Maybe Listen To Ludvig This Time Around?
Mark Spitznagel writes in the WSJ that Ludwig von Mises was snubbed by economists when he warned of a credit crisis in the 20s...predicting the Depression. I didn't read it it in the original German -- "not exactly a beach read," writes Spitznagel. In fact, I never read it at all. But, Spitznagel makes von Mises' thinking remarkably simple to understand:
Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.
Ordinarily, any random spikes in credit would be quickly absorbed by the system--the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.
The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.
I just love this guy. Per Spitznagel:
Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail--no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.
Spitznagel writes that while von Mises turned down a bank job, not wanting his name on any part of the crash, it's a pity Keynes, who lost big in the stock market crash was so dapper, and good English-writing, and so filled with such completely wrong but well-spoken ideas.
Ludvig von Mises Institute is here. And here, from a just-blogged 1964 Murray Rothbard essay, from a quote by Frank Chodorov, is where we're headed:
The state is an antisocial organization, originating in conquest and concerned only with confiscating production.... There are two ways of making a living, Nock explained. One is the economic means, the other the political means. The first consists of the application of human effort to raw materials so as to bring into being things that people want; the second is the confiscation of the rightful property of others....The state is that group of people, who having got hold of the machinery of compulsion, legally or otherwise, use it to better their circumstances; that is the political means.
Rothbard continued:
(Albert Jay) Nock would hasten to explain that the state consists not only of politicians, but also those who make use of the politicians for their own ends; that would include those we call pressure groups, lobbyists, and all who wrangle special privileges out of the politicians. All the injustices that plague "advanced" societies, he maintained, are traceable to the workings of the state organizations that attach themselves to these societies.
Government Spending Divides, Does Not Multiply
The Obama administration and almost all Democrats in congress push the idea that it is exactly our current spree of government taxing, spending, and credit expansion that is going to save us, just like the spending of World War II saved the US from depression in 1941-1945.
Robert J. Barro is an economics professor at Harvard. He found that spending in World War II decreased GDP by 20% (a multiplier of 0.8). Government spending actually killed GDP, even assuming that the spending itself was useful.
An economist quipped: If you think WW2 ended the Great Depression in the U.S., then we can carry out the same enlightened policies without needing a war. Conscript most of the able bodied men and have them build tanks. Then destroy the tanks. Impose rationing for good measure. At the end, everyone is supposed to be rich.
Actually, this isn't so funny. Keynesian economics recommends to do just that. And Obama and many in congress are Keynesian in their thinking, because they like the recommendation that the government should tax a lot of money and spend it on signs saying "Brought to you by a caring Democrats".
That economist also quipped: Some people think that WW2 benefitted Europe because they were relieved of the burden of having old factories. They were bombed out, and so could build new, efficient factories. If you believe that, then they could bomb their own factories, or we could bomb ours, and experience the same boost in wealth.
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Keynes, Digger of Holes
. easyopinions.blogspot.com/2008/12/keynes-digger-of-holes.html
No one should trust a theory that predicts greater prosperity from digging holes. Yet, this is the theory by Keynes that Obama is following, and many past presidents have followed, to forcibly change our society. We will supposedly create even more wealth in the future by wasting our current wealth today.
I know. I must be wrong. No one could believe such a thing. Certainly no President of a great country would listen to a dead crank who spouted such nonsense. But, there it is.
There is a story at the link about Keynes dirtying some towels in a washroom and claiming that he had just helped the economy.
How many obviously false statements must a person make before the quality of his entire thought is in question? The limit has not yet been set for government economists and politicians.
Andrew_M_Garland at November 8, 2009 12:12 PM
Thanks, Andrew - so appreciate your comments on economic issues.
I just saw a link to a Sarah Palin Facebook comment on the health care bill. This bit reminded me of the quotes above:
http://www.facebook.com/note.php?note_id=169376258434&ref=nf
Amy Alkon at November 8, 2009 12:40 PM
Make no mistake: we’re on course to have government commandeer one-sixth of our economy
Sarah Palin: Policy maven. Knows what she is talking about.
Whatever at November 8, 2009 2:33 PM
"The state is an antisocial organization, originating in conquest and concerned only with confiscating production.... There are two ways of making a living, Nock explained. One is the economic means, the other the political means. The first consists of the application of human effort to raw materials so as to bring into being things that people want; the second is the confiscation of the rightful property of others....
The state is that group of people, who having got hold of the machinery of compulsion, legally or otherwise, use it to better their circumstances; that is the political means."
That's one of the best summaries I've read describing what the state mostly is and does. Once you grasp this, understanding the motivations behind everything that politicians do becomes simpler.
Lobster at November 8, 2009 4:20 PM
Amy Alkon
https://www.advicegoddess.com/archives/2009/11/maybe-listen-to.html#comment-1676725">comment from LobsterI felt the same way, Lobster.
A brilliantly simple explanation.
Amy Alkon
at November 8, 2009 7:42 PM
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