This page has been archived and commenting is disabled.

Peter Boettke Explains Austrian Economics

Tyler Durden's picture


In this very informative interview between The Browser and Peter Boettke, the professor of economics discusses the contributions made by the Austrian School, and explains the various nuances of the economic school by way of recent books by "Austrians." He also explains what we can learn from Mises and Hayek, and argues that economics is the sexiest subject.

What is Austrian economics? How does it differ from standard economics?

Like a lot of things in economics, it’s the opponents that give the labels to people. The people who were practising economics at the University of Vienna thought they were just doing economics. It’s the critics who said, “Oh! That’s those Austrian economists.” It’s a label that gets to be associated with a set of propositions, both analytical – about the way you study economics, its methodology – and about the policy conclusions of economics. Representatives of that tradition came out of Vienna in the late 19th and early part of the 20th century. They then migrated to the London School of Economics, and to Switzerland, and eventually to the United States, where they held positions at places like Harvard, Princeton and Chicago. They coalesced around New York University, which became a hub of teaching Austrian economics.

So where are most Austrian economists now? Are they in the US?

It’s a worldwide movement, but I would say the place that has the strongest concentration of Austrian economists in the US is George Mason University. Outside the US, it’s probably Madrid, at King Juan Carlos University, and there is also Universidad Francisco Marroquin in Guatemala. Then there are a lot of people sprinkled here and there. It’s not necessarily full-blown Austrian economics. Here at George Mason as well, it becomes a mix and match of different ideas in economics that people find interesting.

Analytically, the biggest difference between the Austrians and their mainstream brethren is a focus on processes of adjustment and changing conditions, as opposed to static or equilibrium states of affairs. In a supply and demand curve, a standard economist would focus on the price and quantity vector that would clear the market. The Austrians want to talk about all the exchanges and activity that take place that results in that vector being discovered and the market being cleared.

Can you give an example?

Imagine if refrigeration wasn’t an option and you had some fish to sell. You start selling them at $10 a fish, and this many people buy the fish. After a while it slows down and you still have some fish remaining. As the day wears on you’re trying to get rid of the fish because they’re going to spoil. So you adjust your price down, you sell it at $8 a fish, or $6 a fish or $5 a fish. Eventually the market clears and all the fish find a buyer. In standard economics, we talk about the price and quantity vector that would clear that market, and the formal techniques of economics – a series of simultaneous equations – would get us to that vector. The Austrians don’t disagree with that price and quantity vector. But they want to talk about all the activity, a lot of which is what we call entrepreneurship – people adjusting the price, arbitrage opportunities and so on. Eventually you get to that vector, but your focus isn’t on the vector, it’s on all the stuff that goes on before it’s discovered.

From this example, and also from the books you’ve recommended, I get the sense that it’s a lot broader than regular economics?

Yes, because Austrians want to talk about the institutional environment within which economic activity takes place. They want to talk about cultural frames of reference that form the priors that rational actors have. They want to talk about the fact that we each have different priors, because we’re diverse individuals who have different perspectives on the world. Somehow, we have to reconcile these differences through the exchange processes in the market. So, the books series that I edit at Cambridge with Timur Kuran – it’s not an Austrian series, it’s just a straight-up economics series, but its title is “Cambridge Studies in Economics, Cognition and Society”. It’s a very broad notion of social science, of which economics is a part, rather than the idea that economics is somehow separated from all the social sciences.

Is Austrian economics considered “heterodox” by the mainstream establishment?

This is complicated because on the one hand it is. If you go to the official classifications in economics, and look up Austrian economics, it will be listed under modern heterodox economics. But in most cases, when people think of heterodox economics, it’s economics that challenges the basic presumptions of economists. So if you follow the debate that has been going on at Harvard, they had the walkout on Greg Mankiw’s class [Ec10, the basic economics class that Harvard offers as part of its core curriculum for undergraduates]. What the students object to is that Greg Mankiw teaches the invisible hand, ie how through the exchange process individual interests can be reconciled in the overall public interest. People think that’s too ideological. Then Steve Marglin [who teaches a course called Economics: A Critical Approach] did his talk on heterodox economics. He talks about the fact that markets are exploitative, there’s injustice, there’s irrationalities. For heterodox economists, markets don’t satisfy, they exploit. They deny the invisible hand. The Austrians don’t.

Imagine a two-by-two matrix, in which the rows are defined by whether you are dealing with a simple problem situation, or a complex problem situation. The columns are social order or social disorder. Then you look at the individuals pursuing their individual self-interest. What’s going to result? In simple problem situations – where agents are perfectly informed, they live in large number situations and are dealing with homogeneous products – you can get social order, because no one individual can influence the effect on any other individual. But once you introduce complexities into the system, the system no longer generates the invisible hand, and you can get disorder. So in a simple problem situation with free markets everything is popcorn and candy canes, and then we move to a complicated problem situation and we get unemployment and irrational exuberance etc. This is Keynesian economics and market failure theory – all very mainstream.

What Marxists believe is that even under simple problem situations, the market can’t do its job – you get monopolies, you get exploitation. Classical economists, Austrian economists, and New Institutional economists reside in the box that starts with a complex problem situation but nevertheless gets you social order. The way you do that is not based on the behavioural assumptions of the actors, but on the institutional assumptions underlying them, ie things like the political, legal and cultural context within which individuals engage and exchange. If that context is the right context, then even in the most difficult of situations, individuals can generate social order. They can cope with their ignorance, they can take care of uncertainty. When the market goes astray, it’s not because there is something wrong with the market mechanism, it’s because the rules under which the market mechanism operates have got distorted.

Are you saying mainstream economics can’t handle the complexities of the real world?

This is why methodology of the social sciences matters. It defines not only what we consider to be good questions, but probably more importantly what we consider acceptable answers. A lot of people within mainstream economics would like to handle complexity, and we see them constantly striving to do it, but they constrain their efforts by certain methodological straitjackets. They claim they have to fit things into formalistic models, otherwise it’s not a good answer. One of my favourite books is by Richard Nelson, who teaches at Columbia, about evolutionary economics. In that, he makes a distinction between what he calls “appreciative” theory and “formal” theory. What he means is that there is a theory that all economists agree to when they talk to one another about what goes on in markets, about entrepreneurship, about innovation.

Schumpeter uses the phrase “creative destruction”. For example, you have Tower Records, it does very well, then innovation comes in and eventually Tower Records goes out. We can tell the story about how markets operate in that way, and we can develop an appreciation for it. What we can’t do is put it in a model, and our formal, official theory is the modelling exercise. So there is this disjoint between the appreciative theory we can talk about, and the formal theory which limits what we can talk about to only those things that we can formally prove in a deductive model. Austrians aren’t challenging the appreciative theory of neo-classical economics. In fact they’re very much part of the neoclassical tradition. It’s just that the Austrians want to talk about things like dispersed knowledge, heterogeneity, uncertainty – not just risk, but real uncertainty – and institutions, how institutions arise to allow us to cope with our ignorance and our uncertainty and to ameliorate the frictions that exist in the world. Rather than seeing the frictions as the thing that destroys the model we have, or prima facie evidence that the market is not very efficient, they play a positive role.

Let’s talk about your books. The first you’re recommending is Ludwig von Mises’s Human Action: A Treatise on Economics. This is definitely a very broad book, looking at psychology, at philosophy and so on. The title of the last chapter was my favourite: “Economics and the Essential Problems of Human Existence”.

Do you believe that Michele Bachmann reads this book at the beach?

Put it this way, in the first chapter he starts off talking about “praxeology”, which is certainly a word I had to look up. And in my edition, he uses some words which aren’t just derived from Greek, but are actually in Greek. So I’m very impressed she can read it at the beach. It’s also about 1,000 pages long. I know you love this book, but I’m not sure how many people other than Michele Bachmann are going to be able to get through it, so give us some highlights.

Mises was not just some quack, he was a serious economist. He was named a distinguished fellow of the American Economics Association in 1969, and he won the highest medal for scientific achievement in his home country of Austria. There is a great article by Paul Samuelson on who would have won the Nobel Prize in economics if it had started the same year as the other Nobel Prizes, and Mises is on his list. This book was originally published by Yale University Press, and John Kenneth Galbraith wrote a review of it in The New York Times.

Mises made at least three significant contributions to economics. The first contribution is in money and business cycle theory. What Mises tried to show is how money is central to all exchanges, because in a monetary economy, goods trade for money and money trades for goods. Goods don’t trade directly with other goods. Since money is one-half of all exchanges, if you screw around with money, you’re going to screw around with all the exchanges in the economy. He postulated that when the government distorts the monetary unit, through the manipulation of money and credit, it can generate boom-and-bust cycles. So rather than the business cycle being inherent to capitalism, it’s a consequence of distortions caused by the manipulation of money and credit.

Hasn’t what just happened with the housing boom and bust proved the Austrians right then?

There’s a Wall Street Journal profile on me, in that vein. People do argue this. This is why Paul Krugman gets so incensed. You know you’re doing something right when people get really mad. There are technical issues involved here that make this more nuanced. I have an e-book called The House that Uncle Sam Built which is a short little piece directed at the general public that tries to tell this story, how the Austrian story is consistent with what we’ve seen.

Tell me about von Mises’s next contribution.

His second contribution was on the controversy over socialism, and whether it could engage in economic calculation. To put it simply, economic calculation helps you sort out – from the array of technologically feasible projects – those which are economic and those that aren’t. For example, you don’t want to build railroad tracks out of platinum, you want to build them out of steel. Platinum might well be technologically superior – smoother, longer-lasting – but it costs too much. The idea of socialism was to completely transcend the market economy, but if I don’t have prices and I don’t have exchange ratios established on the market because I have abolished commodity production, how am I going to know that I have to use steel?

Mises came in and said: Let’s assume that ends of socialism are highly desired – I’m not going to engage in a battle over ends. What is it socialists want to achieve? A burst of productivity, leading to an overcoming of the conflict between classes. What is their means to attain that goal? Collective ownership over the means of production. Rationalisation of production for direct use and not for exchange will produce this burst of productivity that will overcome scarcity and therefore the conflict between the classes. What Mises said was: Your means are in conflict with your ends, because you can’t engage in economic calculation. You’re not going to get rationalisation of production, you’re going to have endemic waste. He was the first person to demonstrate that. As the history of the Soviet system played out, including its early history from 1917-21, it seemed to play out Mises’s argument. Socialists were always making compromises with respect to their original plan, trying to jerry-rig it, and you get on this treadmill of economic reforms that characterise the entire Soviet period. Then, eventually, it unwinds in the late 1980s, and you even have people like [left-wing economist] Robert Heilbroner admitting that Mises was right.

Which is obvious with hindsight, but is worth pointing out was not necessarily clear at the time Mises was writing. The arguments that socialism was a better way of organising the economy were very persuasive at the time.

Mises makes his argument in 1920, but the socialist calculation debate really takes place, in the English language, in the 1930s, in the middle of the Great Depression. For a lot of economists, socialism is an alternative to the capitalist order, which they see falling apart in front of them. So they’re attracted to it. Then you have the 1940s, where you’re fighting a battle against Hitler. Your ally is the Soviet Union, which has gone from a peasant economy to a military contributor – an amazing transformation of an economy – and because of that is able to help defeat Hitler. After World War II, everyone understands socialism isn’t too pretty in the Soviet Union, and Stalin is not exactly a nice guy. But if only we could have democracy with it, it would be wonderful. That’s where Hayek eventually comes in and challenges this idea as well. But at the time Mises is writing, it’s not at all clear that capitalism is superior to socialism.

You’d better get on to his third contribution.

Mises’s third contribution is an argument about methodology in the social sciences. He argues that human sciences are different from the natural sciences. His methodological argument cut against the trend of the times, which was to move towards a unity of science approach – what’s right for physics is right across the board. Mises talks about methodological dualism. To communicate this simply, he used to say: “If you throw a rock into water it sinks; if you throw a stick into water it floats; if you throw a man into water he must decide whether to sink or swim.” What does that mean then for the way we approach the social sciences? If you think about economists, in the 18th and19th centuries – John Stuart Mill, David Hume, Adam Smith – they were philosophers. The way they reasoned was like a philosopher. When you get to the mid-20th century and you look at Paul Samuelson, he’s not a philosopher any more, he’s more like an engineer. His books look like engineering or chemistry books. There was a transformation of economics – it became a tool of social control.

To the Austrians, economics is not a tool of social control, it’s a framework for helping us understand humanity, its history, and our plight in the world. Hayek had a great phrase about this. He said that the curious task of economics is “to demonstrate to men how little they really know about what they imagine they can design”. Hayek’s Nobel Prize address was called “The Pretence of Knowledge”. He was going after the idea not only of socialism, but of large-scale macro models. Because in the mid-20th century, and going up through the 1970s, the economy was envisaged like a bathtub. One spigot was monetary policy and the other was fiscal policy, and an economist’s task was to turn those spigots on to make sure the water rose to the level in the bathtub that was consistent with full employment.

Mises and Hayek stood in complete opposition to that view. Even more so than Milton Friedman, because he’s arguing over which is more effective – fiscal or the monetary policy, but he’s still telling us we’re in control of the levers. What Mises and Hayek are saying is that that whole way of thinking about the economy reflects a pretence of knowledge – that we know what the full employment output level would be, that we know exactly how much water to let in, and how much to let out – whereas in reality, if we make a mistake with any of that, the water comes gushing out all over our bathroom floor, or it drains completely out and we have nothing.

The belief that social sciences should be like social physics is built on an assumption which Mises says you can’t make. Therefore you mischaracterise what the task of economics is – you send economics in a direction which is totally different from our heritage, of what we got from David Hume, Adam Smith, Jean-Baptiste Say and John Stuart Mill, and then Carl Menger, and then Mises, Hayek, and other people in the 20th century, like Jim Buchanan.

So your view is that the profession took a wrong turn with Paul Samuelson?

That would be the argument, yes.

And do you agree with it?

Personally, yes I do. But there were a lot of things going on leading to this, one of which was that Samuelson was the brightest boy on the block, and when the brightest boy on the block goes in one direction, everyone else follows him. We’re in the midst of the Great Depression and World War II and this is a promise that we can avoid these kinds of problems. Then, the profession was really becoming professionalised, in a way that previously it wasn’t. People like John Stuart Mill were gentleman scholars. It wasn’t this whole professoriate, these departments and tenure and all those battles. Keynesian economics, post-World War II, dominated the entire profession. Everyone became a Keynesian and at the graduate, elite levels, it became a totally Samuelsonian project.

Samuelson had the intellectual entrepreneurship to write both the Principles of Economics textbook – which became the standard textbook for freshmen – and the standard graduate textbook. He dominated both ends of the economics profession. It’s a phenomenal intellectual achievement, independent of what you think about the content. I think Samuelson is worthy of intellectual attention, I just think he sent us in a wrong direction.

This idea of Hayek’s that you can’t know much – is that what leads the Austrian school towards libertarianism? And isn’t this libertarian element the reason it’s embraced by the Tea Party? Though I detect from your tone, also in your email, that you don’t particularly enjoy that connection.

What the position makes you have is not libertarianism, or anything like that, but humility. The economist is nothing more than a student of society, and any economist that tries to represent themselves as a saviour of society should be subject to ridicule. Let me read to you from Adam Smith, the section with the invisible hand explanation. He’s with Mises and Hayek on this humility point, even though the book, An Inquiry into the Nature and Causes of the Wealth of Nations, is written as advice to statesmen:

“What is the species of domestic industry which his capital can employ [ie what he should invest in], and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

In The Theory of Moral Sentiments Smith calls him “the man of system” who is arrogant in his own conceit. Hayek comes back to this in an essay, “Individualism True and False”, and he tries to explain where the system goes. He writes:

“The main point about which there can be little doubt, is that Smith’s chief concern was not so much about what man can occasionally achieve when he was at his best, but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are now, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent, and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wished, to ‘the good and the wise’.

“The chief concern of the great individualist writers was indeed to find a set of institutions by which man could be induced, by his own choice and from the motives which determined his ordinary conduct, to contribute as much as possible to the need of all others; and their discovery was that the system of private property did provide such inducements to a much greater extent than had yet been understood.”

That’s really the Austrian position. It doesn’t fit on a placard for a party to march with. Now we get to a situation which goes haywire for a variety of reasons. We have these big bailouts and the economy doesn’t kick back up to the extent that people thought it would, you have this big bill that’s out there in terms of the public debt. There’s an anger out there, that politics is no longer connected to the people, that it’s these special interest groups. The Tea Party aren’t just against Nancy Pelosi and Harry Reid, they’re not big fans of George W Bush, either. They want to penalise the guys on the right as well. They’re looking for people to read, and that say stuff that is somewhat similar, and they listen to Glenn Beck and they start reading Hayek. I just don’t think it’s relevant to the scholarly assessment of the ideas of Hayek to point out that Glenn Beck likes him, just like I wouldn’t look at Paul Krugman’s ideas differently because Rachel Maddow likes them.

It’s definitely the case that people have turned to Hayek and Mises as iconic figures. Mises stood against the tide of Keynesianism and animal spirits with his alternative theory about the manipulation of money and credit; he stood against the socialists. And they [the Tea Party] say, “Oh. Who was against socialism and who was against Keynesianism? Those are our theorists.” The critics of Austrian economics have used their recent popularity to try to tar and feather them. That’s why people like me get snarky in response. We shouldn’t, we should be more level-headed, and say, “OK, there’s good things about Austrian economics, there’s bad things about it, and all we’re trying to do is improve and go forward. We really just want to understand the economy.”

But to me, libertarianism is a by-product, not an assumption going in. If you look at Mises and Hayek, neither of them are natural rights thinkers. Most libertarianism – if you think about Ayn Rand or even Robert Nozick – derives from an individualist rights perspective. Mises and Hayek are all about consequentialism. If you can show them that the means of collective ownership would generate more successfully the ends of liberty, fraternity and equality, they’d say, “OK, yes, let’s have collectivism!” But because collectivist means undermine those goals, what they say is, “Maybe we ought to rethink this.”

Let’s get on to the book of essays by Friedrich Hayek that you’ve recommended, and you’ve already quoted from: Individualism and Economic Order. He won the Nobel Prize for economics in 1974, and my understanding from mainstream economists is that his big insight – particularly critical for studying financial markets – is that prices don’t just reflect supply and demand, but also information.

Yes, he has a famous essay called “The Use of Knowledge in Society”. What he tries to argue is that the price system systematically communicates dispersed information that you and I hold. If you and I go to the store, we’ll have different subjective preferences. We express those subjective preferences in trade-offs that we make when we buy some goods and not others. That gets communicated to other people via prices in the market – you don’t have to pick up the phone to find out. The subjective trade-offs that you and I make have become objective information for other people in making their trade-offs. The price system is a giant telecommunications system. It tells me about relative scarcities of goods. A classic example of this is gas prices over the last year. We don’t need to know whether there has been an increase in supply of gas or a decrease in demand.

Or what the political situation in the Middle East is.

No, all we need to know is that the price of gasoline has fallen quite a bit since the summer. Then, when I make a decision on whether to take a trip or not, because it’s a lot cheaper, I’ll likely increase my consumption of gasoline. This is all communicated through the price system without any of us having to know in detail what is going on.

But Hayek has an influence far beyond his own writings. In the recent financial crisis, the efficient market hypothesis has, it’s true, taken a beating, but you could point out that the kernel of truth in there is embedded in Hayek’s idea. The stock price gives full and complete information of what’s available on the market at that time, and that gets communicated through the system. Hayek also influenced information economics in general. There’s Leonid Hurwicz who won the Nobel Prize [in 2007] for his contribution to mechanism design theory. He was working on information processing. Hayek’s writings set off a research programme to study how it is that information gets communicated within a complex system, and a variety of different people have picked up on that, and worked with that idea and taken it in directions that even Hayek couldn’t have envisioned.

As a left-of-centre European, I was quite nervous about reading Hayek. But given the era he was writing in – the early to mid 20th century – when socialism was still considered a viable alternative to capitalism, the book seems pretty sensible. In fact there was nothing in it I particularly disagreed with.

And it’s not as if Hayek met leftist intellectuals and said, “Curse on you”. For example, Abba Lerner, a market socialist and author of The Economics of Control, wrote his doctoral dissertation [on which the book is based], under Hayek’s direction. Hayek is the antithesis of the idea of economics as control. Even those guys that went in directions different to Hayek are all trying to provide answers to him.

So he’s not right-wing?

I don’t think he considered himself on the right or on the left. He didn’t like socialism, so if socialism redefines the political landscape so that anyone who is a non-socialist is a right-winger, then Hayek is a right-winger, which is more or less the American context. We like to pick caricatures, and the debate in the US is not sophisticated. In Europe, Hayek is an old liberal, and he remains a European liberal throughout his whole life. He’s for restraint on the abuse of power by the state, he’s for the expansion of human liberties.

Let’s move to the present, and your last three books. You wanted to pick one of your own. What about The Elgar Companion to Austrian Economics?

The Elgar Companion is a big book with a lot of short essays about Austrian economics. My other books are much more about specific things, so, for example, I’ve written three books on the history and practice and collapse of socialism in the Soviet Union, and the transition from it. My book Calculation and Coordination is the last one on that, all essays in post-socialist transition. The easiest way to understand that book is that in order for us to go someplace, we have to go from here to there. If you ill-define where you started from, or where you’re going, your ride is going to be totally different. To move from socialism to capitalism, that’s a here to there idea. So we have to define, first and foremost, what the here and now is, what that system actually is like, and then where we want to go with it. Do we want to look like the US or Britain? Do we want to look like Sweden or Western Europe?

Part of what goes on in the book is trying to straighten out what socialism actually looks like at the point of its demise, because that’s our start state. What I try to show is that a lot of the mistakes that took place during the 1990s were because we didn’t define the start-state correctly. We also ill-defined the end-state, and as a consequence we got on the wrong bus for economic reforms. What I’m doing is trying to get the history right and then get the political economy analytics right, and then trying to use both of those to explain that from that original history it was logical that we ended up with the system that we ended up with, rather than the system that we wanted to end up with.

So if you ask a question which was a popular policy question at the beginning of the 2000s, which is “Who lost Russia?”, you can understand from my book that it was not because of the IMF or the World Bank. It’s because of political economy questions. That’s why the title is Calculation and Coordination, when you establish the institutions that permit economic calculation, you generate the advanced economic coordination that’s possible in a complex system. When you have institutions cutting against the ability to engage in economic calculation, don’t be surprised when people substitute out economic logic for political logic and as a result you get not economic coordination, but political interest groups that form and become dominant and control the system.

You gave me two other examples as well. One was the The Invisible Hook, by Peter Leeson, which is a really fun book about pirates.

I gave you these two books because I think economics is both a deadly serious subject – ultimately it’s about life and death, whether people are living on $2 a day or if they can have longer and healthier lives – but it’s also this fascinating subject that you should read with a great smile on your face. As I tell my students, economics is the sexiest subject you will ever study.

I think The Invisible Hook does a fascinating job of communicating to people the enjoyment of just thinking through a problem like an economist. Pete takes on the organisation of pirate ships and points out how pirates represented a community in and of themselves. Even in a world of thieves, they had to respect rights in order to be able to coordinate with one another. He goes through and explains the elaborate methods by which they organised their activities on a ship. Those ships were not as small as we might think, the ventures actually required people of diverse ethnic backgrounds and sexual preferences, and yet somehow they came to work together. They signed actual constitutions among themselves. So it’s a fascinating read, it’s all about the secret economics of the pirates and how they organised their ventures, and how actually their ventures, a lot of times, were more humane than those of the Royal Navy.

Do you agree with his analysis, ultimately?

I’m persuaded by the economic logic. I don’t know enough about the history to offer an informed criticism of some of the things he might say. What carries the weight for me is the fact that he is pursuing the rational choice model and I can see the logic of what he is saying. But at some level, with this book, the people who would be the best judges of the empirical validity of what he’s arguing would be pirate historians. When I read his book, what compels me is the logic of his argument and then the history as illustrations of that logic, so I’m completely swept up in it – I find it this great story. If I knew more about pirates, I’m sure I’d have quibbles with him.

I loved his point about Blackbeard, probably the most fearsome pirate that ever lived. According to this book, Blackbeard did such a good job of looking scary and promoting his reputation for bloodthirstiness, that he never actually had to kill a single person.

Yes, there is a lot of stuff about signalling in the book – also why they show the Jolly Roger to protect their investment, the ship. Pete really makes economics come alive, to explain things that we normally wouldn’t think of as subject to economic analysis. He’s amazingly talented and he really does make economics jump off the pages for people who read him.

So you’ve chosen this book to demonstrate what modern Austrian economists are doing with the field?

Yes, I’m one representative. There are a whole bunch of people. Calculation and Coordination is an effort to take Austrian economics and apply it to a real world policy-relevant issue, which is the transition from communism to capitalism.

The last book you’ve recommended is After War: The Political Economy of Exporting Democracy, by Christopher Coyne.

This book is amazing. Coyne took on the topic of how successful the US can be at exporting democracy and the free market in after-war situations. This became a big venture in the 20th century, when the US became much more aggressive about this idea that we could intervene to try to help make other countries better off. Part of it was for geopolitical reasons – after 9/11 we believed that one of the things we had to do was make the Middle East more conducive to free markets and democracy, because then it’s less likely to generate terrorists. So then the question is, is that an effective strategy? Coyne takes the strategy as stated by the officials, and then assesses whether the means employed are successful. He uses a very low threshold, which is, after the US intervention, after the country is supposedly settled, does it meet the standard on the Polity Index of modern day Iran? What he found was that in US-led efforts, basically somewhere between two-thirds and three-quarters of the efforts failed to meet even that minimum standard.

Yes, I’m looking down his list of 30 or so invasions that have taken place, and it’s not looking too good.

Right. Everybody points to Japan and Germany, but he points out that before the war, Japan and Germany had very high measures of civil society. In most of these other places, what you’re trying to do is create civil society, and at the point of a gun is not a very good way to do it. So I think Coyne really does show the futility of our efforts. All these efforts at war – the loss of lives, the billions of dollars spent – got us what?

If only this book had been around before the invasion of Iraq. It could have saved more than 100,000 Iraqi lives.

That’s what you think, right? In Coyne, there is not a lightness to his pen, in the same way there is with Leeson. Leeson is dealing with an entertaining topic. Coyne is dealing with a deadly serious topic. Both of them are bringing to bear the kind of economics that comes out of Mises and Hayek, to address why it is people should care about economics and why it is that their caring should not lead them to be sombre and boring, but actually fun and enjoyable, while talking about very sad subjects sometimes.

Thinking through the conclusions of After War, I’m thinking that if the US wants to invade a country successfully, France would be a good choice.

Chris’s point, if you think about what he’s saying, is that imagine you have to put two pieces of a puzzle together. You have a piece and you have to find a piece that fits exactly in it. Chris is arguing that that bedrock of institutions is there prior to our intervention. When we try to intervene and press on them puzzle pieces that don’t fit with their bedrock of institutions, we get distortions. It’s like putting a square peg into a round hole – you’d have to force it, it wouldn’t really look too good, and your puzzle wouldn’t get completed. Because of this issue of underlying institutions, Japan and Germany were able to accept the puzzle pieces. That’s why he ends by saying it’s not going to be about war and imposition, but about trade and development. That’s what’s going to allow that cultural piece, that bedrock piece, to morph into a piece accepting of other pieces. All we can do is give them the opportunity to benefit from free exchange with other individuals. If you give people the freedom to choose, they’ll move in that direction, but what you don’t have is the ability to put a gun to the back of someone’s head and make them engage in freedom.

So if you’re writing a serious book of Austrian economics, it won’t need to have equations in it?

No. Most standard economics assumes that the relationships we are trying to understand can be captured by a continuous function that’s smooth and twice differentiable. What the Austrian analytics suggests is that life is not actually a continuous and smooth function that’s twice differentiable, but instead a lumpy function, a discrete function, in which there are all kinds of difficulties in the ability for us to model them the way our standard approach does. So, instead, what we engage in is discursive reasoning. You use the logic of economic action, the logic of choice, you worry about opportunity cost and presume individuals are doing the best that they can, given their situation. But notice, even in that phrase, you have to spend a lot of time specifying what that situation is. That situation is full of historical context and institutional details. A lot of your story is made up of the specification of the context in which economics decisions are made.

Interview by 

Sophie Roell


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/20/2012 - 23:08 | 2083263 Atomizer
Atomizer's picture

Another BRIC In The Wall - Pink Floyd

While the International Community laughs at the latest Iran threat vs. Central Banking/planning insolvency. Today's (MW) Market Watch headlines sparked IBM's intuitional savor snitch. Why? 

IBM profits built on BRICs growth

'The company said revenues in the BRIC countries - Brazil, Russia, India and China - increased 10%. This compared with just 3% in the Americas and 1% in its combined Europe, Middle East and Africa division.' 

Comedy: Drive in Intermission 1960's 

Do you understand that things will not end well or as centrally planned? It's a scripted playbook. You're the Ginny Pig, not I.

Fri, 01/20/2012 - 23:12 | 2083264 Vic Vinegar
Vic Vinegar's picture

I can't look up the exact quote right now but this has already been covered by he once said: If Keynesianism did not exist, it would be necessary for TPTB to invent it.

We might as well be in a forum pushing kiddie porn right now.  It's got a better chance of going mainstream than Austrian econcomics.  Sorry but it's true.

Sat, 01/21/2012 - 00:21 | 2083358 economics1996
economics1996's picture

John Law should get the credit for the bull shit economics we endure today.

Sat, 01/21/2012 - 07:26 | 2083802 bank guy in Brussels
bank guy in Brussels's picture

Nearly all of the 13 remaining AAA-rated countries, and which also are many of the best places to live in the world (north-western Europe), are semi-socialist countries, a mix of socialism and market economies, countries which have universal health care and supportive good social benefits.

The 'straw man' of Austrian economics is an extreme Soviet-style socialism which totally destroys the market and has fascist crushing of individual freedom.

On the other side, extreme capitalism leads to oligarch fascism and the police state, like are happening in the US right now.

Whereas a group of well-run semi-socialist countries which remain the best places to live in the world, show the middle way is the right one.

What the Austrians miss, is that a web of social protections, intelligently run (like doesn't seem possible in the US), actually liberate people to be economically productive ... removing the extreme fears (of personal disaster, of brutality by others)  that also distort economic relationships.

The 13 remaining AAA-rated countries - most of them mixed 'market socialist' economies with huge social protection safety nets:

Finland, Germany, Luxembourg, Netherlands

Denmark, Sweden

Norway, Switzerland

United Kingdom, Canada, Australia

Hong Kong, Singapore

Sat, 01/21/2012 - 08:31 | 2083853 nmewn
nmewn's picture

I would agree that the "social safety net" aspects (from some on your list) works quite well for the parasitic monarchial families still being ensconced in the lap of luxury.

Provided by the labor of the masses of course ;-)

Sat, 01/21/2012 - 09:53 | 2083921 GMadScientist
GMadScientist's picture

Oooh...."class warfare". Johnny, git yer gun!

Sat, 01/21/2012 - 10:27 | 2083956 nmewn
nmewn's picture

lol...I think we can say positively, that royal families of europe are supported by "social safety nets".

Its still unclear whether these particular "wards of the state" have added any real value to their societies but I'm very certain no one is entitled to the fruits of my labor just because their blood is blue.

Or even red, like mine ;-)

Sat, 01/21/2012 - 10:46 | 2083981 GMadScientist
GMadScientist's picture

Someone has to hold the loot and you look so tired. ;)

Corporations and farmers are supported by social safety nets too.

Some might say they are the primary beneficiaries of most public policy decisions, in that the money comes back to them and the taxes come from you and me.

At least that's what the lobbyists have managed to convince their corporate donors to believe.

Monarchy, plutocracy, anarchy,...hmmm no really good choices here. Disintermediate and regroup!

Sat, 01/21/2012 - 11:16 | 2084028 nmewn
nmewn's picture

"Corporations and farmers are supported by social safety nets too."

Thats what happens when you sell your soul to the devil...he will come and collect.

I don't think anyone is advocating for beggars starving in the streets but the obesity rate for the "poor" speaks volumes on how far we've come. I remember when being known as a ward of the state carried with it the social stigma of shame. Now, its just a part of many peoples lives.

Its become normal. For the corporation and the individual.

Reset is the only option.

Sat, 01/21/2012 - 11:27 | 2084035 New_Meat
New_Meat's picture

EBT cards in all of their flavors look just like Visa cards; helps with the "self-esteem" of the recipients.

I wonder what it would be like if the wards of the state actually had to show up each week to collect the gubbiment cheese?

- Ned

Sat, 01/21/2012 - 12:04 | 2084068 GMadScientist
GMadScientist's picture

Why, do people wielding actual banker plastic deserve more respect?


Sat, 01/21/2012 - 14:04 | 2084367 Schmuck Raker
Schmuck Raker's picture

Come now, no one claimed respect was deserved.

Appearances DO matter in a society where "Image Is Everything".

Sat, 01/21/2012 - 17:52 | 2085002 JW n FL
JW n FL's picture

The OeNB’s biannual Financial Stability Report provides regular analyses of Austrian and international developments with an impact on financial stability. In addition, it includes studies offering in-depth insights into specific topics related to financial stability.


Dec 2011


Sat, 01/21/2012 - 18:56 | 2085112 Schmuck Raker
Schmuck Raker's picture

Thanks Dubs. Following the "Polity Index*" link in the interview offered up this report, which you may find interesting -

Global Report 2011 - Center for Systemic Peace

After all, whither financial stability without political stability.

[* Don't let an association with the CIA put you off. :D]

Sat, 01/21/2012 - 23:51 | 2085738 JW n FL
JW n FL's picture



Thanks for the Info!!

I am a reader.. not as a young man.. but as a middle aged man I read to read to read..

Seriously! Thank You Very Much!!

anything else you would like to share I am sure many will read.. and they will be just as grateful as I am for the good info!

My Best to You and Yours!

Sat, 01/21/2012 - 15:41 | 2084664 nmewn
nmewn's picture

"I wonder what it would be like if the wards of the state actually had to show up each week to collect the gubbiment cheese?"

I bet Jenny Craig could answer that one ;-) 

Sat, 01/21/2012 - 19:00 | 2085127 Schmuck Raker
Schmuck Raker's picture

Do they have to walk to get there, or drive their Gubbiment Motors SUV?

Sun, 01/22/2012 - 10:46 | 2086341 GMadScientist
GMadScientist's picture

"I do solemnly swear that I have not any property, real or personal, exceeding $20, except such as is by law exempt from being taken on civil process for debt; and that I have no property in any way conveyed or concealed, or in any way disposed of, for my future use or benefit. So help me God."

Sat, 01/21/2012 - 11:21 | 2084030 economics1996
economics1996's picture

Bank guy, one word, demographics.  Those countries will be capitalist soon enough.  Socialism and central planning always fail.  The reason is simple, no government can create the permutations, or choices, of a private market.  Fighting private markets is like fighting the tide.  In the end the tide will come in and go out.

Sun, 01/22/2012 - 12:22 | 2086489 TrulyStupid
TrulyStupid's picture

Actually.. the socialism that always fails is the creation of fiat money by governments particularly to finance malinvestment.. foreign wars and their unintended consequneces. "Defense" expenditures are pure socialism "financed" by pure monetary expansion.

Sat, 01/21/2012 - 09:52 | 2083919 GMadScientist
GMadScientist's picture

Oh, dear...two diametrically opposed slippery slopes.


Sat, 01/21/2012 - 10:32 | 2083923 Sean7k
Sean7k's picture

AAA ratings mean absolutely nothing. Britain, for example, has a debt to GDP ratio that is second only to Japan. All these counries, including Germany, are drowning in debt- debt that financed their "well run, semi socialist" systems. Like all fascist states, they use debt to create the illusion of wealth, employment and a higher standard of living.

The reason for the PIIGS failures, whose systems are also well-run, semi socialist states, is that production of goods and services/ natural resouces/ spending habits were not  as conservative. This does not mean that the other countries will succeed, but merely that they will take longer to fail.

There is nothing intelligent about debt financing in a democatic political system. 

You have a distorted pricing structure, that much like the US and Britain, puts an emphasis on financial goods and services that are easily used for criminal theft and fraud, theft and fraud that bankrupts whole economies, while a privledged class makes a getaway with the proceeds.



Sat, 01/21/2012 - 15:38 | 2084651 Matt
Matt's picture

creditworthiness is a rating of a nation's ability to pay its debts. Countries which can print the money to pay their debts cannot fail to do so, thus they are AAA. The other factor is the value of the money you will get paid in. Currency devaluation is a different risk than not getting paid at all.

USA is what AA or AA+ now? This is a result of the debt ceiling nonsense, which creates a risk of delayed payment or other payment issues.

The PIIGS cannot print their own money, so their ability to pay their overwhelming debts is in doubt. Britain and Japan can print away their debts. That's not to say that is a path to success.

Sat, 01/21/2012 - 15:50 | 2084698 Sean7k
Sean7k's picture

Well then, you can explain why all the credit agencies disagree, often because of where they are located? US, Europe, China or independents? 

AAA means absolutely nothing. Germany is approaching 100% debt to GDP. This is typically the point a fiat currency fails. Since it hasn't, there are better explanations.

I won't begin to discuss the rating agencies and subprime debt or derivatives either. 

NONE of these agencies are reliable and all are manipulated. 

Sat, 01/21/2012 - 23:55 | 2085741 JW n FL
JW n FL's picture



Low 2011 Default Environment Further Boosted by 59.4% Recovery Rate

The U.S. high yield default rate finished 2011 at 1.5%, falling below 2% for the second consecutive year. Over the past 32 years, the default rate has ended shy of 2% 16 times.

The weighted average recovery rate on the year's defaulted issues was a robust 59.4% of par, higher than 2010's 56.7% and up from the recent cyclical low of 34.1% recorded in 2009.

A new report from Fitch Ratings includes:

- full details on 2011 key default and recovery trends
- updated long term default and recovery statistics
- vintage default rates
- industry specific default and recovery rates
- recovery rates by seniority and year
- other important credit indicators

View full report

The top industry default rates in 2011 included: paper and containers, 10.3%; transportation, 7.4%; and utilities, 5.9%.

Approximately 80% of the 2011 defaulted issues were rated 'CCC' or lower at the beginning of the year, for a ‘CCC’ or lower par default rate of 6%. Isolating 'CCC' or lower bonds trading at the distressed level of 80% of par or lower at the beginning of the year, Fitch Ratings calculates that 30% of these subsequently defaulted.

If you are having trouble opening the report, please follow this link:

Working Paper No. 12/23: Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings Author/Editor: Kiff, John ; Nowak, Sylwia Barbara ; Schumacher, Liliana Summary: We find that Credit Rating Agencies (CRA)’s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor’s resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs’ certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

Sat, 01/21/2012 - 12:33 | 2084133 falak pema
falak pema's picture

The only ones worth pointing to as creative, value added,  with an export surplus: Germany, Neth, SW, HK, Sing.

Canada, Nor,  and AUstralia are RM based economies and will depend on demand of these commodities for growth. Not that I underrate them as demand for RM will stay strong. 

Sat, 01/21/2012 - 13:22 | 2084240 brent1023
brent1023's picture


This quote from the article - "not so much about what man can occasionally achieve when he was at his best, but that he should have as little opportunity as possible to do harm when he was at his worst" - makes the crucial distinction.

Capitalism today has completely missed the second part - absent regulation sufficient to prevent the worst activity, the system fails. That regulation is missing and is unlikely to be retored until the western economy hits bottom.

A very slight modification of this quotation - from doing harm to having harm done to a person - justifies catastrophic health insurance. No need to get into everyone's life and manage their health care, but if disaster happens, we should help the people involved.

Some of the Austrian analyis produces words to live by.

Sat, 01/21/2012 - 15:55 | 2084717 Sean7k
Sean7k's picture

You obviously know nothing about economics.

We have no capitalism as it is defined in the world today. We have State capitalism, crony capitalism, command capitalism, but no capitalism. All these add-ons are the result of market intervention (distortions) by governments and/or corporations.

If you read the piece, you will understand that capitalism requires zero regulation- it is self regulating through the operations of free markets. As a system, it allows the least amount of harm to be inflicted, because competition is unfettered and regulates itself through the greed that is a part of every human being.

Sat, 01/21/2012 - 13:49 | 2084329 DionysusDevotee
DionysusDevotee's picture

In other words; "Market manipulation stalls and exacerbates collapse".  Makes the Austrians point nicely.  Of course the people that live off their credit cards look better longer.

Sat, 01/21/2012 - 22:51 | 2085633 prole
prole's picture

Bank Guy in Brussels your Commie Manifesto should have more accurately been labeled "Nordic People are just so damn pleasant of course their countries are better, and the proof is that the whole miserable world agrees with their feet (trying to get there)"


On the other side, extreme capitalism leads to oligarch fascism and the police state, like are happening in the US right now. (US hasn't had 'extreme capitalism' since before the US Civil War)

Whereas a group of well-run semi-socialist countries which remain the best places to live in the world, show the middle way is the right one. (Or the Norse People are so superior in Civility and Intelligence that their countries are oasis of prosperity and freedom regardless of sloganeering/labels attached)

What the Austrians miss, is that a web of social protections, intelligently run (like doesn't seem possible in the US), actually liberate people to be economically productive ... removing the extreme fears (of personal disaster, of brutality by others)  that also distort economic relationships.  (Invented nonsense from your mind, attempt to invert reality, the hallmark of the arrogant uberlords seeking power over men = YOU. I guess higher taxes really do "liberate people to be economically productive")

The 13 remaining AAA-rated countries - most of them mixed 'market socialist' economies with huge social protection safety nets:

Finland, Germany, Luxembourg, Netherlands

Denmark, Sweden

Norway, Switzerland

------------------------------------- Hmm, the most free countries in the world, the Nordic Countries and Swiss.

United Kingdom, Canada, Australia

Hong Kong, Singapore

--------------------------------------And the British Empire! I never said the Brits were nice, but they know how to make a prosperous endeavor if they want to.  What's "social safety net" got to do with it? In HK lol?

Anyway your defense of Socialism is and was pathetic.

Sun, 01/22/2012 - 12:15 | 2086485 TrulyStupid
TrulyStupid's picture

I would argue that these countries prosper  (relatively) because

1. The net malinvestment of government  (and consumerism) is on a much smaller scale than the US, which engages in outright socialized wealth destruction in foreign wars, negative net balance of payments etc.

2.Monopoly capitalism has yet to take full hold (higher prices, lower wages, greater income disparity) and there still exists mechanisms for money to be recycled to the bottom of the economic pyramid

Generally speaking though the trend towards more debt and credit creation, illustrates that these countries are only behind the US in the downward spiral to monetary collapse.



Sat, 01/28/2012 - 15:49 | 2086541 Archduke
Archduke's picture

+1 insightful.  also, lacking price signals doesn't mean you erase common sense.

I concede it may make for less efficiency on the whole, as you have to recalculate

relative cost-benefit a lot, at decision time, but it isn't apparent on every iteration.


The US space program spent millions developping the space pen whlie the soviets

used their heads and solved that problem with a lead pencil.   Also, that the US with

sophisticated markets and price signals chose to embark on ventures that made no

direct economic sense seems to invalidate the rational theory.  These only make

sense in the context of a struggle for a geo-political hegemony.


the ironic thing is that the nasa space pen program probbaly made more sense

as a marxist program for giving employment to a whole slew of state workers.



Sun, 01/29/2012 - 14:20 | 2107498 JeffB
JeffB's picture

Actually, it turns out the "space pen" vs pencil story is an urban legend. Fisher had developed the pen NASA used before they had ever asked for it. Russia also ended up purchasing many of these pens for their own space program:

See also:

Good old free enterprise and the free market prevailed in this case as well.


Tue, 01/24/2012 - 01:50 | 2091518 aaxiom
aaxiom's picture

"On the other side, extreme capitalism leads to oligarch fascism and the police state, like are happening in the US right now."


Uh, the U.S. hasn't known anything remotely resembling "Capitalism" for well over a century now (being very conservative). You're obviously referring to "Cronyism" which is often confused with capitalism -- quite intentionally, I'll add.

Fri, 01/20/2012 - 23:19 | 2083273 lolmao500
lolmao500's picture

Yeah like most in congress have enough IQs to understand Austrian economics. Please.

Fri, 01/20/2012 - 23:33 | 2083285 Vic Vinegar
Vic Vinegar's picture

Buddy this presupposes they care to understand!  They don't even read the bills they sign.

Sat, 01/21/2012 - 00:23 | 2083362 economics1996
economics1996's picture

Main stream economics is designed to baffle the peasants with bull shit, and it works well.

Sat, 01/21/2012 - 00:54 | 2083382 Vic Vinegar
Vic Vinegar's picture

I started out in college majoring in math.  Eventually the math got so complicated, it was basically like studying a foreign language.

I decided to switch to business and finance and was fed/ate Keynesianism like a cow is fed/eats grass (or GMO corn if you will).

So was economics designed to baffle me?  Am I the peasant?  Or is the cat who didn't study finance the peasant?

Sat, 01/21/2012 - 00:59 | 2083409 palmereldritch
palmereldritch's picture

*Always be the rancher* - The Second Amendment is a required part of the job description.

Sat, 01/21/2012 - 09:01 | 2083869 GMadScientist
GMadScientist's picture

Depends on whether or not you've paid off your biz school loans.

Apparently math was designed to baffle you, not econ.

I'll grant you that rings and fields may not always be the most pragmatically applicable tools for modern life, but if you stop training for the hundred yard dash to devote more time to your synchronized swimming, are you still a winner?

Sat, 01/21/2012 - 11:24 | 2084032 economics1996
economics1996's picture

Keynesianism is nothing more than state propaganda, if that is what you are into then go with it.

Sat, 01/21/2012 - 12:27 | 2084123 falak pema
falak pema's picture

As the article clearly points out neo-Keynesianism under Samuelson became outright social engineering on centralised basis. So yes, statism has used this model of economics to achieve the welfare state construct since WW2, based on demand side which fed the inflation beast. Having said that all schools cannot predict human nature and irrational behaviour, which is often entrepreneurial driving force in a "market" society before it goes "complex" and Oligarchy dominated. So the key is to stay humble; not as of today, where HHHHH runs the world. 

Sat, 01/21/2012 - 12:41 | 2084153 economics1996
economics1996's picture

Bubbles are not hard to predict if you understand some basics.  When?  We do not know, but we know when there is a bubble.

Sat, 01/21/2012 - 16:30 | 2084816 piceridu
piceridu's picture

If you truly want to get an economics education, go to prison. It's amazing what becomes money and how black markets rule. No matter what restrictions or barriers are put in the way of the "market", in the end, the market always wins.

Sat, 01/21/2012 - 13:08 | 2084210 peekcrackers
peekcrackers's picture

Vic VinaGER

Plus 1 .. well said ..

  Regurgiate  and you pass dont have to understand it .

Sat, 01/21/2012 - 04:26 | 2083693 taeonu
taeonu's picture

‎"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it."

- John Kenneth Galbraith

Fri, 01/20/2012 - 23:32 | 2083286 Hedgetard55
Hedgetard55's picture



I wonder how many can even speak Austrian?


h/t Barry O.

Sat, 01/21/2012 - 01:30 | 2083457 WonderDawg
WonderDawg's picture

Let's throw another shrimp on the barbie.

Sat, 01/21/2012 - 03:43 | 2083669 prole
prole's picture

Let's Not.

Sun, 01/22/2012 - 13:06 | 2086551 Archduke
Archduke's picture

probably more than can speak american.

Sat, 01/21/2012 - 00:22 | 2083356 LetThemEatRand
LetThemEatRand's picture

I love how the faithful supporters of the competing economic models accuse each other of being unintelligent and merely ideological.  Perhaps they are both right.  The fact that most who fall in either camp cannot fathom such a possibility says a lot. 

Sat, 01/21/2012 - 00:30 | 2083370 economics1996
economics1996's picture


Austrian economists do not believe in models.  The reason they do not believe in models was explained in the article using the fish example.  Here is another example we can all relate to.  When you married your wife how did you fell about love?  Today do you lover her the same?  Things change and models are useless in the long run.


Sat, 01/21/2012 - 00:40 | 2083389 LetThemEatRand
LetThemEatRand's picture

Okay, economics1996.  Let's use the word "framework," which means the same thing in this context.  

Sat, 01/21/2012 - 00:56 | 2083407 jaffi
jaffi's picture

So, the ERE isn't a model?  How about the Crusoe model, isn't this used by Austrians?

Austrians use models (i.e. imaginary construction) to understand the world around them, what differs is that they use a logical-deductive approach to modeling, and that they do not assume a model to be a representation of the real world (i.e. it just a model).  

Sat, 01/21/2012 - 02:08 | 2083539 honestann
honestann's picture

All the predators-that-be and the predator-class KNOW FOR SURE that austrian economics is valid, and KNOW FOR SURE that keynesianism is nothing but a rationalization and cover for them to create endless fiat, fake, fraud, fiction, fantasy, fractional-reserve debt-money that they get to lend and spend to further entrench themselves into the affairs of every human on the planet (their slaves, as far as they're concerned).

There is no real dispute about economics.  Not really.  The pretense is just as much of a blatant fiction as the "republican" versus "democrat" delusion.  The predators-that-be and predator-class are quite a bit smarter than the average liberty advocate, especially about these topics, because they spend 100% of their time studying and practicing deceit and manipulation, and 0% of the time being productive.

How people can actually believe the BS the predators-that-be and predator-class promote is beyond me.  Frankly, humans are dumber than rocks or any other species on earth.  After all, no other species supports, defends, sanctions, protects, advocates and financies the predators who prey upon them.  Only humans do that.  MORONs.

Sat, 01/21/2012 - 05:08 | 2083717 wandstrasse
wandstrasse's picture

Fine post, 'Predators That Be' great wording. They do not only study deceit every day, they have - over centuries - a very successful track record in the discipline of subliminal dialectic mass manipulation by letting things look towards the population exactly as they want to.. just one word: Lusitania.. in every democratic system we have only fake debates.. many parties but just one option.. all to cement their eternal reverse Robin Hood status..

Sat, 01/21/2012 - 10:07 | 2083932 Sean7k
Sean7k's picture

Nicely said. 

I would go further and recognize that there is a symbiotic relationship between the parasite and the host in nature. The real question goes to the terms of that relationship: ie. slavery versus liberty for example. We attempt to define the relationship through social contract, unfortunately, that contract can be abridged or neglected.

As a species, we are at a crossroads where an understanding has accumulated in a significant portion of society that is questioning the terms of our contract while simultaneously, the parasites are attempting to take more and more blood. 

Just as the common man cannot live well without the capitalist, the capitalist cannot live well without the labor of the common man. Is it possible that the need for the parasite is being diminished by their rush to feed rather than expand the conditions for the host? 

Tough choices.

Sat, 01/21/2012 - 14:15 | 2084387 Schmuck Raker
Schmuck Raker's picture

@ honestann and Sean7k, both are fine posts.

Sat, 01/21/2012 - 17:43 | 2084995 blunderdog
blunderdog's picture

Just as the common man cannot live well without the capitalist, the capitalist cannot live well without the labor of the common man.

In what way is a capitalist not a "common man"?  Is it some kind of genetic thing?  Bloodline or education, you think?

Sun, 01/22/2012 - 01:40 | 2085902 honestann
honestann's picture

Yes, I think we all know he is talking about one subset of "capitalist" who run large organizations (like foxconn) who need lots of worker to do the physical work.

Like you, I object to the characterization because some of us have invented, designed, developed [and sometimes even manufactured and marketed] products... and we did so without ANY "employees" (but sometimes partners who also have a stake in our success, not salaries).

Frankly, I hate the term "capitalism", because it puts VASTLY too much emphasis on "capital" AKA "money".  As far as I am concerned, I was just as much a "capitalist" as BillGates when I was mowing lawns and shoveling driveways for spending money at age 8.

All productive work is GOOD.  Every employee is also a "capitalist", since he is selling his time and effort in exchange for money (which should be gold in order to make the transaction legitimate (as in "value for value")).

Sun, 01/22/2012 - 03:42 | 2085984 blunderdog
blunderdog's picture

Well, I've got what I'd perceive as a running dialogue with Sean7K, and I'm curious what meaning he ascribes to the words.

(I do understand the appeal of the "honest work for honest pay" meme--that's the kind of thing that's been an ongoing challenge for me.  I've held a few of those positions where there was plenty of pay and not a whole lot of work, and dumbass that I am, I was never able to argue myself into believing that I was being properly rewarded.  I've been on the other side too--backbreaking miserable labor for almost nothing, and I've been stuck in the position because it represented my best option.  I didn't come by my opinions without a bit of exposure to the implications.)

Sun, 01/22/2012 - 05:59 | 2086104 Sean7k
Sean7k's picture

Hello Blunderdog,

General terms. Yes, we can all be capitalists, but some people are more capitalist than others (entreprenueurs, investors, factory owners, etc). We are all common man as well. However, most people are unwilling to save and invest there labor (they prefer to consume almost exclusively). 

Consequently, we have these two classes or distinctions, if you prefer, whereby any common man can belong to either/both, usually a person is one or the other most of the time. However, when posting for a general audience, one must use terms that have general definitions they are familiar with to enhance communication.

For you, or course, I must make a distinction.


Sun, 01/22/2012 - 01:44 | 2085904 honestann
honestann's picture

Ever since I first heard the term "social contract", probably when I was 6 or 8 years old, I immediately raised my voice and said "I have no such contract, and I am not subject to any so-called contract that I did not read, understand and voluntarily agree to".

One thing humans need to do is carefully listen to what people say, think carefully about what the words mean, and JUST SAY NO to the endless predators who scam them, and suck them into endless pits of quicksand and self-destruction.

I am me.  I have zero contracts with anyone.  I have zero positive obligations to anyone.  Got that, everyone?

Sun, 01/22/2012 - 06:12 | 2086109 Sean7k
Sean7k's picture

So, you would have zero problems with shooting your neighbor when he plays loud music? Stealing from stores must be fine as well? Raping women or men would be acceptable? 

Social contracts exist at every level of civilization. Without them, we would have no society at all. This is how humans organize.

Now, if you are referring to the Constitution, I understand your pain. I did not, nor ever was consulted regarding a social contract that holds the power of life, death, prosperity, poverty, crime and punishment over my head. I was never asked to be a citizen nor, to be honest, do I understand why I have to be. I was born here, but why must I confrom to a set of rules made by 55 odd men in a smoky backroom and approved by a small minority of landowners? Being born into a world should never require total obedience to a contract I have never approved or would I ever approve in its' present format.

Just as my refusal to accept said contract require I leave the land of my birth. Since contract law abhors coercion, there should be another remedy that allows for life, liberty and the pursuit of happiness with a social contract of my choosing.

Sun, 01/22/2012 - 06:57 | 2086135 honestann
honestann's picture

What?  Are you kidding?  How you can draw your conclusions from what I wrote is totally beyond me!  I think you're pulling my leg, but I'll bite [back] just for fun.

A contract cannot be a one-sided issue.  To say I could obligate you into a contract without your knowledge, and in some way that contract would apply to you is pure, unadulterated BULLSHIT.  If that was true, I hereby create a contract that makes me the sole, undisputed owner of the entire universe forever.  Gee.  That was easy!

My point is... OF COURSE... that contracts must be VOLUNTARY agreements between everyone involved.

From this, somehow, you claim that I can lie, cheat, steal, kill people WITHOUT THEIR VOLUNTARY AGREEMENT.  Hmmmm.  Seems like you have it backwards, don't you?

To say humans cannot organize without so-called "INVOLUNTARY CONTRACTS" (which is EXACTLY, PRECISELY, EXCLUSIVELY what a "social contract" IS and claims to be), is obscene.  Humans organize through VOLUNTARY AGREEMENTS.  Humans can organize AS LITTLE OR AS MUCH as they wish to organize via voluntary contracts.  To claim that I ***must*** enter into contracts is to say I ***am*** your slave.  Well, I am not.  And somehow, I don't believe you really think I am.

Since I accept no involuntary interactions between humans, obviously I CANNOT go around raping, I CANNOT go around stealing, and I CANNOT go around shooting people... except in self-defense, of course.

To follow up on the sensible part of your post, birds are perfectly able to fly across the completely artificial, arbitrary, non-sensical "lines" called "national borders".  Are humans somehow special in that we are the only species who needs permission to cross these fake lines?  Anyone who believes this is insane, which means, the VAST majority of humans ARE insane... completely, radically, clinically insane.

Your final sentence is the point.  When contracts are VOLUNTARY, you and everyone else get to have whatever contracts you wish... AND NO OTHERS.  Where we find common agreement, we can make agreements.  Where we do not find common agreement, we tip our hats, bid each other good-day, and move on.

I must say, I am rather stunned when seemingly intelligent humans "by accident" forget to notice that the most central and necessary aspect of contracts is --- they are VOLUNTARY.  How anyone can imagine that stealing and killing somehow fall into the category of "voluntary" is far beyond me.

The distinction I think you're looking for, which you can find explained in some length in my posts from time to time, is the distinction between "predator" and "producer".  A predator has no need for contracts, or even for the notion of "voluntary".  The modus-operandi of predators is "get away with whatever you can", which necessitates a policy of endless INVOLUNTARY behavior.  Part of how humans execute this INVOLUNTARY behavior is to tell producers blatant lies like "you have a social contract that mandates you do whatever I and my fellow predators tell you".  It is only a "producer" who needs the concept of VOLUNTARY.

Understand this.  A predator has ZERO use for VOLUNTARY... except as a word to confuse producers who are morons and believe their BS.  A producer NEEDS the notion of VOLUNTARY... because otherwise he has ZERO incentive to produce, because others would simply TAKE whatever he produces and he would receive no benefits from his actions.  The producer CREATES what would not have existed without his productive actions, and thus "production" is simply causality as applied to human actions.  The predators DESTROYS whatever he wants, and he treats "production" by humans as being simply one of many "natural processes" for him to grab and consume for his own enjoyment.

Thus, EVERYTHING about "predator" and "producer" are opposites... and utterly, totally, completely incompatible in every way.  The problem with modern producers is, they treat human predators as if they were producers, by producer rules, with producer assumptions.  But predators do NOT operate on the basis of producer rules, they operate on the basis of predator rules, which is "do anything you can get away with, without limit".

Finally, a civilized world is exactly what a producer world is, and the opposite of what a predator world is.  A civilized world is where ethics exists, and the most fundamental aspect of ethics is voluntary interaction.  And since that is true, there ABSOLUTELY CANNOT BE any civilized world in which a "social contract" exists, because the very meaning of social contract requires blatant, open-ended involuntary interactions THAT ALWAYS BENEFIT PREDATORS AND PARASITES.  And that is the opposite of civilization.

I'm not sure why all these issues are so clear to me, but not to others.  I reject social contracts because they mandate INVOLUNTARY interaction.  I reject theft and assault because they are INVOLUNTARY internaction.  What could be more obvious?

My comments have nothing to do with the constitution or any other written document.  Not sure why you think anything like that matters, or has anything to do with this issue.  In fact, the loudest and most common arguments for "social contract" are to support theft-redistribution-scams like social security, medicare, unemployment payments, etc --- which are not in the constitution.

PS:  And I did say "I do not have any positive obligations to anyone".  Clearly I have plenty of negative obligations --- to not defraud them, to not steal from them, to not harm them or their property.  But in the strictest sense those are not actually obligations at all, since they do not require/obligate that I do anything at all.

Sun, 01/22/2012 - 07:31 | 2086154 Sean7k
Sean7k's picture

A social contract, at it's best is voluntary. We all engage in them when we become part of a society, town, church, etc. There is usually no paperwork, we are not even asked our approval necesaarily, but if we want to remain in that group, we must accept the terms.

Unless you are living on a deserted island, you have adopted a social contract. That contract defines your sphere of possible actions which probably do not include theft, rape or murder. It has nothing to do with whether the victim has accepted the terms- you HAVE.

Rant all you want. You behave according to a set of social mores that you neither wrote or read, but accepted to be part of a larger group. Voluntary? What real choice did you have if you wanted to be part of the group? You needed it more than it needed you, otherwise, you would have held out for a better deal. Perhaps you did, perhaps you are the apex predator and got a better deal. It willing to bet that is not the situation here.




Mon, 01/23/2012 - 01:14 | 2087771 honestann
honestann's picture

I never became part of any "society", any "town", any "church", any "etc".  I'm sure of that, because I would remember something that important.

If you SERIOUSLY believe there CAN BE such a thing as a "social contract", then you are absolutely, completely, totally, clinically, raving insane.  But don't worry, somewhere between 95% and 99.9999999% of mankind are too.

I have not adopted any social contract.  I guarantee you that.  In fact, I openly reject the majority of what most people consider the "social contract".  And those specific points I more-or-less agree upon are accidental overlap.

What I have done is decide to be a producer and not a predator.  Having made that decision, I need and have an ethics, and that ethics identifies for me that interactions with other producers must be voluntary, while interactions with predators cannot be voluntary because they make that impossible.

That was MY decision.  I did not ask anyone else about this.  I made these identifications entirely on my own, and I made these decision entirely on my own.  I know this for a fact, because as far as I can tell, nobody else has correctly identified the fundamental nature, source and need for ethics in the first place.  I have, and I have stated it in ZH at least a couple times in detail, and a few times briefly.

I have ZERO "social mores", because I chose my own ethics and my own behavior.

I have a choice how to behave every single time I am with other humans, or other animals, or other lifeforms, or when I am completely alone.  My limbs are controlled by my brain, not yours, and certainly not some kind of wacko "collective consciousness".  I am NOT part of ANY group that I and every other member is not explicitly and voluntarily a member.  In fact, I don't even think in those terms.  If I have associations and dealings with several people, I have associations and dealings with several individuals, and not necessarily on the same basis with each of them.  Why would ANYONE want to be part of ANY group?  I dunno.  I do know why I and others want to interact with other individuals from time to time, but I only and always interact with [zero or more] individuals, never with groups.  Period.

As a matter of fact, I have lived on deserted islands, and I love that very much.  Looks likely I'll be living on one again for a couple years starting in a few months.  But I'll still hop in my little airplane and go fly a few hundred miles to other islands every 3 months or so to buy supplies, but I can assure you, I will deal only with individuals.

I am saddened that humans have become so astronomically stupid.  Modern humans believe things that humans from 200 years ago would laugh... then be absolutely shocked and terrified when they realized what modern humans believe.  Far more humans hundreds of years ago understood the difference between reality and fiction, because most of them worked directly with reality with their hands, not "paperwork full of bogus words".  Most of them knew a pile of BS when they saw it, heard it, smelled it.

Today, the trivial and fundamental ability to distinguish real from fiction has been almost completely brainwashed out of the population of mankind by the predators-that-be and predator-class who enslave them (largely with completely bogus, fictional ideas like "social contract" and "government" and "corporation" and "society" and endless more).  All they have to do is get morons to accept bogus and inherently self-contradictory formulations like "social contract", then you are their slave, their permanent slave, their unlimited slave... because it is always THEM who control what is in that "social contract" you mention.  Notice that YOU have never had any control over that contract --- THEY DID --- and they constantly change it to suit their plans.

Any human who accepts they are subject to a "social contract" has made themself an overt slave.  I am sorry to learn that includes you and a few others here on ZH.

When you say things like "the social contract defines my sphere of possible actions" you show clearly how completely insane you are.  How can you explain all the murders, thefts, fraud, wars and abuses all over this planet?  Let me explain this for you.  YOU let the predators define this so-called "social contract" which you and some others obey to varying degrees.  THEY the predators do not follow any "social contract", which is their huge advantage.  THEY practice their modus-operandi, which is "get away with whatever they can".  In other words, THEY are not at all constrained by the social contract or by ANYTHING ELSE EXTERNAL.  THEY are only constrained by their best judgement of the risk TO THEM of each action they consider taking.  PERIOD.

If you cannot see these things, my rants are unlikely to help.  You have already made it a policy to be a slave, and you shall almost certainly continue to be a slave.  What's worse, you have adopted some kind of vested interest in supporting the predators and their fictions, a sort of "false pride" or something, so you will likely instantly reject any and all evidence that you have been deluded for ages.

We (call us "society" if you wish) cannot save you.  Only you can save you.  And guess what?  That is individualism.  You open and point and focus your eyes, you operate your brain, and only you can decide to wake up and distinguish reality from fiction, and embrace reality. and reject fiction.  You're on your own, buddy.  Good luck.  You and everyone like you is gonna need good luck in spades in the coming years, as the predators-that-be and predator-class close the noose around your necks.

PS:  For whatever it is worth, the following is my short soundbite definition of "ethics".  It is amazingly simple, but is completely reality-based.  In effect, this formulation is simply the nature of causality applied to human action.

For producers, ethics and justice is the state in which every individual enjoys/bares/suffers ALL the consequences of his actions, and enjoys/bares/suffers ZERO consequences of the actions of others.

Sat, 01/21/2012 - 09:22 | 2083888 GMadScientist
GMadScientist's picture

The most hilarious part of econ is that each of the 'schools' is correct, within different starting contexts.


Sat, 01/21/2012 - 10:55 | 2083991 mess nonster
mess nonster's picture

Yes.. intersting isn't it that its the same with religions?

Fri, 01/20/2012 - 23:39 | 2083292 Misean
Misean's picture

Very nice article. Thanks for posting it Zerohedge!

Fri, 01/20/2012 - 23:54 | 2083307 Cabreado
Cabreado's picture

This ain't about economics anymore.

This is about suffocation of the psyche.

Stave off the numbness, dammit.

ps. vote RP, fast as you can.

Fri, 01/20/2012 - 23:50 | 2083312 A Lunatic
A Lunatic's picture

It appears as though the point at which TPTB decided to use the economy as the means for social control spelled out the end.

Sat, 01/21/2012 - 14:20 | 2084400 Schmuck Raker
Schmuck Raker's picture

Yes, but I'm having trouble narrowing it down... A.D. or B.C.?

Fri, 01/20/2012 - 23:51 | 2083316 deflator
deflator's picture

This bullshit is not the Austrian economics that I have been studying for 25 years. This is clearly a status quo glomming on to and pre-emptive marginalization of Austrian economics in order to further marginalize  future more refined protests of the status quo than what is being accomplished by OWS.

Sat, 01/21/2012 - 16:19 | 2084778 Rusty_Shackleford
Rusty_Shackleford's picture

"As Robert Wenzel has pointed out:

It would probably be best to describe Pete (Boettke) as the standard-bearer of the Uptight Wing of the Austrian School of Economics. The Uptights tend to promote the work of Noble Prize winning economist Friedrich Hayek, over the work of the Austrian economists Ludwig von Mises and Murray Rothbard.

Discussing Hayek but ignoring Mises is something akin to discussing Scottie Pippen when talking about the championship years of the Chicago Bulls and not mentioning Michael Jordan. Nothing wrong with Pippen, but Jordan was "The Man.""

Sat, 01/21/2012 - 00:00 | 2083317 Atomizer
Atomizer's picture

Just remember, the paid CFR media puppets are expected to dwindle down the weakest Republican opponent for Maobama to challenge them on his teleprompter.

Reaching out to children, by convincing parents that illusions still exist in his Hope & Change campaign irony.


Magic Carpet Kingdom

Sat, 01/21/2012 - 00:46 | 2083374 LetThemEatRand
LetThemEatRand's picture

CFR members included Bush I, Bush II, Reagan, Condi Rice, [the] Dick Cheney, Reagan, Wolfowitz and Nixon, among others.  And Gore and Clinton and Greenspan and Ford.  This is not a new problem and if your comment is directed to the current sock puppet, you need to expand your anger a bit. 

Sat, 01/21/2012 - 01:35 | 2083469 Atomizer
Atomizer's picture

I believe we think on the same playing field. Many lemmings still struggle over the jackass & elephant division. As the propagation of government dependency ensues, the fifth columnist are finding it difficult to sell the new planned society agenda. 

Sat, 01/21/2012 - 01:58 | 2083521 honestann
honestann's picture

As the propagation of government dependency ensues, the fifth columnist are finding it difficult to sell the new planned society agenda.

Oh, they can sell dependency to people who are already dependent.  That's one of their reasons for the current depression --- to make the majority dependent and therefore back them (the predators) and help the predators monitor and expose any producer not backing every plan the predators-that-be and predator-class mandate.

At this point the only chance for producers is armed revolution that exterminates the predators-that-be and predator-class.  But the entire mindset of producers is naturally oriented to further production, not destruction.  But now only destruction will allow further production, so that's their only choice.  I fear they will not realize this until far, far, far too late (much like in nazi germany), and not have the cajones to organize, collaborate and "just do it".

Fri, 01/20/2012 - 23:53 | 2083321 Goatboy
Goatboy's picture

People are not rational (there is no such thing in real world) and there is no free will. We all constitute a huge loose organism.

All this is just a bunch of crap just like "mainstream" economics. Both are religions born out of our misunderstanding of laws of nature. Almost pure impotence and pathology.

Sat, 01/21/2012 - 01:09 | 2083422 jimmyjames
jimmyjames's picture

People are not rational (there is no such thing in real world) and there is no free will. We all constitute a huge loose organism.


People are not as a whole rational they are irrational as you say-but-they are irrational in mass and thus we can read them and project an outcome-so-by irrationality/crowd behaviour/mania mentality they were not a loose organism-but rather all bound together tightly by greed and illusions of wealth-

For example-the housing bubble was irrational because the majority of the people were irrational and irresponsible and the reason they were-was because of the easy availability of the money/credit supply-

I think most people here could see several years ago that we would end up in this mess-simply by watching the mass mind in motion-

Now that money/credit has tightened and the dream of riches has vanished-they will all shift "as one" to not spending and start saving and you will hear "at the bottom" never go into debt-never buy a home-never invest in the stock market and we'll know it's time to do the exact opposite-

Sat, 01/21/2012 - 01:33 | 2083467 WonderDawg
WonderDawg's picture

That's a pretty solid boiled-down version of reality.

Sat, 01/21/2012 - 01:53 | 2083511 honestann
honestann's picture

Unfortunately, I don't think regular folks will swear off debt.  It is still far too available, and few people who got used to spending like drunken sailors are willing to become frugal.  I suspect the dynamic cannot change as long as one group of individuals (banksters) can create and loan fiat debt-money out of thin air and practice endless forms of fractional reserve perversity.

What's going to happen, I suspect, is that mankind is finished.  That the predators-that-be and predator-class will forever continue to take predatory actions that prevent widespread creative actions from beginning or fluorishing.  Thus the state of mankind will get worse and worse and worse, and they will become more and more and more control-freak police-state as people get increasingly annoyed.

It all comes down to this.  Either humans revolt and exterminate the predators, or the predators will completely destroy mankind.  Given the hyper-stupidity of the vast majority of modern humans, the later is much more likely.  Mankind is finished.

Sat, 01/21/2012 - 02:49 | 2083609 jimmyjames
jimmyjames's picture

Unfortunately, I don't think regular folks will swear off debt.  It is still far too available, and few people who got used to spending like drunken sailors are willing to become frugal.  I suspect the dynamic cannot change as long as one group of individuals (banksters) can create and loan fiat debt-money out of thin air and practice endless forms of fractional reserve perversity.


I'm sure people who cannot get credit now-would continue to borrow if they could-but banks wont lend to them now if their credit is ruined-

The people who could borrow do not want to because the sentiment of-"it will be cheaper in the future" is setting in and that is what's got Bernanke stymied with his-if you keep rates low and keep throwing money at banks until it happens policy-but it's not happening-


Sat, 01/21/2012 - 14:47 | 2084467 Schmuck Raker
Schmuck Raker's picture

You touch on Mish's(and others') theme that because banks find few credit worthy, and the credit worthy individuals and businesses won't take on debt, that we are in a deflationary leg. I agree whole-heartedly.

Eventually those that want credit, but are not worthy, will not have access. The problem will solve itself. In the meantime so called PTB do what they can to support the illusion of prosperity(such as it is) for as long as they can(I don't think anyone can say with certainty how long that will be).

I would note that this paradigm is also becoming more obvious in the realm of sovereign debt. Scary stuff.

Mon, 01/23/2012 - 01:22 | 2087645 honestann
honestann's picture

LOOK... I totally advocate free market economics.  I do.  I really do.  However, what I do NOT advocate is trying to figure out the economy on the basis of free market economics when the economy is a blatant ELITIST-PREDATOR PLANNED ECONOMY.

That's the problem with your scenario.  Here is the way to demonstrate this.  If we had the kind of economy in which those opinions were valid, then we would never have had FannyMae, FreddieMac, FHA and several wacko programs, we never would have had the housing bubble, the housing crash, and about 90% of the other economic dislocations that strangle the economy today.

The federal government CAN and WILL continue whatever programs their bankster masters tell them to continue, as well as whatever programs the predators-that-be and predator-class think they need to save their necks from armed revolution.

Now, for a long time it looked like the bankster plan was to get the federal reserve to create endless trillions and hand it to them, then get everyone with a pulse into massive debt, then cut off that debt in order to totally crash the economy to drive prices into the dirt, THEN BUY UP EVERYTHING with the trillions of freshly printed federal reserve fiat paper that is lent to them in unlimited quantities at ZERO percent.  However, while the government predators mostly obey the bankster predators, they also execute their own manipulations designed to get them re-elected.  Therefore the complete dynamic cannot be exactly predicted, and CERTAINLY not on the basis of "free market economics", because it does not primarily depend on mass aggregate behaviors like supply and demand, but instead on completely artificial decisions of a pack of predators-gone-wild.

I do accept that the intended endgame of the majority of predators is to TOTALLY STEAL the entire country from the population by utterly fiat, fake, fraud, fiction, fantasy, fractional-reserve manipulations of various kinds AND to completely and permanently enslave the population.  Frankly, if they succeed in their plans to enslave everyone, what price levels happen to be makes ZERO DIFFERENCE.

The bottom line is, I don't think we can know for sure what will happen.  However, the usual course of fiat currencies and absurd levels of government debt is hyperinflation, death of the currency, war, authoritarianism and misery.  The only difference this time might be - the disaster is permanent because the predators-that-be and predator-class have sufficient high-tech media, brainwashing, monitoring, police-state and military technologies to prevent the populations from overthrowing them.  And because every government on earth is working from this exact same playbook now, with help from the predator-class in the USSA, that this condition will be permanent for everyone on earth.  So the bottom line is, mankind is finished unless he shapes up, arms himself, organizes, collaborates and ACTS.

NOTE:  Everyone today is free to save and transact in gold.  How many do?  Without anyone noticing, the human population of earth has dropped to somewhere between 7 thousand and 7 million, while the population of two-legged sheep is now 7 billion.

Sat, 01/21/2012 - 09:30 | 2083895 GMadScientist
GMadScientist's picture

People will not "swear off" debt...of necessity, not mere availability.

Many are using that plastic to buy food, gas to get to work, and clothes for their kids...because their mortgage reset eats everything they take home from the "job creators".

The paranoid schizo view of reality earns you two pity points.

Sat, 01/21/2012 - 02:29 | 2083582 Goatboy
Goatboy's picture

I can agree to an extent to your opinion. But it has very little to do with what I was saying and specialy with scope of it.

For one, we obviously dont think about the same thing but use the same word - "rationality". When I say we are not rational I mean incapable of using logic in a true, abstract, mathematical sense. We are just memorizing machines not capable of thinking as we would like to believe. Our minds are only reshuffling stuff which already came from outside. Think about it for a while before dismissing it. Also, there is no free will. Brain scans detect peoples "decisions" seconds before they become aware of them.

All that calls for radical socio-economic adjustment.

Sat, 01/21/2012 - 03:06 | 2083626 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

That's a bizarre comment. Math itself doesn't rationalize. It computes. Logic isn't the same as math.

As far as humans being rational, A human  behaves rationally when they make the best possible decision based on the information available to them at the time.

Sat, 01/21/2012 - 03:22 | 2083644 Goatboy
Goatboy's picture

"..A human  behaves rationally when they make the best possible decision based on the information available to them at the time."

As you well know, many times we dont, even when we have enough information (almost never). But its easier to believe that what you said is a meaningful fact and something we could build economic theory upon.

Sat, 01/21/2012 - 04:09 | 2083681 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture


 I can assure you, I didn't know we were building economic theory tonight.


None the less, the key to making the best decision on the information available at the time, is the information available at the time. We are not talking in terms of “enough” or "not enough."


If you want to make the point that humans don't always make the best decision based on the information available to them at the time, I'll give you that.


Human beings have some sort of emotional capacity that  superficially appears to occasionally interfere with their capacity for logic and reason....


Or does it? If your emotional needs are so strong at the time that they interfere with an otherwise logical decision, then perhaps the real logical decision is to indulge your emotional needs.

Sat, 01/21/2012 - 01:46 | 2083490 Harbanger
Harbanger's picture

I don't believe we constitute a huge loose organism, that's a central planners view of humanity.  Individually as people we are inherently rational even if we sometimes act irrationally.  That's the free-will you say doesnt exist.

Sat, 01/21/2012 - 02:41 | 2083594 Goatboy
Goatboy's picture

That level of "rationality" you allude to exists in full in animals too. No difference. Sort of rationality we ascribe to ourselves is pathological and impossible. You wont like it but we decide nothing consciously and depend heavily on our (for animal kingdom) impressive memory and brain plasticity. We just have very convincing illusion of agency.

Sat, 01/21/2012 - 09:32 | 2083898 GMadScientist
GMadScientist's picture

Decide not to eat or sleep.


Sat, 01/21/2012 - 19:56 | 2085233 Harbanger
Harbanger's picture

That's an irrational decision unless it serves a rational purpose.  You choose.

Fri, 01/20/2012 - 23:57 | 2083326 lolmao500
lolmao500's picture

Hitler explains how SOPA is bad :

Sat, 01/21/2012 - 01:17 | 2083435 palmereldritch
palmereldritch's picture

Funny.  The only tweak I would offer would be:

"Everyone from China, Syria , Iran and Google...get out"

Fri, 01/20/2012 - 23:58 | 2083327 chinaguy
chinaguy's picture

Read it...or think you know it from sound bites:

The Use of Knowledge in Society

Sat, 01/21/2012 - 00:03 | 2083334 CrashisOptimistic
CrashisOptimistic's picture


Let's look at what is going to happen.

1) Ron Paul will not be the winner of the 2012 Presidential election.

2) Governments will do ANYTHING to keep the train wheels turning, including murder, theft, false imprisonment . . . ANYTHING.  So if there is a matter prominent on the radar screen as a threat to those wheels turning, chances are they can stop that threat, provided it can be stopped by anything at all (for example, nothing, legal or illegal, can stop oil scarcity).  And so Greece is not going to cause the collapse.  It's too visible and understood.

3) The US government will default on its debt without defaulting, and that doesn't mean hyperinflation.  I would suspect it is something like . . . if its owned by a US citizen, that citizen has his Treasury holdings set to zero with a tax cut given to him for life to compensate, and he will not be allowed access to the court system to challenge it. Something like that.  Some outrageous maneuver that can be done by redefining what is or is not legal.

Sat, 01/21/2012 - 01:45 | 2083499 honestann
honestann's picture

3) As you point out, hyperinflation is not the only possibility, but hyperinflation is the most likely result.  Besides, your solution doesn't really work very well, since it greatly lowers future revenues (by lowering future tax receipts), thereby force them to print more aggressively, which ends up causing hyperinflation anyway.

4) World-wide civil war between people and the predators-that-be and predator-class who destroyed mankind.

Sat, 01/21/2012 - 00:33 | 2083376 disabledvet
disabledvet's picture

"commanding heights" always rules (or it rues?) the day because of mankind's notion of history and how he sees himself in it. economics teaches us that imperial over-reach has material consequences...yet history teaches us that upon seeing the negative consequences...all things being human...nothing prevents us from trying "another leg down." our own precepts or lessons of history as Americans have been so violated it's really ridiculous to call this "our country" anymore. it took FDR...easily the most powerful President in American history...years to even feel COMFORTABLE with broaching the subject of "involving ourselves in a foreign affair." When the Japanese attacked Pearl Harbor the United States really was unprepared for the war we were entering in. Now we have never been more prepared...and yet EVERY PHUCKIN' CLOWN ON PLANET INSANE-O is simply globbing over the American people when they want us to "rally around the annihilation of Iran." This is indeed "two America's." One that has been annihilated by a massive war of choice...and another that says "you're still alive. let's try that again so that we know you're dead this time." totally INSANE. the only good news i see on planet earth right now is that there really has been a silent coup in the USA and for all intents and purposes the military is running the country up until election day this year. that and the fact that the French finally will turn back to socialism--even though i'm not a socialist myself. there's something about being "French" and "socialist" to me. "It's all right when they do it" kinda thing. Excellent interview...i'm a big fan of George Mason University. Now let's get back to our regularly scheduled programming of watching Larry Kudlow extol the virtues of Newt Gingrich annhilating the very idea of private equity and having Mr. Free Market Capitalism call it "the best thing ever!" What a fraud we live in. It would be hysterical if the pure evil of trying to pretend your Herman Cain didn't take what certainly is a mockery of our political system and turn actual voting and elections into a crime itself. Really...what a sad nation we have become. Does anyone care?

Sat, 01/21/2012 - 09:38 | 2083905 GMadScientist
GMadScientist's picture

I think the people of the Phillipines, Cuba, Panama, and Nicaragua might have a slightly different view of the United States' willingness to engage in imperial reach before WWII.

Keep in mind that the MIC is more 'I' than 'M' at this point.

I have no idea what the blathering about Herm the Sherm was about.

Sat, 01/21/2012 - 00:35 | 2083380 blindman
blindman's picture

we are at the point where the first world is suffering
from the technology and infrastructure of the last millennium
so the third worlds potential is superior in the face
of the latest awareness. here the choice. attempt to sustain
the old structure with the resources beyond the pale or restructure
in light of the new circumstance.
creative destruction might come to mind? or destructive
destruction in ignorance?

Sat, 01/21/2012 - 00:39 | 2083387 Seasmoke
Seasmoke's picture

It's winter and yet the price at the pumps keeps going up and up and up.....this is a major problem

Sat, 01/21/2012 - 00:41 | 2083388 navy62802
navy62802's picture

To me, "Austrian Economics" is just common sense economics whereas Keynesian Economics is the exact opposite.

Sat, 01/21/2012 - 00:54 | 2083406 snblitz
snblitz's picture

Your description of Austrian Economics' methodology reminded me quite a bit of descriptions of the development of common law. The goals and the methods have many common traits.

I wonder though, is legal positivism in law, keynesism in economics? These two doctrines both seem to say we the experts know better.

It would be fascinating if these various concepts have more in common than meets the eye.

I am extensively read in classicial economics and law. I look forward to further reading of Austrian Economics and exploration of the possible common threads that may exist between law and economics.

And yes I am a Unified Field Theoriest too. You have provided me with another place to look.

Sat, 01/21/2012 - 01:41 | 2083491 honestann
honestann's picture

Ah yes, unified field theory.  Damn annoying when the truth is obvious (that everything is configurations of a single unified field, and changes thereof), but also just elusive enough that we can't quite precisely nail down the specifics or the equation.  Yet.

Sat, 01/21/2012 - 03:13 | 2083628 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

Where is a good place to start in studying the development of common law?


The potential link between common law and Austrian economics and Keynesianism and legal positivism is an interesting observation btw.

Sat, 01/21/2012 - 00:59 | 2083411 buckethead
buckethead's picture

"Economics is extremely useful as a means of employment for economists."

~John Kenneth Galbraith

Such sweet irony.

Sat, 01/21/2012 - 01:24 | 2083448 Catullus
Catullus's picture

This man is a George Mason "austrian".  There's no mention of Rothbard and the characterization that Austrian economics is a "heritage, of what we got from David Hume, Adam Smith, Jean-Baptiste Say and John Stuart Mill, and then Carl Menger, and then Mises, Hayek, and other people in the 20th century, like Jim Buchanan." is such total bullshit that it boggles the mind. It's no wonder he didn't mention Murray Rothbard, the George Mason boys and their Koch Brothers funding warped their version of Austrian economics into a socially acceptable form of academic teaching of austrian economics. Hell, there's not even a mention of the Mises Institute.

You can tell their where they stand by the over-emphasis of Hayek.  Though Hayek did great things, Hayek's nobel price in economics should have been awarded to Mises for his work on the price system and socialism.  He doesn't even mention that Mises demonstrated that Socialism wouldn;t work because of the calculation problem BECAUSE OF THE PRICING ISSUE.  Under a socialist system, you're incapable of allocating resources because you have no private property and therefore prices mean nothing.

And I didn't see any George Mason "austrian" in Vienna in September 2011, but they missed the speech by Hoppe that killed of the notion that Hayek was the great Austrian of the time and that Austrian economics migrated to the LSE.

My thesis is essentially the same one also advanced by my friend Ralph Raico: Hayek is not a classical liberal at all, or a "Radikalliberaler" as the NZZ, as usual clueless, has just recently referred to him. Hayek is actually a moderate social democrat, and since we live in the age of social democracy, this makes him a "respectable" and "responsible" scholar. Hayek, as you may recall, dedicated his Road to Serfdom to "the socialists in all parties." And the socialists in all parties now pay him back in using Hayek to present themselves as "liberals."

This is an absolutely facinating speech and I knew when I heard it that it was historic in the sense that it closes the book on Hayek from an Austrian perspective and why the discipline has tended toward Mises and Rothbard rather than Hayek. 

Sat, 01/21/2012 - 04:09 | 2083663 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

I was also wondering about the lack of mention of Murray Rothbard?


I know he got into conflict with the Koch brothers in the 1980's. Don't know what it was about. But I know Koch tried to shut down the Mises Institute for allowing Rothbard to sit on their board.


But Rothbard is a must read for the Austrian school. The lack of mention makes me question whether the interviewee is really an economist in the Austrian tradition.

Sat, 01/21/2012 - 11:47 | 2084046 flattrader
flattrader's picture

>>>But I know Koch tried to shut down the Mises Institute for allowing Rothbard to sit on their board.<<<

The predator class at "work" in their own playground.

Sat, 01/21/2012 - 08:37 | 2083856 Cassandra Syndrome
Cassandra Syndrome's picture


This article is a failiure for not mentioning Rothbard who was the best of them all. His book "Man, Economy and State" was the greatest Economics Treatise of the 20th century and achieved making economics understandable to the layperson and also a priceless book to have for the postgraduate.

His predictions and forecasting were incrediblly accurate and his commentary on socio-economic circumstances of his day and the consequences of the actions were superb. For example predicting that Friedman's Neo Liberalism philosophy would fail like it did back in 1971 ir illustrating the coming failures of Reaganomics back in 1981.

For the author here to ignore all this, is extremely myopic or worse still deliberate. 


Sat, 01/21/2012 - 09:40 | 2083908 GMadScientist
GMadScientist's picture

You're right. What this article really lacked was appropriate "shout outs". How dare he not mention the correct names.

Get the paddle.

Sat, 01/21/2012 - 14:37 | 2084438 Catullus
Catullus's picture

I don't buy shitty tequila, and I don't buy imitation "austrian" economics.

Sat, 01/21/2012 - 12:59 | 2084195 proLiberty
proLiberty's picture

Without property rights, there cannot be a free market in the exchange of goods and services.

Without a free market, without a willing buyer and a willing seller, it is IMPOSSIBLE to know the real price of anything.  

Without the price, it is IMPOSSIBLE for anyone to make the necessary economic calculation, that is to know when the inputs to an activity (labor or raw materials) costs more or less than the output of an activity (the value of the thing produced or service performed).

Without the economic calculation, it is IMPOSSIBLE for an economic activity to make a profit and thus be sustainable. Conversely, it is IMPOSSIBLE for an unprofitable economic activity to be sustainable.

Without profit, it is IMPOSSIBLE to have resources from which to feed, clothe and house those who are involved in the activity.

Without profit, it is IMPOSSIBLE, to have excess resources to set aside in the form of savings.

Without savings, it is IMPOSSIBLE to have capital to invest in new economic activities.

Without the ability to have property rights to those savings, it is IMPOSSIBLE to evaluate all of the other possible economic activities to find the ones that carries the least risk when compared to their anticipated return, and to properly allocate savings to the most promising investments.

Without new economic activity and without the ability for others to invest as it suits the saver, the economy cannot have the opportunity nor the resources with which to adapt to changing circumstances, let alone to provide jobs and resources for the next generation.

Without honest money, government is free to destroy the very means of accounting for, saving and exchanging wealth.  Without the assurance that money will retain its value, people will not save but instead will either consume excess wealth or will store it in forms like fixed assets that preclude investment in new economic activity.

In other words, without property rights, a free market, price information that allows economic calculation of profit, the ability to save with the assurance those savings are free to be invested when and where the saver sees fit, and without honest money, a sustainable economy is IMPOSSIBLE.

Without a sustainable economy, it is IMPOSSIBLE for humans enjoy any level of prosperity. This is exactly the reason that North Koreans are reduced to foraging for bark and grass to fill their empty stomachs. Their government forbids property rights, forbids a free market, destroys price information, confiscates savings, forbids investment and has no economic growth.

Liberty, property, profit, investment, capital and honest money are the only means of creating a sustainable economy. All other ways have been tried and have failed utterly. Yet, somehow, property rights, profit, capital and honest money are still considered to be evil, particularly in the thinking of people still yearning for the perfect socialist Utopia. Socialism is in reality the economy of death.

Sat, 01/21/2012 - 13:31 | 2084267 AnAnonymous
AnAnonymous's picture


One fallacy at least by sentence.

Really impressive.

Sun, 01/22/2012 - 09:58 | 2086292 hooligan2009
hooligan2009's picture

probably already stale as this looks like one of the more responded to posts...but...i still wonder if the underlying economy has always been healthy in the sense it lies between normal booms and busts that would otherwise occur without any fed involvement. i do wonder if fiscal deficits are larger because of the actions of the fed in adminstering "medicine" to a patient that simply has not needed its "medicine" for decades. the dotcom bubble swas burst by high interest rates prior to 2000 which revealed the underlying bubble caused by low interest rates in the mid90's which had to be followed up by even lower interest rates after the financial collapse in 2008. well the time line might be awry, but the point is..i am convinced that the Fed will be viewed as a "user of leeches" (if we all live to 2020) to correct any ill.. it is a dinosaur, as are other central banks. governments now how zero discretionary spend because democracy indulges a welfare state..the solution get to vote for parties and politicians in proportion to the amount of tax you pay, either as a company or an individual.

Sun, 01/22/2012 - 23:58 | 2087569 technovelist
technovelist's picture

This is probably the best approximation to a syllogistic statement of Austrian economics I've seen. Bravo!

Sat, 01/21/2012 - 16:30 | 2084813 Rusty_Shackleford
Rusty_Shackleford's picture


Sun, 01/22/2012 - 00:14 | 2085776 JW n FL
JW n FL's picture

In distinct contrast, how refreshingly clear — and very different — is Mises! For him, the definition of liberalism can be condensed into a single term: private property. The state, for Mises, is legalized force, and its only function is to defend life and property by beating antisocial elements into submission. As for the rest, government is "the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisonment. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom."

all of this sounds Great! and it is wonderful to discuss..



Sat, 01/21/2012 - 02:01 | 2083529 847328_3527
847328_3527's picture

Very educational. Thank you for this article.

Sat, 01/21/2012 - 03:28 | 2083649 jimmyjames
jimmyjames's picture

Why You've Never Heard of the Great Depression of 1920

| Thomas E. Woods, Jr.

An hour of an Austrian explaining how this depression was cured in one year-

Sat, 01/21/2012 - 03:34 | 2083656 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

Good article. Ponder the idea that practically all the other economic schools view their systems as a means of achieving social control. That's the starting point. Custom tailored from there to suit the fancy of the elites who finance the universities.


 Many  Keynesians believe that economics is a science like chemistry. The belief is  a carry over from the early 1900's to about the 1950's when it was widely believed that even “political science" was a hard science, before being debunked and regulated to the same college department as women’s studies.  It was under these assumptions that the new deal was introduced and the Administrative state arose. It was believed that there was a scientific way to “manage” society and every segment of society needs to be managed by agencies and bureaucrats.

Sat, 01/21/2012 - 03:50 | 2083675 iamse7en
iamse7en's picture

Boettke is a Kochtopus hack who is not a real "Austrian School" devotee. 

Sat, 01/21/2012 - 09:43 | 2083909 GMadScientist
GMadScientist's picture

Oh he's Austrian, but is he ...Viennese?

Sat, 01/21/2012 - 04:42 | 2083703 hooligan2009
hooligan2009's picture

The central tenets of "Austrian" economics apear to me to be a required humility of the person doing the analysis (in that they know that there is no "right answer") and secondly, that the avoidance of the bad (because we all can deliberately or inadvertently do good and bad things) leads to a greater good for everyone as well as the individual.

I find these tenets appealing, but wonder (in a humble way of coruse) how we can know when we are doing bad things and if the punishment is poverty or some other metric, like, public humiliation or becoming some sort of social pariah. Today's polticians know they are in a bad place, so do the bankers. Yet there is no "punishment" unless you count the accumulation of wealth and inability of being able to go for a drink without a security detail a punishment.

In this sense, Austrian economics does not try to be anything other than a method for setting behavioural standards that might not harm others and is (another personal belief) that we are evolving a new standard of civilisation (once grunting round a fire, then religion, now politics). I don't know what it is, but I do know it has nothing to do with politics or religion or the tea party.

Sat, 01/21/2012 - 07:19 | 2083792 AnAnonymous
AnAnonymous's picture


Austrian economics is just another fairy tale as US citizens like to produce to cover what they are doing.

Situation is quite simple right now:

US citizens have been quite successful at thieving their way up the ladder.

So successful that they can no longer lionize theft as a great advancement for humanity as it would indict them as the primary target for all the theft to come, since US citizens own or controll nearly everything.

Austrian economics is one tale to come with the propaganda that theft is bad,especially when it targets US citizens.

All US citizen economists point at the same outcome. They know what is coming.

And they want their school to be in charge to enjoy the priviledges.

Left, right, liberal, conservative, austrian, keynesian, all part of the same US citizenism paradigm: rivalry.

Sat, 01/21/2012 - 08:04 | 2083836 EvlTheCat
EvlTheCat's picture

WOW... we invented rivalry too?  Man what hasn't the U.S. invented?

Sat, 01/21/2012 - 08:51 | 2083865 AnAnonymous
AnAnonymous's picture

US citizenism is as US citizen does.

So if one US citizen claims that theyhave invented rivalry, well, so be it.

As to myself, never wrote such a thing.

But hey, putting words in others' mouth is cheap propaganda, and US citizens are high on cheap propaganda.

Sat, 01/21/2012 - 09:45 | 2083912 GMadScientist
GMadScientist's picture

Whereas the rest of the world is well-informed and only ever told the truth?

Try again, this time with neurons fullly engaged!

Sat, 01/21/2012 - 13:20 | 2084234 AnAnonymous
AnAnonymous's picture

What does it mean?


US citizens use cheap propaganda in a desperate effort to hide what they do.

It has little to do with being informed.

Of course US citizens are informed about what they are doing.

Who are you trying to convince that US citizens joining the military right now are joining because they think they are WMDs in Iraq?

The rest of the world sees through US cheap propaganda, thats the misery.

Sun, 01/22/2012 - 00:06 | 2085765 prole
prole's picture

Annymouse what the Hell are you trying to say? What is your message? What is your point?

Why don't you make a written complaint to the US Embassy in your country
(Assuming you never want a VISA lol)

Do you know what website you are on? Do you think we are the ones writing the propaganda?
Do you think the posters on ZH made up the "US cheap propaganda?"

Do you think we wrote, or believe in the "US cheap propaganda?"

I would like to direct you to

I think that is where you want to be. There you will find cheerleaders for war, believers in propaganda, eager cannon-fodder for wars... why don't you go over there and tell them what you really feel, your efforts and time are completely wasted here.

Sat, 01/21/2012 - 16:34 | 2084785 EvlTheCat
EvlTheCat's picture

"US citizens own or controll nearly everything."

The grass is always greener AnAnon.  Well we may have collectively adopted rivalry, but you (individually) certainly have perfected envy.

Sat, 01/21/2012 - 16:28 | 2084798 EvlTheCat
EvlTheCat's picture

No. Your particular grasp of the English language is specious at best.  Engage AnAnonymous version 3.0 and he can give you a few pointers.

Sat, 01/21/2012 - 08:34 | 2083855 hooligan2009
hooligan2009's picture

all debt is theft?

Sat, 01/21/2012 - 08:53 | 2083866 AnAnonymous
AnAnonymous's picture

Since you are making the question, maybe you or another US citizen could answer to it?

I dont really see why I should bother to answer a US citizenish question that is unconnected to what I wrote.

Sat, 01/21/2012 - 08:58 | 2083867 falak pema
falak pema's picture

Economics is like bowel movement, unpredictable. And you never know what you are going to eat tomorrow to pretend organising your trips to the throne! 

Man's predicament solved. Don't eat, economise, if you never want to go to the loo!

Let the economic shrinks predict your bowel movements, like you were the Roi Soleil. What a mad hatter's game! 

Having said that, great stimulating read! 

Sat, 01/21/2012 - 09:46 | 2083914 GMadScientist
GMadScientist's picture

Evocative flatus.

Sat, 01/21/2012 - 09:52 | 2083922 blabam
blabam's picture

Lol I actually tried to read Human Action while on vacation. After 10 pages I was like F'ck this shit I'm going swimming/ get a beer. 

Sat, 01/21/2012 - 10:52 | 2083986 Sizzurp
Sizzurp's picture

Want to open your mind to what is really happening?  The sickness not one man in a million can diagnose.

Sat, 01/21/2012 - 12:02 | 2084063 falak pema
falak pema's picture

ty for this post. Very illuminating.

Sat, 01/21/2012 - 13:57 | 2084349 Sizzurp
Sizzurp's picture

Here is a little treasure trove.  Great reading on a cold rainy day.

Sat, 01/21/2012 - 13:38 | 2084294 AnAnonymous
AnAnonymous's picture

With the nice Jefferson's quote, highly credible and the fun transformation of "have conquered" into "have gained"

But hey, imagination at work.

Sat, 01/21/2012 - 14:55 | 2084488 sgt_doom
sgt_doom's picture

Page 13, of Prof. Michael Hudson's brilliant 18-page presentation is presented below and explains everything, but please do read the entire article.

Finance capital’s raid on industry

Marx defined “primitive accumulation” as the seizure of land and other communally held assets by raiders and the subsequent extraction of tribute or rent. Today’s financial analogue occurs when banks create credit freely and supply it to corporate raiders for leveraged buyouts or to buy the public domain being privatized. Just as the motto of real estate investors is “rent is for paying interest,” that of corporate raiders is “profit is for paying interest.” Takeover specialists and their investment bankers pore over balance sheets to find undervalued real estate and other assets, and to see how much cash flow is being invested in long-term research and development, depreciation and modernization that can be diverted to pay out as tax-deductible interest.

Whatever is paid out as income taxes and dividends likewise can be turned into tax-deductible interest payments. The plan is to capitalize the target’s cash flow (ebitda) into payments to the bankers and bondholders who advance the credit to buy out existing shareholders (or government agencies). For industrial firms such leveraged buyouts (LBOs) are called “taking a company private,” because its stock ownership is no longer publicly available.

Permitting interest to absorb the revenue hitherto paid out as taxes and (after-tax) dividends to stockholders is diametrically opposite to replacing debt with equity funding as Saint-Simon and subsequent reformers hoped to bring about. The logical end – and the dream of bank marketing departments – is for all cash flow – earnings before interest, taxes, depreciation and amortization – is to be paid out as interest, leaving nothing over for taxes, capital renewal and modernization to raise labor productivity and living standards. All land rent, corporate profit, tax revenue and personal income over and basic spending is to be pledged to banks and bondholders as interest.

Under such conditions fortunes are made most readily not by industrial capital formation but by indebting industry, real estate, labor and governments, siphoning off the economic surplus in interest, other financial fees, bonuses, and “capital” gains. Populations willingly go into debt as it appears that gains can be made most easily by buying real estate and other assets on credit – as long as asset prices rise at a pace higher than the rate of interest.

Today’s financial investors aim at “total returns,” defined as earnings plus capital gains – with increasing emphasis on the latter gains in real estate, stocks and bonds. Industrial companies increasingly are “financialized” to produce such gains for investors, not to increase tangible capital formation. The “bubble” or Ponzi phase of the financial cycle aims to create the financial equivalent of a perpetual motion machine, sustaining an exponential debt growth by creating enough new credit to inflate real estate, stock and bond prices at a rate that (at least for a while) enables debtors to cover the interest falling due. [31] As a recent popular phrase puts it, financial collapse is staved off by the indebted economy trying to “borrow its way out of debt.”

This asset-stripping dynamic, which Marx characterized as usury capital, is antithetical to that of industrial capital. Based on the liabilities side of the balance sheet, financial securities take the form of anti-wealth – legalized claims on the means of production and income earned productively. The underlying dynamic is fictitious, because it cannot remain viable for long. It sustains interest payments by stripping assets, leaving the economy with less ability to produce a surplus out of which to pay creditors. And indeed, the financial sector destroys life on a scale similar to military conquest. Birth rates fall, life spans shorten and emigration soars as economies polarize.

This is the “free market” alternative to Progressive Era and socialist reforms. It typifies the IMF austerity plans that epitomize centralized planning on behalf of the global financial sector. Yet pro-financial ideologues depict public ownership, regulation and taxation as the road to serfdom, as if the alternative endorsed by Frederick Hayek, Ayn Rand and Alan Greenspan were not a road to debt peonage. And the endgame of this dynamic is a financial crash, wiping out savings that have been lent out beyond the indebted economy’s ability to pay.

It is at this point that the financial sector wields its political power to demand public bailouts in a vain attempt to save the preserve the financial system’s ability to keep on expanding at compound interest. Much as environmental polluters seek to shift the cleanup costs onto the public sector, so the financial sector demands cleanup of its debt pollution at taxpayer expense.

The fact that this is now being done in the context of ostensibly democratic politics throws a leading assumption of political economy into doubt. If economies tend naturally to act in their self-interest, how did the financial sector gain such extractive power to raid and dismantle industry and shed its tax burden?

If Darwinian models of self-betterment are to explain the past century’s development, they must show how creditors have translated their financial power into political power in the face of democratic Parliamentary and Congressional reform.

How has planning become centralized in the hands of Wall Street and its global counterparts, not in the hands of government and industry as imagined almost universally a century ago? And why has Social Democratic, Labour and academic criticism become so silent in the face of this economic Counter-Enlightenment?


Sat, 01/21/2012 - 16:20 | 2084782 hooligan2009
hooligan2009's picture convert product develoment via R&D/marketing into interest payments on debt until the products made become obsolete and the company fails...well you put it that way, the regulators and tax men simply need to put a cap on non-financial companies leverage to augment the capital ratios being imposed by Basel III. where do derivatives fit into this?

Sun, 01/22/2012 - 03:59 | 2085996 blunderdog
blunderdog's picture

Nice couple posts.

where do derivatives fit into this?

MAYBE the problems begin to develop at the point where a company becomes nothing but a financial abstraction designed solely to maximize return of these fictional units of measure we call "dollars."

It's not so much an answer to the question, but I think it has something to do with the schizophrenic implication that a corporation's ultimate interest *must* become 100% completely independent of the founding purpose.  It seems (from the most simpleminded and intuitive perspective) that GM and Ford were not founded as companies expressly to provide a rate of return to a small number of owners.  Stock price?  Market cap?

These companies may actually have been created to help someone manufacture and sell cars!

No, derivatives aren't the start of the problem--they're a late-stage symptom. 

Perhaps we begin by asking if there is legitimacy and unity of purpose, as with GM and Ford's cars, that justifies the formation of a BANK.

Sat, 01/21/2012 - 16:27 | 2084803 steve from virginia
steve from virginia's picture


A few random thoughts:

 - All 'modern' economics attempts to make industrialization rational so that it might 'work better' which is impossible. No industrial economy has ever worked. Industry does not pay for itself; the product of industrialization is debt which is the responsiblity of the industries' customers to service and retire.

 - Austrian economists include others than minor figures Hayek, Samuelson and von Mises. Where is Carl Menger and Schumpeter?

 - All of the pipsqueak Austrians stand on the shoulders of a giant: Karl Marx! (Human Action is an unreadable bore, good lord. Worse than Atlas Shrugged.)

 - Death of economics as much that matters: Marx misunderstood the true nature of industrialization. Certainly his Austrian children misunderstood it as well.

 - Austrian economics is morphing into the new orthodoxy, the 'New Keynesianism'. The concepts gained traction as Austrians were more willing to suck up to Big Business than Socialists who distrusted it. Not surprising that Austrians are close to the BAU establishment and plutocrats.

 - Who was the first Austrian policy maker? Andrew Mellon in 1921: "Liquidate stocks, liquidate labor, liquidate real estate".

 - Steve Keen insists economists don't know nuttin' 'bout money, how right he is! Money is outside the control of government (even as governments 'own' the monies in circulation). The 'idea' of money is a consensus, it does not belong to any one person or institution; the author's primary contention is false: that the government can control money or its effects any more than governments/central banks can control the weather. Our institutions are irrelevant.

For example, the Fed and the rest of the central banks do not set the money-worth of money or its cost. This is done every day by millions pulling up to the pump and 'filing 'er up': exchanging dollars for a valuable physical good on demand. Priced in crude oil, dollars have worth. To compete with motorists the central banks have set money cost to zero .. to no effect. Close the Fed, board it up and nobody will notice.

 - The Austrians laud 'entrepreneurs' and 'innovators' who are thieves who improve nothing and steal from everyone. Those who band together to resist theft are labeled 'socialists'.

Good grief!

Sun, 01/22/2012 - 04:12 | 2086003 blunderdog
blunderdog's picture

the Fed and the rest of the central banks do not set the money-worth of money or its cost.

They influence it by mucking around with stuff--there's direct manipulation of the relationship between "lending interest" and inflation.  You're right that they're no effective arbiter, but the ability to step in between the stake-holders of virtually any commercial transaction can't be ignored.

Props for mentioning Marx in context, but you should've been specific.  If your take on the Austrians is based on the guy in this interview, bone up.

Sun, 01/22/2012 - 10:37 | 2086329 GMadScientist
GMadScientist's picture

Thank you for boldly sharing your "out of the box" views, Steve. Much like Keen, it never fails to send me away thinking differently, if not always in perfect agreement.

They'll never take credit for causing the depression though (he said that during the Hoover admin, not Harding) has been rendered unthinkable by their cognitive dissonance.

Do NOT follow this link or you will be banned from the site!