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Source link: http://blog.mises.org/13778/bad-monetary-policy-is-redundant/

Bad Monetary Policy Is Redundant

September 3, 2010 by

The Austrian theory of the trade cycle explains why the Fed’s below-market interest rates invariably lead to a correction known as the bust. The theory is not new. Why has it been so out of favor with most economists? FULL ARTICLE by George F. Smith

{ 15 comments }

Liz September 3, 2010 at 10:08 am

Wow, George ! Great research. Very powerful when all the data is put together, in the format you presented it! Scary stuff! Thanks! I certainly learned many things.

Allen Weingarten September 3, 2010 at 1:17 pm

Same here; thank you George.

Stephen Grossman September 3, 2010 at 11:28 am

>Congress and Woodrow Wilson, at the behest of the country’s most powerful bankers, forced a banking cartel on the economy

At the behest of shoe-wearing bankers. Coincidence is not cause ,as Mises warns in his rejection
of statistics. And how money win a dispute with a gun? Altruism is the justification for intervention and socialism. The demand for sacrifice is the enemy of the selfish right to production ,trade, property and profit. Bankers are merely riders on the storm.

james b. longacre September 3, 2010 at 4:30 pm

the elements of coincidence can at times show a cause, correct?

james b. longacre September 3, 2010 at 4:32 pm

are you saying data is or is not statistics??

Stephen Grossman September 4, 2010 at 8:26 am

Some data is statistics, ie, quantitative. Some is qualitative, eg, man acts thru time. There’s a discussion in George Reisman’s _Capitalism_.

Stephen Grossman September 4, 2010 at 8:21 am

>the elements of coincidence can at times show a cause, correct?

Coincidentally, of course. ;<) And how, except with the non-statistical laws of economics, would you know a cause if it was staring you in the face? Bernanke's head is stuffed with Great Depression statistics. What good does it do him? The laws of economics act in each concrete situation in a way concrete to that concrete situation, unlike physical laws, eg, gravity, which is 32'/sec/sec everywhere. And economic law is known by a sort of philosophical reflection upon the common human experience of concrete reality. Eg, what statistics would tell an economist that man acts with a purpose and with the passing of time? Or that man hierarchically prefers and sets aside? Or that the production of material wealth requires the efficient allocating of always limited resources relative to man's unlimited wants? Or that man's independent mind, not government force, is the source of material wealth? Or that only the market, not govt, creates prices? Mises says we then we deduce from these axioms, using a stationary economy as standard to identify effects of introducing or changing definite. I am concerned, however, how induction proceeds in economics. More work is needed.

Mashuri September 7, 2010 at 11:34 am

What could induction reveal that is not already self-evident? Economics is the study of human behavior and, since we are human beings, we already have complete, reflective insight on the subject. Induction is a clumsy way to go about discovering what is already evident.

Stephen Grossman September 10, 2010 at 7:30 am

Yes, youre right but irrelevant because the self-evident is the base of causal knowledge. Ie, there is more than the self-evident in the physical sciences and the human sciences. Eg, a child rolls a ball and recognizes that pushed balls roll (in some context, with qualifications from subsequent knowledge). Then he may learn that the friction of a rug slows the pushed ball. Etc. There is the derivative knowledge built on the self-evident, ie, the vast and varied knowledge that man has produced in his history. Consider the millenia of knowledge of varied causes (star movements, tides, balls rolling down inclined planes, etc.) that was induced into Newton’s discovery of universal gravity. Man puts knowledge of causes together, ie, he induces and then induces the inductions, etc. This allows an ever wider or more specialized knowledge of causes. Consider all the causes needed to cause a car to move and to explain it. See David Harriman’s _Leap of Logic_ (2010) for induction in physics. He rejects the contemporary reliance on statistics (tho statistics has a narrower, derivative validity). But induction in the human sciences has not yet been theoretically identified. I believe that Austrians do induce but its not obvious or explicit. And consider that deduction is always from a prior induction as in Aristotle’s famous syllogism about Socrates and mortality. I think that some of Mises’ insights are inductions, of various hierarchical levels, from the self-evident even tho he only discusses deduction from the stationary economy. Mises, a Kantian, thinks that axioms are in thought rather than in perception-based reasoning about concrete reality. An Objectivist economist, Brian Simpson, who has a recorded lecture on Austrian business cycle theory, says deduction is important in economics. Economist George Reisman, who integrates classical, Austrian, etc. into his own system, has some comments in his massive _Capitalism_ (free, online). Rand, who has several Mises books in the bibliography of her _Capitalism_, rejects his praxeological method as rationalist. She holds that _all_ knowledge is based in perception and then integrated into concepts. See her _Intro to Objectivist Epistemology_ for a radically new theory of concepts as volitional/logical products with measurement-omission. Concepts are then induced into generalizations. Mises knew that philosophy is the base of the special sciences but accepted Kant’s rationalism rather than Aristotle’s realism. There is an Objectivist recorded lecture by Richard Salsman on Menger as Aristotelian and how later Austrians became subjectivists (starting knowledge and value inside consciousness instead of in the perception of concrete reality). Rothbard is said to be a causal realist. I have only fragmented knowledge of induction in economics but hope that my studies of various Austrians will lead to a theory of induction in economics. It does strike me as interesting how Mises’ concern w/the economically self-evident was similar to the philosophical self-evident. Philosophy, of course, has the widest self-evidencies, eg, existence, causality, entities, etc. I had not previously thought that economics also had self-evidencies that were so obviously valid.

fundamentalist September 3, 2010 at 4:06 pm

Mises wrote somewhere that economists rejected the role of money in business cycles because it undermined Marxism. I agree. The monetary theory of business cycles proves Marx wrong; markets are not unstable. In order to keep Keynesian socialism alive, mainstream econ had to ditch sound monetary theory.

Stephen Grossman September 4, 2010 at 1:02 pm

They ditched monetary theory for a monetary ideal. The more of the ideal, the better we are morally if not practically. And if a particular policy fails, we were not living up to the ideal, we need more of it. See Krugman.

weak stream September 5, 2010 at 9:44 am

The other really keen insight that Hayek noted was how inflation eroded business profit margins. Input cost increases invariably lead final product pricing power. Thus, after large inflations unemployment ensues. Unemployment is not the problem, but rather a consequence. Also, why would Greenspan refer to “persistent overissuance of money” on others’ watches but not on his own? These central bankers are well aware of Mises, Rothbard, Hayek and others but don’t have the strength of character to do what is right. So then we all have to suffer.

Stephen Grossman September 7, 2010 at 7:48 pm

>[Richmond Federal Reserve Bank President Jeffrey Lacker] said, “Our central objective is and always has been the domestic purchasing power of the US currency.”[16] Logically, the central objective can be either to preserve or destroy the dollar’s purchasing power. Lacker somehow forgot to say which.

But he has good intentions! Why speak of crude consequences?

nikkilarsson December 24, 2010 at 8:32 am

Good blog for understanding Monetary Policy. It is the process by which the monetary authority of a country controls the supply of money, targets a rate of interest, to attain a set of objectives oriented towards the growth and stability of the economy. Thanks for this to inform me this.

Monetary Policy January 17, 2011 at 5:52 am

This is really nice blog about monetary policy. It is very important factor as it is directly related to unemployment rate.

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