Mises is no longer with us to comment on our present debacle, we know which economic principles (truths) he relied on, and it is certainly apropos to raise the question, what would Mises say about the present crisis? His reply would be clear as day. The true cause of the economic instability is what he labeled inflationism. By this he meant the unlimited creation of new money on the part of governments — fiat money without any backing whatsoever. FULL ARTICLE
Source link: http://blog.mises.org/9672/what-would-mises-say/
What Would Mises Say?
Previous post: Is the Economy a Perpetual Motion Machine?
Next post: Saying Goodbye to Mises from Vienna
{ 10 comments }
The article “What would Mises Say” accurately reflects the stand of the great free market economist. Even though Mises was derided for stating that economic calculation was impossible under a socialist state . . . . is in an economy where prices have been grossly distorted by rampant inflation . . . he had a powerful ally in socialist economist Dr Oskar Lange. Lange recognised the fatal flaw of the socialist economic system in Mises research . . . and declared that Mises was right.
Joseph Keckeissen wrote:
“That would be Mises’s message today. The quantity of money must never be increased.”
Can someone, anyone, tell me where Mises wrote this or said this?
Keckeissen ruins an absolutely outstanding article by appealing to the Quantity Theory of money, a theory that Mises took pains to deny. Mises was all about the exchange value of money not the quantity of money and so he would never say “The quantity of money must never be increased.”
The quantity of money is not really the issue. The issue is that more money has been forced into the economy than the economy needs to properly value the exchange value of money.
Hopefully those who call themselves Austrian will stop their love affair with the Quantity Theory of money and embrace Mises exchange value theory of money.
Can too much money distory the exchange value? Of course. But if the quantity of money is never changed could that destort the exchange value of money? Absolutely.
The only way for money to be optimal is for there to be a free market in money which will lead to a currency anchored in the most stable commodity, gold.
Dick Fox:
In a memorandum (April 24, 1946) to businessmen, Mises reluctantly wrote a sketch regarding the economic consequences of cheap money. I say reluctantly because he says he wrote it reluctantly, and I remembered this essay because it was interesting to me. Was he reluctant because he was writing something about quantity of money? You can judge:
In this essay, Mises wrote regarding the end stages of a crises (starting on to hyperinflation and the flight to real goods). He describes how credit expansion (circulation credit expansion, not commodity credit, his name for real savings) inevitably leads to this rapid rise in prices and wage rates. People lose faith in the monetary unit and buy whatever they can.
I’ll give a quote from the ending, which is rather long but about as close as I can remember to a statement about not ever increasing the quantity of money:
” If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes or by loans on the bank books. In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, re-baptizing it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused.”
So, in light of the current situation, perhaps Keckeissen was simply speaking out against artificial credit expansion, and trying to suppose based on something like the above what Mises may have said. Mises wrote that termination of the policy of easy money must come, and sooner rather than later, if real prosperity is to be achieved.
I realize this isn’t exactly “The quantity of money must never be increased”, but it is saying something along the lines of … when you are inflating with abandon, this must be ceased to avoid a currency crisis or to restore the chance for a subjective valuation of money by market participants.
My two cents; I’m no economist.
to those, like dick fox, who think austrian economics stopped at mises, read phillip bagus’ article: “deflation: when austrians become interventionist”
http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf
mises actually said this:
“Changes in the supply of money or in the demand for it can never occur for all individuals at the same time and to the same extent and they, therefore, never affect their judgments of value and their behavior as buyers and sellers to the same degree. Therefore the changes in prices do not affect all commodities at the same time and to the same degree. The over-simple formula both of the primitive quantity theory and of contemporary mathematical economists according to which prices, that is, all prices, rise or fall in the proportion of the increase or decrease in the quantity of money, is absolutely wrong.
We have to study monetary changes as changes which occur first for some groups of individuals only and slowly spread over the whole economic system to the extent that the additional demand of those first benefited reaches other classes of individuals. Only in this way can we obtain a realistic insight into the social consequences of monetary changes.
(Address delivered before the Economics Faculty of New York University at the Faculty Club on November 20, 1940)
- this is merely condemnation of the crude and mechanistic version of the quantity theory.
Hmm, I’m not very convinced about the blessings of deflation as outlined in the article…
Anyone can offer an opinion?
I sort of wonder if the same arguments for the pro-deflation position – if they can be applied to support a case for mild inflation. Seems almost interchangeable to me.
Newson, thanks for the Mises quote. Mainstream economists could easily model the behavior Mises describes with econometrics if they weren’t so stubborn and lazy. Instead, they slap a model together for several decades that regresses interest on money supply and conclude that there is no correlation. However, the correlation would improve if you had some variable to describe recessions and booms, such as a price index or even GDP, or just a dummy variable. Then you would see a strong correlation during booms and less during depressions. In addition, you would need several lagged variables to model Mises’ point that the new money spreads through the economy over time.
Hebe: “Hmm, I’m not very convinced about the blessings of deflation as outlined in the article… I sort of wonder if the same arguments for the pro-deflation position – if they can be applied to support a case for mild inflation. Seems almost interchangeable to me.â€
On the surface that seems true. But inflation is a form of theft; it transfers money from one group of people (the late receivers of new money, often people in manufacturing and retail) to another group (the early receivers, usually the financial services industry and government) without the permission of the late receivers.
In addition, mild inflation distorts prices that would naturally occur and that causes errors in business judgement which destroy wealth. If the money supply is held constant while the population increases and production increases, prices will naturally fall across the board at the same rate as the increase in population and production. That is the natural order and gives the clearest pricing signals. It also encourages saving over borrowing.
PS, Mild price inflation can also be deceptive. It fooled the Feds in the 1920′s and 1990′s. The Fed has aimed for decades at price stability, that is, mild inflation of 2-3%. But when productivity is increasing, prices naturally will fall. So a mild observed inflation of 3% could be hiding a real inflation of 6-10%. But the price inflation isn’t the real problem. The real problem is the monetary inflation behind it which comes from low interest rates. The low interest rates that cause monetary inflation and eventually price inflation also set in motion the Austrian business cycle with its booms and busts.
mises, sums up favorably the deflationary frb bust in “on the manipulation of money and credit” (p149).
“7. Intervention No Remedy
It may well be asked whether the damage inflicted by misguiding entrepreneurial activity by artificially lowering the loan rate would be greater if the crisis were permitted to run its course. Certainly many saved by the intervention would be sacrificed in the panic, but if such enterprises were permitted to fail, others would prosper. Still the total loss brought about by the “boom†(which the crisis did not produce, but only made evident) is largely due to the fact that factors of production were expended for fixed investments which, in the light of economic conditions, were not the most urgent. As a result, these factors of production are now lacking for more urgent uses. If intervention prevents the transfer of goods from the hands of imprudent entrepreneurs to those who would now take over because they have evidenced better foresight, this imbalance becomes neither less significant nor less perceptibleIn any event, the practice of intervening for the benefit of banks, rendered insolvent by the crisis, and of the customers of these banks, has resulted in suspending the market forces which could serve to prevent a return of the expansion, in the form of a new boom, and the crisis which inevitably follows. If the banks emerge from the crisis unscathed, or only slightly weakened, what remains to restrain them from embarking once more on an attempt to reduce artificially the interest rate on loans and expand circulation credit?
If the crisis were ruthlessly permitted to run its course, bringing about the destruction of enterprises which were unable to meet their obligations, then all entrepreneurs-not only banks but also other businessmen-would exhibit more caution in granting and using credit in the future. Instead, public opinion approves of giving assistance in the crisis. Then, no sooner is the worst over, than the banks are spurred on to a new expansion of circulation credit.”
…not the words of a reflationist.
Comments on this entry are closed.