Turning to Mises
Every hour the crisis continues, I'm more grateful that we have Hayek, Rothbard, and Mises in print on all of this. I was just looking through Mises's Causes of the Economic Crisis (print and pdf) , and my eye quickly fell on this from 1931:
The appearance of periodically recurring economic crises is the necessary consequence of repeatedly renewed attempts to reduce the 'natural' rates of interest on the market by means of banking policy. The crises will never disappear so long as men have not learned to avoid such pump-priming, because an artificially stimulated boom must inevitably lead to crisis and depression....
All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program. However, it is perhaps not too optimistic to assume that those governments and parties whose policies have led to this crisis will some day disappear from the stage and make way for men whose economic program leads, not to destruction and chaos, but to economic development and progress.
Comments (24)
It's comforting, yet enraging to read Mises. I immensely enjoy reading his comprehensive and detailed exposition of the free market and how an interventionist state can both frustrate and divert the necessary readjustments in a market economy. But it's drives me to deep despair and, sometimes, anger that all these insights, many of which have been in print for 70+ years, have not yet been absorbed. Many of Mises' views have been driven onto the fringes of popular intellectual debate and the present exponents of the Misesian line are, in some cases, considered on par with conspiracy theorists. I wish to seem optimistic that in the end the Mises/Hayek economic line will ultimately triumph, but I am not so sure, which is incredibly depressing once one truly reflects upon the awesome level of government intervention in the financial markets that has taken place in the past year.
Published: October 10, 2008 12:43 PM
I forget if it was Mises or Rothbard, but one of them writes that the correctness of the Austrian economic model renders its eventual triumph inevitable. All other economic theories bear the seeds of their own destruction. It may take a long time for the powers-that-be to wake up to this fact, but it will happen.
That's what I tell myself to remain hopeful and not give into despair, anyway.
Published: October 10, 2008 12:53 PM
Jeff, that is an interesting insight, and an incredibly comforting one when we look at the state of our most important capital allocators.
I support Ron Paul and admire him, but I do wish we had a more forceful and eloquent (i.e. someone like Obama) advocate of decentralized, 100% reserve banking and true stability.
Published: October 10, 2008 1:12 PM
The problem isn't that there are not plenty of intelligent people who know what needs to be done, it's that none of them are in charge of anything that can actually make a difference.
If only Mises had developed a theory of how to keep bad economic ideas from creeping into politics...
As I read the above comments, I find I'm not alone in this thought...what can be done? It's time for ideas, not lamentation...
Published: October 10, 2008 1:44 PM
There was an economist from Notre Dame on a radio talk show yesterday and all he could do was just stammer. The poor guy was at a loss for words because everything that he had been taught and practiced over his academic life is falling apart. I suspect he is a of the monetarist school and is seeing that the usual bag of tricks (artificially lowering the Fed Fund Rate, auction loans, open market operations, et al…) are just not working. I really feel for the guy. He is in a moral crisis; the foundations of his being are shaken to the core.
One thing we all can hope for is for these economists to search for truth during their moral crisis and find the works of Hayek, Rothbard and Mises.
Published: October 10, 2008 1:48 PM
Hi folks,
I also can't help but feeling sad to see all this crisis happening before our eyes, exactly as foreseen by the great Austrian thinkers, and everytime the subject arises during normal conversation with colleagues or friends, I tend to be regarded as a kind of anti-social weirdo as I categorically say that "the boom was the natural consequence of the injection of fiat money into the banking system, cheap credit and irresponsible loans".
Just an idea: as mainstream economics is so fond of the mathematical approach, would it be feasible to create an "Austrian-oriented" algorithm to simulate the free-market interactions that define the boom & bust concept? Perhaps this would be a convincing tool to shake the mental inertia of academic medium?
Just a thought... (I'm no economist but an interested mises.org reader since 2005)
Regards from Rio,
R. Halevy
Published: October 10, 2008 2:32 PM
Just an addition to my previous post:
"...would it be feasible to create an "Austrian-oriented" algorithm to simulate the free-market interactions ON THE ONE SIDE, AND GUVMINT INTERVENTION ON THE OTHER SIDE, that define the boom & bust concept?"
Published: October 10, 2008 2:37 PM
Halevy:
Whenever this stuff comes up I'm the only weirdo in the room who thinks government is the cause of every problem known to man. People hate that I don't conform to their little system. I was actually thinking that a good way to get people to believe in free market economics would be to make a formula that could predict every market bubble; kinda like physicists have the hope of a universal equation that explains everything. I bet that there is a formula, we just have to find it.
Published: October 10, 2008 2:42 PM
I'm no economist, only an amateur who has been unlearning Keynsian economics ever since Econ 101-102, but I think the Austrian school's problem in the marketplace of ideas is that there is no econometric application because there is no mathematical formula that can be used to forecast prices and market activity. That, plus compulsive governmental price-fixers are incapable of believing that they should ask forgiveness, go, and never dabble again.
Published: October 10, 2008 2:47 PM
There has to be some relation between money supply and the timing of these bubble bursts.
Published: October 10, 2008 2:49 PM
Andy, read up on the business cycle per Mises and Hayek. You'll see how bubbles work. It doesn't quantify very well for time and price predictions since the system the theory describes depends on everyone's rank preferences for all occupations, savings levels, capital and consumer products in the marketplace, in addition to all future innovations (in products and occupations). In other words, it is not quantifiable now, but probably roughly quantifiable looking back. It's also possible that someone could empirically discover a formula for handling innovation and work out an Austrian econometric model. The more often we encounter bubbles and their inevitable pop, the better such a model should get.
Published: October 10, 2008 3:28 PM
Halevy: “… would it be feasible to create an "Austrian-oriented" algorithm…”
LJ Miller: “…I think the Austrian school's problem in the marketplace of ideas is that there is no econometric application because there is no mathematical formula…”
If you search in the Quarterly Journal of Austrian Economics on this site and the Review of Austrian Economics over at the George Mason U site, you’ll find several articles where people have done econometric studies of Austrian Econ. They don’t make up a full economic model, but have some very interesting results. I don’t think it would be difficult to do one. Getting the appropriate data is the hard part. I’m working on one for myself in my spare time but it’s slow going because I don’t have much free time right now.
Austrians make qualitative forecasts in all of their work. All you have to do is take those qualitative models, apply some numbers to them and run them through the appropriate software.
The business cycle theory helped me avoid the current stock market crash. I was reading Hayek’s “Prices and Production” and got to the point where he writes that high profits in the consumer’s industries will lead to a shift to using more labor and less capital in production (the Ricardo effect). That was over a year ago and I had been reading about record profits in the news. I figured the boom was about over, so I got out of stocks and into cash. I have been in cash since, but it looks like about time to get back into stocks.
Published: October 10, 2008 4:03 PM
I know that this is anti-Austrian school, but I want to make a comparison. I took conceptual physics college as an intro class. I loved that class, all the concepts and laws of physics just made sense to me, everything worked out perfectly. The next class was all application. It was hardcore math and calculus, which actually explained the laws of physics, and I guess showed how the laws worked. I mean this is how Einstein worked, he invented calculus to further his work. Does this not exist in the Austrian school? Did someone forget to invent the calculus of Austrian Economics?
Published: October 10, 2008 4:09 PM
I think the Austrian school's problem in the marketplace of ideas is that there is no econometric application because there is no mathematical formula that can be used to forecast prices and market activity.
Econometricians seem to have no appreciation for the outrageous complexity of an economic system.
As a matter of combinatorics, calculation of something useful, like the price of sugar (or houses or interest rates or stocks and bonds) a week from now, is unknowable. 100% impossible.
As a matter of actual economics, the information on which such calculations could be based is not knowable or measurable. Subjective preferences are not knowable until after a person is forced by scarcity of time and money to actually choose a course of conduct.
I mean this is how Einstein worked, he invented calculus to further his work.
Calculus was invented by Issac Newton and Gottfried Leibniz in the late 1600s.
Published: October 10, 2008 4:26 PM
Why don't economists embrace collaboration with the theoretical physicists who have entered the economic space and have been building models based on agent modeling. I have done no investigation into it, but it strikes me as though some of them have some interesting skills that could be brought to bear.
http://www.nytimes.com/2008/10/01/opinion/01buchanan.html?_r=2&partner=permalink&exprod=permalink&oref=slogin&oref=slogin
Published: October 10, 2008 4:44 PM
@ andy who said "Does this not exist in the Austrian school? Did someone forget to invent the calculus of Austrian Economics?"
I think you should really read Economic Science and the Austrian Method @ http://mises.org/esandtam.asp
I lays out the foundation and methodology of Austrian Economics. While reading you'll find out that much of what you're suggesting can be seen as impossible for as of quantitatively prediction, while qualitative prediction is possible to some extent. For quantitatively reconstructing the boom and bust in a model would require an amount of data one cannot imagine. And in the end the restriction would always be the model, because one cannot model human action by definition because humans are subjects, not objects like stars, falling apples out of trees etc. Retrospect analysis is always possible but the extent of it being quantitative is very limited. Qualitatively much work has been done by Mises, Rothbard, Robbins, Higgs, Woods (last two much more on the political rather than the economical side alone). So my advice, trash the online library! :)
Published: October 10, 2008 4:45 PM
Speaking of interventionist measures, I think you'll be interested to hear investor Jim Rogers respond (yet again) to Bloomberg's questions on the latest idiotic interventionist schemes.
http://financetrends.blogspot.com/2008/10/jim-rogers-speaks-with-bloomberg-tv.html
I've been hearing more people commenting lately that the only people who have anticipated the current financial mess are those who have an understanding of sound economic principles.
Rogers, among others (like Marc Faber, James Grant, Jim Puplava, Peter Schiff, and many of the economists and contributers here), has been consistently right on these trends (from my view) largely due to his understanding of history and Austrian economics.
Published: October 10, 2008 6:10 PM
Be very careful when taking Physics as an analogy for other sciences. It's a science of its own and its method is its own. Social sciences differ drastically from sciences studying things without intentionality.
Published: October 10, 2008 7:24 PM
Hi Andy,
A great book to read about the impossibility of predicting such things is The Black Swan, even if it doesn't directly attack this issue.
It's a great discussion of true randomness and why it is impossible to make predictions that involve complex systems.
However, Taleb (though a strong fan of Bastiat and FA Hayek) doesn't seem to think that all gov't intervention has bad unintended consequences (unless he avoids directly saying this to make his ideas and work much more likely to enter the mainstream discussion). It seems like he's read Hayek and Bastiat but not Mises and Rothbard.
Published: October 10, 2008 11:37 PM
So, to summarize, there's no way out of a crises other than a complete crash and there has been no economic development or progress since 1931?
Published: October 11, 2008 7:14 AM
All you guys:
Reread Mises. Pay attention to Magnus' comment above.
No quantitation is possible because no constant numerical
relations have ever been discovered. It is entirely possible that we shall discover some such in the future--but "don't hold your breath."
But here's the real "takeaway":
If it were possible to predict people's economic behaviors with the precision necessary to predict and prevent crises, PEOPLE WOULD ALREADY BE ACTING THAT WAY AND THE PREDICTION WOULDN'T BE NECESSARY.
IF IT WERE POSSIBLE TO FORESEE THE SHAPE AND LOCATION OF A FUTURE CRISIS, WE COULD CERTAINLY PREVENT IT, MEANING SIMPLY, THAT WE'D HAVE CRISIS AT A DIFFERENT LOCATION AND OF A DIFFERENT SHAPE.
The economic future is, within broad limits, essentially VERY PREDICTABLE. We should know---that's what the Austrian School has been doing now for the better part of a hundred years.
The specific locations of crises are not actually difficult to predict. They're actually somewhat easy (and people with no expert economic knowledge do it all the time). Virtually everyone knew it was a bad idea to be lending enormous sums to people with
marginal prospects for repayment of their loans. And everyone understands that someone with "nothing to lose" by default is more likely to default. How much more need be known? It's also pointless to point out that someone with nothing to lose is more likely to be willing to risk MORE of that nothing (and thus "bid up" prices). Under such circumstances is set in motion a vicious chain; "prudence" itself is adjustable: under price competition, even some who incline toward prudence may expand their appetite for some things (houses, for instance) by considering that they're able to be more economical in other areas. For some of those, it'll work---just not for all.
Remember the S & L bailout? same thing--just a different set of players and a different asset class that was fueled by a change in lending practice.
But, in both cases, the weakness was encouraged by changes in regulation encouraging less prudent loan behavior ( exacerbated by ever-present competitive pressure). (That is to be compared with regulation of long standing, with which lenders have already become adjusted, or, ideally, no regulation , in which the least prudent are "weeded out" by failure and attrition.)
But I want to emphasize the theoretical point I've been making repeatedly: crises and failure are inevitable under government authority over money.and lending practice. Gold Standards. abolition of the Federal Reserve, etc.--all useless shifts (and temporary) when money itself is under authority, when most believe government has any business whatever telling people who should lend and to whom, at what rates of interest and, even more basically, what is money and what its value should be.
I am optimistic on several levels. For one, that the spheres--ours and others---will continue in their orbits in the foredeeable future and that nature will behave pretty much as in the past. But men will also not change much--and that's spelled ever-larger disasters in the past, which does not bode well for the future. There's just no such thing as "foolproof."
But here's There are serious (and I have no reason to believe unintelligent) guys (probably running through grant money) trying to establish predictive "models" and
(reading over at gnxp.com) they've found some interesting apparent heritabilities of behavior in certain "economic games."
Published: October 11, 2008 8:28 AM
The problem with developing a truly predictive economic model is that both the output and the input are always fully dependent on each other. While this might have individual value, I don't really see any policy value except for maybe the short-term. How many cycles before gamesmanship destroys any policy value of the model? We built one of the largest predictive models for recruiting in the world and got only a couple of cycles before people started gaming.
Published: October 13, 2008 9:17 AM
Glen: “We built one of the largest predictive models for recruiting in the world and got only a couple of cycles before people started gaming.”
I assume that your model had the potential recruits respond to questions about themselves. The problem there is not the econometric technique, but the intelligence of the test takers who can determine from your questions what result you are trying to achieve. A better method would be to ask a couple of open ended questions and have the recruits write short essays then anaylize the essays with text mining techniques. That will reduce the ability to game the system.
While it’s clear that econometric techniques are rarely accurate and if they are it’s usually by accident, that doesn’t mean they have no value. Some people seem to think that if the models can’t be 100% accurate then we shouldn’t use them at all. That’s not true. Businesses use statistical modeling all the time with great results and such models are only about 60% accurate. I have a friend who developed a model to predict horse races that was only about 60% accurate and he won a lot of money at it because he won more than he lost.
All that a model has to do to be useful is to be better than a random walk. An econometric model of the economy based on Austrian econ would not improve on theory any, but instead of only being able to say that credit expansion will cause a boom that will reverse at some point, a model could give you ranges of time periods in which to expect the crisis and ranges of for how much GDP might change, for example. Which brings up another point: good forecasters don’t ever give just point forecasts, such as those we see in the media every day. Real forecasters give a point estimate for the expected forecast with the range of value showing the 95% confidence limits either side of the point. The 95% confidence intervals tells people that the model is 95% confident that the forecast will be between those values with the highest probability being the point estimate. The point estimate will almost always be wrong, but the 95% interval should rarely be wrong or you need to get another model.
In other words, all that good econometric modeling will do is add some specificity to the qualitative forecasts already made by Austrian economists. That added specificity can be very helpful to businesses and can make them a lot of money.
Published: October 13, 2008 11:20 AM
Magnus: “I think the Austrian school's problem in the marketplace of ideas is that there is no econometric application because there is no mathematical formula that can be used to forecast prices and market activity.”
Actually, the econometric models for Keynesian econ are incredibly bad, so bad that few textbooks will let you know how poorly they do. Academic economists know how bad they are, but that doesn’t change anyone’s mind. They cling to Keynesian economics because they desparately want socialism to be true and possible and Keynesian econ tells them it is. Without the models, history should tell them that Keynesian economics is wrong. That’s why mainstream economists refuse to study economic history. Even if Austrian econ was as heavily modeled as Keynesian econ, those who don’t care about the truth would still find excuses to reject it. The problem isn’t one of evidence for the evidence for Austrian econ is overwhelming. The problem is an unwillingness to accept the consequences of the truths that socialims is impossible; state intervention in the economy impoverishes everyone; the state cannot control the economy, and neither can the Federal Reserve.
Published: October 13, 2008 11:37 AM