands for the price level, and T for the volume of transactions. This equation states that money multiplied by velocity equals the value of transactions. Many economists employ GDP (gross domestic product) instead of PT, thereby concluding that MV = GDP = P (real GDP). The equation of exchange appears to offer a wealth of information regarding the state of an economy. For instance, if one were to assume stable velocity, then for a given stock of money one can establish the value of GDP. Furthermore, a given real output and a given stock of money enables us to establish the price level. For most economists the equation of exchange is regarded as a very useful analytical tool. The debates that economists have are predominantly with respect to the stability of velocity. If velocity is stable, then money is seen as a very powerful tool in tracking the economy. The importance of money as an economic indicator however diminishes once velocity becomes less stable and hence less predictable. However, an unstable velocity could occur because of an unstable demand for money. Most experts believe that since the early 1980s, innovations in financial markets made money velocity unstable. This in turn made money an unreliable indicator of inflation. We believe the alleged failure of money as an indicator of inflation emanates from an erroneous definition of inflation and money supply. This failure has nothing to do with an unstable demand for money, and just because people change their demand for money does not imply instability. Because an individual's goals may change, he might decide that it benefits him to hold less money. Sometime in the future, he might increase his demand for money. What could possibly be wrong with this? The same goes for any other goods and services—demand for them changes all the time. Defining InflationAccording to Murray Rothbard and Ludwig von Mises, inflation is defined as the increase of the money supply out of "thin air." Following this definition, one can ascertain that increases in money supply set economic impoverishment in motion by creating an exchange of nothing for something, the so-called counterfeit effect. General increases in prices are likely to be symptoms of inflation—but not always, however. Note that prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are "pulling things" in an opposite direction to monetary factors, no visible change in prices is going to take place. If the growth rate of money is 5 percent and the growth rate of goods supply is 1 percent then prices are likely to increase by 4 percent. If, however, the growth rate in goods supply is also 5 percent then no general increase in prices is likely to take place. If one were to hold that inflation is about increases in prices, then one would conclude that, despite the increase in money supply by 5 percent, inflation is 0 percent. However, if we were to follow the definition that inflation is about increases in the money supply, then we would conclude that inflation is 5 percent, regardless of any movement in prices. Defining Money SupplyPrior to 1980, it was popular to employ various money supply definitions in the assessment of the changes in the prices of goods and services. The criterion for the selection of a particular definition was its correlation with national income. However, since the early 1980s, correlations between various definitions of money and national income have broken down. Some analysts believe that this breakdown is because of changes in financial markets, making past definitions of money irrelevant. A definition presents the essence of a particular entity, something no statistical correlation could ever provide. To establish the definition of money we have to explain the origins of the money economy. Money has emerged because barter cannot support the market economy. Money is the general medium of exchange and has evolved from the most marketable commodity. Mises wrote:
Since the general medium of exchange was selected out of a wide range of commodities, the emerged money must be a commodity. Rothbard wrote:
Through an ongoing selection process, individuals settled on gold as standard money. In today's monetary system, the core of the money supply is no longer gold, but rather coins and notes issued by the government and central bank that are employed in transactions as goods and services are exchanged for cash. Hence, one trades all other goods and services for money. Part of the stock of cash is stored through bank deposits. Once someone places money in a bank's warehouse, he is engaging in a claim transaction, never relinquishing his ownership of the money. Consequently, these deposits, which are labelled demand deposits, are part of money. This is contrasted with a credit transaction, where the lender relinquishes his claim over the money for the duration of the loan. In a credit transaction, money is transferred from a lender to a borrower, but the overall amount of money in the economy does not change because of the credit transaction. The introduction of electronic money seems to cast doubt on the definition of money. It would appear that deregulated financial markets generate various forms of new money. Notwithstanding, various forms of electronic money or e-money, like digital currency, do not have a "life of their own." Various financial innovations do not generate new forms of money but rather new ways of employing existing money in transactions. Irrespective of these financial innovations, the nature of money does not change. Money is the thing that all other goods and services are traded for. Once the essence of money is established by excluding various credit transactions, one can identify the status of inflation. Changes in prices are not going to be relevant here. ConclusionContrary to popular thinking, inflation is not about increases in the prices of goods and services but about increases in money supply. Following this definition, we can establish that the key damage caused by inflation is economic impoverishment through the exchange of nothing for something. What matters as far as inflation is concerned is not the correlation between money supply and the prices of goods and service but increases in money supply. Contrary to popular thinking, the essence of money did not change because of various financial innovations. Money is a thing that is employed as a medium of exchange. Furthermore, according to Mises's regression theorem, the historical link between paper currency and gold is what holds the present monetary system together. This posting includes an audio/video/photo media file: Download Now |
| The Epistemological Case for Capitalism Posted: 09 Jul 2022 03:00 AM PDT [This article is excerpted from chapter 21 of Mises: The Last Knight of Liberalism.] In the early 1950s, Mises's NYU seminar dealt increasingly with epistemological questions. As he said to Ludwig Lachmann, he felt that the analysis of epistemological problems would be the number one task in the social sciences in the coming years.1 It was the topic of his last two monographs: Theory and History (1957) and The Ultimate Foundation of Economic Science (1962). The subject had been prominent in his thoughts and reflections since the publication of "Sociology and History" (1929) and "Conception and Understanding" (1930). It was one of the two areas in which he felt contemporary economics was most deficient (the other one being the theory of economic calculation). In Nationalökonomie and Human Action he had stressed the historical significance of the problem:
He had come to the conclusion that political motivations were behind these epistemological critiques of economic science:
Thus the epistemology of economics was not just an idle pastime for ivory-tower intellectuals; it was of direct practical relevance. How does economic theory relate to reality? Most economists believed — and still believe today — that their propositions concern only hypothetical conditions never actually given in real life. To Mises, this point of view was paradoxical: "It is strange that some schools seem to approve of this opinion and nonetheless quietly proceed to draw their curves and to formulate their equations. They do not bother about the meaning of their reasoning and about its reference to the world of real life and action."4 He himself felt it was a necessity to explain the epistemology of economic science and devoted chapters two and three of Human Action (a total of 62 pages) to these issues. However, despite its fundamental importance, epistemology did play only an incidental role in Human Action. The great organizing theme of Human Action was the theory of economic calculation. Mises began with an analysis of the conditions under which no economic calculation could take place, then turned to the discussion of economic calculation in general, then within the market economy, and finally to those social settings that render economic calculation impossible (socialism) or pervert its use (interventionism). From a philosophical point of view, Human Action made a sweeping case for utilitarian social philosophy — "utilitarian" with a distinct Misesian flavor. And the scientific core of this case was economics and the theory of economic calculation in particular. In his new book, Mises made another case for his utilitarian philosophy. This time, the argument turned on the epistemology of social analysis. Mises argued that the only scientific interpretation of social reality was based on economics and history, and that the conclusions of both these disciplines led to the more speculative generalizations of utilitarian philosophy as he understood it. He showed that the major alternative approaches — Marxism, positivism, and historicism — despite their pretensions to science, were untenable on epistemological grounds. They were essentially metaphysical doctrines; that is, their claims were not based on ascertainable fact, but on speculations (many of which, as Mises would show, were incoherent). The new book was eventually published under the title Theory and History and subtitled An Interpretation of Social and Economic Evolution.5 It has remained one of his least read and least understood works. The difficulty lay only partly in the abstract nature of its subject. The main hurdle was, as in several of his other writings, a lack of pedagogical effort on his part. Many people know what to expect when they consult a treatise on economics. But few have any idea about the relationship between theoretical and historical approaches to social analysis. Mises's new book was not about narrating mankind's social and economic evolution. It dealt instead with the epistemological problems of the various competing narratives. In Human Action, he had referred to these problems incidentally. He had stressed that economic analysis, starting from the actions of individual persons, gave a purely fact-based account of the origin of human society. The holistic approaches had been unable to do this. They explained society by "theological or metaphysical professions of faith."6 In Theory and History, he amplified this argument into a sweeping epistemological vindication of the case for liberty and capitalism. The book is divided into four parts. Part one deals with the central phenomenon of the social sciences: value. Mises explains the nature of value and studies the implications for a scientific analysis of human behavior. In part two, he argues that, while all endeavors to discover scientific laws must be built on the assumption of strict determinism, all attempts to find laws that determine the origin of ideas and of value judgments have been in vain. Marxist dialectical materialism and other theories that explain ideas in terms of more fundamental material conditions are merely metaphysical speculation. The same holds true for those philosophies of history that explain the evolution of society in terms of some final destination. In part three, Mises gives an in-depth discussion of the problems of scientific historical analysis, developing the approach of the Southwest German School of historiography. In part four, finally, he critically dissects various speculations about history. In what follows, we will discuss the major elements of his contribution. The Argument in a NutshellFor Mises, the starting point is that "[a]ny epistemological speculation must lead toward determinism." This is so because the human mind is the instrument through which we learn about all things, and our human mind has a determinist bent. It cannot help thinking that all things are strictly determined by certain causes.
This point of view implies that human action could be explained, at least in theory, in terms of underlying material forces. We know that human action is immediately determined by the ideas and value judgments of the acting individuals. But these ideas and value judgments must in turn be determined by more fundamental causes. If such causes were physical or chemical processes, then the explanation of human behavior could become a branch of applied physics or applied chemistry. However — and this is the crucial consideration that Mises had stressed already in previous work — at present nobody knows anything about the more fundamental causes of human behavior. Up to now all attempts to identify laws that would explain ideas and value judgments in terms of physical, chemical, or other processes have been in vain. There are various hypotheses about what such basic determination could look like. But not a single one of them has ever been validated.8 All such hypotheses are therefore mere speculation. They are philosophical or metaphysical constructs, not scientific knowledge.9 Our deficient knowledge about the more remote causes of human behavior has two straightforward methodological implications. All efforts to explain the causes and consequences of human behavior must, at least for the time being, take individual human behavior as an ultimate point of departure. They must accept the principle of methodological individualism. The older economists had applied this principle intuitively and even Schumpeter, who coined the term, defended it merely on grounds of expediency. Mises delivered an epistemological demonstration of its necessity. Methodological individualism is rooted in deficient human knowledge. The causal analysis of individual human behavior must take account of the fact that any human action has certain invariant consequences — that is, consequences that result from like action at any place and any time. For example, an increase of the quantity of money tends to entail an increase of the price level above the level it would otherwise have reached, irrespective of when and where the money supply is increased. The study of such consequences is the task of praxeology and economic science. But human action also has contingent causes and consequences. The very same action — increasing the quantity of money — can be inspired by very different ideas and value judgments. And the objective consequences resulting from any action can provoke very different individual reactions at different times and places. In other words, the causal chains through which ideas and value judgments are connected with human action are contingent. The elucidation of these contingent causal chains is the task of historical research.10 Mises stressed that this is as far as scientific analysis of human action can go. Starting from observable human behavior we can explain its invariant consequences (with the help of economics); we can also explain its contingent consequences (by historical understanding); and we can to some extent explain how this behavior resulted from the ideas and value judgments of the acting person in the particular case under consideration (again by understanding). Mises did not exclude the possibility that individual value judgments and ideas had invariant causes, but again, neither he himself nor anybody else knew what they were. At present, only some of the contingent causes of human action could be identified by historical understanding on a case by case basis. And even this analysis was not likely to give the full picture. There was an unfathomable remnant that defied any explanation whatever: historical individuality. Mises explained:
It follows that the social sciences, at least for the time being, cannot be bound with the natural sciences into a unified body of scientific knowledge. "This ignorance splits the realm of knowledge into two separate fields, the realm of external events, commonly called nature, and the realm of human thought and action."12 For methodological reasons, the social sciences are separate from the natural sciences. Mises called this the principle of methodological dualism. Social analysis, if it just sticks to the known facts, must explain all social phenomena as resulting from individual action, and the causal chain of events must start and end with the ideas and value judgments of individuals. Scientific endeavors within the constraints of methodological individualism and methodological dualism entail the development of the disciplines called "praxeology" and "history." The former is the discipline that describes the invariant consequences of human action that result regardless of time and place. The latter is the discipline that (1) describes value judgments from the point of view of the acting person and (2) describes how individual actions and other relevant factors combined with one another in a given objective context to produce a definite outcome. History describes in retrospect how the acting person perceived the situation in which he had to act, what he aimed at, what he believed to be the means at his disposition. And it uses the general laws provided by economics and the natural sciences to describe the objective impact that the acting person had through his behavior. Thus the mission of history is to describe the drama of social and economic evolution from the point of view of its protagonists. Its specific tool is "psychology" or "specific understanding" or — Mises's favorite expression — "thymology." Of the two disciplines, economics had the most momentous practical implications.13 In Human Action, Mises had shown that economic analysis leads directly to laissez faire conclusions. He demonstrated that government intervention entails consequences that are unwanted even from the point of view of the champions of these interventions. In Theory and History, he completed the case for capitalism from the epistemological point of view. In particular, he took on those theories that were grounded on an explicit or implicit rejection of methodological individualism and methodological dualism. His basic argument against the approaches of Marxism, teleological philosophies of history, and positivism was that they had no scientific underpinning whatever. They were based on certain beliefs about social and economic evolution, but they had not delivered the goods. Their most fundamental tenets could neither be refuted nor verified with the tools of science: reason and observation. Moreover, to the extent that they did make propositions about ascertainable facts, they were wrong (or incoherent) at the crucial junctures of the argument. For example, Marxism and the various philosophies of history could not explain how the general direction in which they believed society was moving resulted from individual action. Positivism blithely disregarded the fact that there are no constant relationships in observable human behavior. The champions of historicism contradicted themselves whenever they championed any government policy whatever, while holding to the notion that there was no such thing as economic law. Strictly speaking, these were metaphysical or quasi-religious doctrines, not science.
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| Posted: 08 Jul 2022 03:00 PM PDT Jeff and Bob discuss the effect of rising interest rates on Uncle Sam's ability to service debt—and promote the increasingly less radical idea that a default on Treasury debt is both inevitable and good. Jeff's article on rising rates: Mises.org/HAP351-1House Budget Committee report on higher interest rates and US debt service: Mises.org/HAP351-2Rothbard on the ethics of debt repudiation: Mises.org/HAP351-3 |
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