Austrian School of Economics: Not Tough Enough 34 comments
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"A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them."
-- John C. Maxwell
The war between socialism and free market capitalism has been raging for almost 200 years – and far longer than that, if you toss aside those particular monikers and go straight to the ideological conflict that has pitted economic and financial entrepreneurs against collectivists since the dawn of human history. But never has the war been more pronounced – nor more critical – than in the current economic crisis in which the world finds itself mired.
For decades, proponents of the famed Austrian School of Economics – to which I proudly subscribe – have predicted that, as huge central governments, like the bloated United States federal bureaucracy, increase deficits and spending attempting to control the economy, they will have to continuously find new and creative ways to manipulate debt and currency-creation in order to maintain the illusion. Indeed, many great economists have agreed that, even though the game can continue for a very long time – even decades or more – eventually the scheme will run out of resources, at which point the government will have to return to sound fiscal and monetary policy, or else print more money and destroy its currency, and by extension, the economy.
For many years all of this was largely based on theory; Keynesians and Fed proponents printed and spent with reckless abandon. And why shouldn't they? They had time and history on their sides. After all, didn't taxing and spending get us out of the Great Depression? Weren't World War II expenditures the catalysts for enormous economic growth thereafter? No, the Austrians absolutely had to be wrong, and even if they weren't, what self-serving politician in his right mind was going to ignore his "children" clamoring for someone – anyone -- to do something? That's no way to attract votes. Keynesian policies were just the panacea for any gloomy economy. Or so it would seem.
Unfortunately, Austrians were right – albeit patient: Government spending is not the solution. Oh, sure, it might work for a while – just like living off credit cards with no job might work for a while. But the government can only play these silly games for a time, until eventually the immutable economic law mandating that resources are indeed scarce will catch up to even the mightiest of empires. And so here we are – not just a single nation in peril, but an entire globe staring into the abyss, telling ourselves it can work again…if we only believe…
But it won't work again. With the recent addition of Fed's strategies, The U.S. government has now committed itself to $8.8 trillion in expenditures over the next two years. Some economists predict the number will actually easily exceed $10 trillion. In real terms, even a conservative appraisal still exceeds all of the major projects the U.S. has undertaken in its entire history, combined.
I'll say it again. We face two choices: we can suffer now and return to sound monetary and fiscal policy, or we can print money and inflate our problems away – postponing the suffering until a later date. Of course, if we do choose postponement, the suffering will be much more severe and much more difficult to endure. Yet the truth is we really don't have two options, because we live in a paternalistic democracy run by politicians who cannot possibly risk angering an irresponsible and undisciplined constituency, and therefore, a return to sound monetary and fiscal policy is about as likely as the sun burning out tomorrow. Sure, it could happen. But it's not going to. Thus, we arrive at the focal point of my article.
I have a confession to make. I used to be a socialist. I have read with breathless passion the dogma – from Marx to Proudhon, to Bakunin, to Chomsky. And while I have long since rejected all of it – having been persuaded initially and irreversibly by Mises' Economic Calculation Argument, and subsequently by so many others – I am luckier than most of my fellow free market advocates in that I truly know my enemy. But I have also spent a great deal of time reading and listening the proponents of free-market capitalism -- both classical and modern -- and I find myself convinced more than ever by the theoretical and practical maxims of the Austrians, that we are indeed on the verge of an economic and socio-political tragedy whose magnitude is almost unfathomable.
I find myself devouring anew the works of great minds like F.A. Hayek, David Boaz, Murray Rothbard, and David Friedman, reviewing the entreaties to reign in the federal government before it's too late. And too often these days, I lift my head and sigh, realizing the warnings no longer mean anything -- it's already too late. Beyond my resignation that it really is "different this time," and all the concomitant fear that comes with the acquiescence, I also find myself frustrated by some of the contemporary voices carrying the flag of free markets.
Case in point: Peter Schiff. Please don't misunderstand me – I have read everything I can get my hands on by Mr. Schiff, and I listen and watch his interviews with eager focus. Here is a man who, like me, predicted almost everything that is happening around us – in print, years before the fact -- and I have nothing but the deepest respect for his insight, born from deep Austrian roots. But time and again, when asked about the solution to the problem, Mr. Schiff launches into a brilliant effusion about eliminating debt, lowering taxes, soaking up excess currency, and raising interest rates.
Again, it's not that I disagree with him, in that doing all these things would solve the problem. But my question is this: why on earth eat up valuable airtime discussing such moot points? The government isn't going to buy down debt. It isn't going to lower taxes. It isn't going to stop printing money. And it certainly isn't going to raise interest rates anytime soon. So are these really solutions?
Peter Schiff is a rock, and when he's under pressure on national television – taking heat from the likes of Ben Stein and Art Laffer – he exudes equanimity, and he sticks to his guns. He is an inspiration in this era of the super-status quo, driven by egalitarian-media propaganda that expects only the appropriate conditioned responses from anyone with makeup and a set of vocal chords. I admire Peter Schiff for his cool and his conviction, and I certainly don't know that I could maintain my composure in such environments. And yet, his "solutions" pack no real punch because they fail to reflect realistic outcomes in any kind of meaningful way. I am disappointed, because I think this is Mr. Schiff's only weakness.
Even Jim Rogers -- whose no-nonsense, blunt approach to the crisis has me nearly jumping out of my seat in applause – fails to present any viable strategy for the government. When a reporter asks what he would do if he were appointed Chairman of the Federal Reserve, he answers without hesitation: "I'd fire everyone. Then I'd resign." And in the midst of my laughter, I realize his strategy would be brilliant – if he were appointed Chairman of the Fed. Of course, he has about as much chance of getting that position as my 16-month-old daughter.
In my mind, the identification of the problems is now something for the history books: people like Peter Schiff and Jim Rogers – and their Austrian predecessors -- called it right, and with every passing day, they only get more right. But now is not the time to propose outlandish, unachievable strategies. We can't fix the mess the government has created over the last century; it has sealed its own fate, and the only thing we can do now is watch it unravel and collapse before us, as it delivers the final blows to our weakening currency.
But there are things we can do – realistic solutions that will become more viable as inflationary price-increases return with so much vengeance. We, as individuals, can move our assets away from the dollar, and other weakening currencies. We can invest in commodities and instruments that allow us to profit and thrive in the coming economic hurricane. We can also support politicians and business leaders who understand that we are on the cusp of a revolution not unlike the one that occurred over 200 years ago.
What will it look like? What will the outcome be? Who knows, but as with every revolution, the outcome will be extreme and radical. I, for one, would rather be a part of the new paradigm than a voice attempting to salvage the old one.
Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
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Nah, I think the author is correct. You cannot have a solution that works that is not supported by the voters and making voters understand that the government has to reign in it spending by cutting benefits AND raising taxes is like sticking a hot poker up a bull's butt...you had better have somewhere to go when he finds you. Besides, you cannot educate them. They prefer their ignorance and when you give them facts, they start talking more loudly as if volume has anything to do with being correct.
I say raising taxes only from the standpoint that we might want to pay off the debt, but then if the only folks we owe are for the most part the Federal Reserve, let them swing in the wind. They have earned far more than they are justly entitled to anyways. Paying China and foreigners who have been nice enough to fund our Saturday sloppy drunk spending habits is probably a good idea.
All debt to central banks should be repudiated, IMO.
On Mar 31 12:02 PM @TexasER wrote:
> All systems atrophy, and the US economy and government is no exception.
> But doomsayers take heart, the rebirth and renewal will be well worth
> the pain. At least, as Paco points out, if the old paradigms are
> allowed to fail and die.
>
> The current administration is resisting with every bone in their
> Keynesian bodies, and it will work for a time.
>
> As for the future of big central government -- it is over. Thankfully
> we are finally talking about Chapter 11 for GM. That means that with
> some luck, we may start talking about it for the federal government
> soon.
>
> What's good for GM is good for the country, right?
Also, it is nonsense to say that collectivism doesn't work and is less efficient than free enterprise.
If proof were needed, just about every war in history would be proof.
During wars, economies are collectivized and armies, which are already socialist organizations, take control of just about everything. The reason this is done is that totalitarian socialism is far more efficient than free enterprise and any war would be lost as soon as enough free citizens asserted their free right not to fight.
History also proves that collectivism works just fine under non-wartime conditions.
Slavery made the South into a very pleasant place for slave holders who didn't value free enterprise for Africans whom they regarded as subhuman.
The Egyptian, Greek and Roman civilizations were built with the same collectivized slave labor and they even allowed their slaves to earn their freedom sometimes and become slave holders themselves.
As far as collectivism/free enterprise in the United States, every corporation tries to do everything possible to kill its competition. Microsoft is a good example.
Microsoft built its monopoly operating systems using public domain software created in 'socialist, collectivized' colleges and universities whose 'socialist' programmers didn't receive any money for their discoveries.
Then Microsoft did everything possible to crush all of its competitors who were trying to use THE SAME FREE SOFTWARE to build their own companies. www.amazon.com/Hard-Dr...
This isn't a criticism of Bill Gates, Rupert Murdoch, John D. Rockefeller or Jay Gould, or the rest of the American oligopoly. Just an observation.
We need to keep in mind that these highly collectivized monopolies and oligopolies (and Frederick Taylor's work theories which made them possible) were the very thing that led many of the Austrian School economists to conclude that socialism was inevitable.
The 'Taylorization' of the American and world capitalist economies (and even the Russian economy) was based on the highly influential collectivist ideas of the American social thinker Frederick Taylor.
business.nmsu.edu/~dboje/teaching/503/t...
www2.cddc.vt.edu/digit...
We shouldn't forget that collectivism is as American as apple pie.
Or, as Pogo said,
'I have seen the enemy and he is us.'
On Mar 31 02:58 PM carey_jim wrote:
> Caveat Emptor:
>
> The rating system on Seeking Alpha is worthless if you have posted
> many hundreds of comments.
>
> Why? Some posters, rather than debating a post they don't agree with,
> or simply giving it a minus one rating, go through previous posts
> and randomly assign minus ones, bringing down your overall positive
> point rating to whatever rating they think it should be.
>
> My rating has gone down at least a hundred points that way in the
> last month or so.
>
> It makes the Seeking Alpha rating system worthless especially if
> you consider the fact that these same people can add hundreds of
> points to their own ratings by logging in with dummy user accounts
> on other computers.
The military works because it is standardized. When the Sargent says jump, everyone jumps. There is a reason for that kind of discipline. There is a reason it is called a fighting machine.
It all comes down to profit, is the army with the mercenary Sargent earning $150,000 three times better than the army with the Sargent earning $50,000?
When money changes hands during a transaction, is it a vital component of capitalism that a third party make a profit? If we regulate that profit, is it socialism?
My rating went down by 77 points in about one hour and the ratings of my last 20 posts remained the same.
What do you think of that Mr. Top 100?
Do you want me to prove my point by taking your rating down a few hundred points?
On Mar 31 03:08 PM John Polomny wrote:
> Maybe it is not a conspiracy against you but the ideas that you post
> that they find objectionable. I find that more plausiable based on
> the fact you whine about a comment ranking system that means absolutely
> nothing in the real world.
It is a fact that high taxed Societies are generally have higher living standards, and lower economic growth rates. Neither need much explanation.
It is a fact that reducing taxes and/or increasing Government spending increases growth rates. The wealthy prefer the first alternative, the poor prefer the second. No surprises there.
It is a fact that you privatise public services, you get a modest growth spurt, partly because of efficiency issues and partly because of the increased capital injected into the economy. How much growth comes from each source? Who knows? It is clear that the increased capital benefit is short term.
I know, I know, you prefer the extremists - at least their answers are simple.
The author presents a false dilemma:
"We face two choices: we can suffer now and return to sound monetary and fiscal policy, or we can print money and inflate our problems away – postponing the suffering until a later date."
1) Deflation (which every Austrian seems to be hoping for) is not sound monetary policy, nor is severe inflation. The right policy is to match the demand for money and keep prices stable so that people behave rationally. This is what the Federal Reserve does, and is currently doing.
2) The Federal Reserve and the Federal government don't just print and spend money, not even now. It simply doesn't work that way. The Federal Reserve only creates money to satisfy demand and keep prices stable. The Federal government only spends what it is able to raise through either taxes or selling Treasury notes. Deficit spending may or may not have any effect on aggregate demand, but it does NOT cause inflation.
3) The perceived financial problems of this country (i.e. the National debt) which the author says we are trying to "inflate our way out of" are imaginary... simply a technicality of accounting... a vestige of hard currencies. There never needs to be any suffering at a later date to deal with this. Our problems are real, not financial: Trading of real goods and services has slowed down, resources are sitting idle, and we have made bold promises to provide for our aging population despite a shrinking labor force. Those are the problems that we need to talk about, and nothing that Austrians spend their time talking about will solve them.
Tim
Perhaps you missed the announcement by the Fed that it is going to print money and buy treasuries? The size of this stated program exceeds the current monetary base. The Fed prints money to buy newly issued treasuries...this is identical to the Fed's behaviour in the 1970's when the gold window was closed. They monetized the spending associated with The Great Society and Vietnam War and created a massive inflation. We appear to be on the same track unless the Fed has some exit strategy they are keeping to themselves.
What the Federal Reserve is doing is entirely separate - just fulfilling its obligation to create enough money to match demand. This will not cause inflation either. When inflation starts to pick up again, the Fed will simply raise interest rates and sell assets (the Treasuries) back to the public. That's not really a secret. This isn't the 1970's anymore. Our understanding of monetary policy has come a long way.
Tim
On Mar 31 10:12 PM Brian Coleman wrote:
> Perhaps you missed the announcement by the Fed that it is going to
> print money and buy treasuries? The size of this stated program
> exceeds the current monetary base. The Fed prints money to buy newly
> issued treasuries...this is identical to the Fed's behaviour in the
> 1970's when the gold window was closed. They monetized the spending
> associated with The Great Society and Vietnam War and created a massive
> inflation. We appear to be on the same track unless the Fed has
> some exit strategy they are keeping to themselves.
I think your simplistic view of the crisis and the world on par with the Schiffs and Rodgers is laughable. At least here you correctly point out their proposed solutions are hogwash and do not have a place in reality.
What upsets me most about you people is your 100% attitude and perceptions that what you say is correct. I'm glad currently after 200 years we are in a period where your thoughts get increased air time. But we are just as likely for any failure of this system to take another 200 years as we are to your "immenent" break down.
Maybe you should focus your attention on how you are going to cart around all your commodity assets and not be a target of unruly mobs when the shite hits the fan? Or figure out how you're and your commrades are going to keep retreading this stuff when, sorry "if", things turn around. You look fairly young, can't imagine what a terrible 50-60 years you might have in front of you peddling this.
Sell your TBT, don't fight against the FED. If they are going to buy the debt, insider traders are going to buy it before the FED and the price is going to rise, time and again.
Some (Mr. Banks) need to understand that it isn't about Obama, it is about the State. All of 'em, not just picking on the magic man that smiles rainbows. State-bashers, not Obama-bashers.
I HATE referencing Atlas Shrugged, but John Galt just got strapped to the gurney for some torturing (..."aggressive interrogation"!) until he fixes the mess the state is in--while making sure not to really change any of the bad habits the state likes. Unpossible! Then there's a loooong ramble by Galt and they smoke cigarettes.
"There is no possibility that Austrian School (of) thought can be applied to the US in this Administration and this Congress."
Exactly, Allan Frain. And certainly not with this population. They are not ready, nor have they earned it. They have earned exactly what they (or their children) will get.
The battle for America is over and "we" lost. But in truth this should be a much needed revelation and acceptance of a different path for Austrian. Can we finally stop beating our heads against the wall and move on to a potentially more lucrative place? Let's at least agree to laugh (from afar) at the Americans chanting over and over "We ARE capitalists. We ARE free."
For the record, Hot Richard has decoupled from the high tax bracket and voluntarily is under-employed. Current US policies have demotivated me from continuing to contribute.
PS: Mr. Banks used "shine" and "crank" in the same sentence and that is redundant. But, I defer to his expertise.
Hot Richard never gives negative marks, only positive or none.
Note: Libertarians believe the Egyptian pyramids were built by free, non-union space-alien labor.
Fear of the firing squad remains the best form of worker motivation and the ball and chain the best way to prevent worker absenteeism.
But most of us Americans prefer the carrot, or to use Thomas Jefferson's phrase, 'the pursuit of happiness.' In fact, it was one of the principle motivations for the American Revolution and the American Constitution.
On Apr 02 10:25 AM Hot Richard wrote:
> Collectivism DOES work, but not State (forced) collectivism. I've
> lived in a CA collective (voluntary) that worked very well and we
> were very successful financially. But as always, it depends on what
> your definition of "works" is.
>
> Hot Richard never gives negative marks, only positive or none.
"Libertarians believe the Egyptian pyramids were built by free, non-union space-alien labor."
No. This is not a belief held by Libertarians or libertarians.
"Fear of the firing squad remains the best form of worker motivation..."
No. Money, recognition, and self-fulfilment (pursuit of hapiness) have all proven to be much greater motivation techniques.
"... and the ball and chain the best way to prevent worker absenteeism."
Preventing absenteeism should not be the goal if a present worker is unfit or unwilling to work.
I can only go by what you write, Carey Jim.
BTW I want them audited. Support HR 1207.
Finally: The latest Atlantic has great work in May issue out now, about how the banking industry captured the reins of government and messed things up.
"
The rating system on Seeking Alpha is worthless if you have posted many hundreds of comments.
Why? Some posters, rather than debating a post they don't agree with, or simply giving it a minus one rating, go through previous posts and randomly assign minus ones, bringing down your overall positive point rating to whatever rating they think it should be.
My rating has gone down at least a hundred points that way in the last month or so.
"
Interesting, I had not noticed that. It would never occur to me to go through the process of clicking negatively on priors comments of a person which whom I merely disagreed. On the other hand, I imagine if one is EVIL, then there is no honor to hold them back and, in fact, what you say is true, the SA rating system is useless b/c of the EVIL people among us.
Very good posts on collectivism, and an insightful addition to the articles theme. Good job.