Comments (38)

• greg

  Good article. But I our political direction has been set towards more socialistic policies from both sides of the aisle. More government injections, regulations and control over investments. So the question is why is the public demanding this direction?
  Part of the answer lies with the market moves yesterday. Just like your checker's program, when the S and P broke a bottom, program selling hit and the market fell like a rock. Then support formed and program buy programs hit causing a 800 point swing. A few people made money and many lost as they sold off the bottom and was slow in getting back in on the upswing.
  Then as I was watching the few hedge fund managers testifying before congress. The many are feeling like they are getting taken by the few and vote for the people that promise to control them and fix the problem. Does a problem exist?

  Published: November 14, 2008 9:19 AM

• David Roemer

  Very good explanation of why economics is absolutely true. The trouble is that times have changed since Rothbart and Mises were writing. Now, everyone believes in capitalism and democracy. Everyone knows the benefits of free trade. The New York Times reporters describe government intervention in terms used by Milton Friedman. Everyone knows about special interest groups getting their way with ignorant and apathetic voters. Even in the case of the business cycle, the government has not pursued inflationary policies--perhaps for the wrong reasons-- but this is the only are where people need lectures on economics. What I would like to see is more analysis of where the interventionist political blows are coming from, not the benefits of free trade.

  Published: November 14, 2008 9:32 AM

• Curt Howland

  "Even in the case of the business cycle, the government has not pursued inflationary policies..."

  Pardon me for asking, but what planet are you on?

  Published: November 14, 2008 10:02 AM

• marco saba

  From the U.S. Army Field Manual FM 3-05.130, Appendix D, September 30, 2008: " While free trade theory may be economically sound, it can be disruptive to markets, industries, and entire societies. "
  http://www.fas.org/irp/doddir/army/fm3-05-130.pdf

  Published: November 14, 2008 10:28 AM

• Jim of Austin

  Great article. I think the reasons that most politicians in power don't understand (or chose not to believe) the laws of economics is because their voters don't understand the laws of economics. With the pulbic school system that we've had in our country for too long now, economic education is completely inept. Funny, because on of the top ten things Marx said a country needed to become communist was a public school system.

  Published: November 14, 2008 11:28 AM

• Jim of Austin

  Great article. I think the reasons that most politicians in power don't understand (or chose not to believe) the laws of economics is because their voters don't understand the laws of economics. With the pulbic school system that we've had in our country for too long now, economic education is completely inept. Funny, because on of the top ten things Marx said a country needed to become communist was a public school system.

  Published: November 14, 2008 11:29 AM

• Stanley Pinchak

  Marco,
  you had better believe that it is disruptive to those who have poor entrepreneurial skill. Just think of the plight of the buggy and whip makers one century ago. Or the typewriter and telegram firms. Or think of British Colonial mercantalism circa 1776. But like other reactionary interventionists, the military's eyes are firmly fixed to the past, always fighting the last war. All change is revolutionary and rather disturbing from that viewpoint. The market and liberty are highly unsettling concepts.

  Published: November 14, 2008 11:56 AM

• Michael Tabony

  I'll get more enthusiastic about free-market capitalism when the market makers and fund managers can't "naked short" stocks. I see it as counterfeiting stock shares and we all know increased supply will push the price down.

  These guys have been crushing a weak market and destroying capital in a rush for a quick buck. We have no idea who most of them are as the hedge funds are so poorly regulated. Even Osama bin Laden could be involved and the SEC would never know.

  Published: November 14, 2008 1:20 PM

• N. Joseph Potts

  I wonder what the difference is between a "forced win" and a "win." Or a "forced draw."

  Published: November 14, 2008 1:31 PM

• greg

  michael, you have hit the very point of the problem. In trading you need rules and regulations to limit abuses to the system. When allowed people will cheat the system to make a fast buck at the expense of others in the market. So does a pure free market need regulations?

  Published: November 14, 2008 1:37 PM

• Don Duncan

  M. T. said: "I'll get more enthusiastic about free - market capitalism when..."
  All capitalism is "free-market" or it's not capitalism. Under capitalism chasing a "quick buck" is not harmful to society. To bad we have NEVER had any economic system except a mixed-economy. Which is perfect for the socialists. Every crisis is blamed on capitalism and moves us further towards socialism. This benefits a few who just want a "quick buck" at the expense of society. I recommend you study the problem by reading Ayn Rand's "Capitalism: The Unknown Ideal".

  Published: November 14, 2008 1:51 PM

• Inquisitor

  "So does a pure free market need regulations?"

  If it does, they won't be stemming from anything quite as useless as a government...

  Published: November 14, 2008 2:38 PM

• Inquisitor

  "So does a pure free market need regulations?"

  If it does, they won't be stemming from anything quite as useless as a government...

  Published: November 14, 2008 2:39 PM

• greg

  Don Duncan,
  I suggest you play the futures market or try investing in the market. I think MT was coming in from the real world, not an ideal world. And I think this is the problem with this this economic approach, the ideal will never be applied to the real.

  Published: November 14, 2008 2:39 PM

• Som

  Sweet article, it basically says to the state, "Game over!"

  Actually I think the government can overcome the obstacle of economic law... remove human action

  Published: November 14, 2008 3:29 PM

• Dan

  Maybe I'm not understanding, but whether shorting a stock, or naked shorting a stock, there still must be a buyer right? So both supply and demand increase in a naked short...so how can one come to the conclusion that naked shorting always drives down prices?

  Published: November 14, 2008 5:42 PM

• saildog

  This article elegantly confirms what we already know: that Austrian economics, like religion, ultimately relies on circular arguments; and therefore cannot be disproved. So what?

  Praxeology, as an explanation for exponential human population growth; and the challenges this represents, is irrelevant. It neither explains it nor offers any useful information about how to act, either at an individual or societal level.

  That is because it ignores the biosphere and the fact that humans are a subset of the biosphere and not the other way round.

  Published: November 14, 2008 5:51 PM

• Stanley Pinchak

  Saildog,
  you did read the same article that the rest of us read, right? Austrian economics relies on the fact that humans act. All of the remainder is derived from this axiom. Are you falling for the old empirical positivist fallacy which denies that a priori knowledge can inform one of the working of the universe?

  Published: November 14, 2008 7:03 PM

• saildog brother

  The Austrian posit is not a scientific theory as it cannot be disproved. To argue simply that all intervention is necessarily bad because it creates unforseen and/or unknowable (a priori) effects, which exacerbate rather than relieve fluctuations in a free market environment is not meaningful; this hypothesis can never be tested, therefore can never be proved, nor disproved.

  I wonder how many of those unfetted capitalism adherents have, or know somebody who has, lost a job in the current recession and faces a finanical insitution foreclosing on their home. The allocative mechanism of the market is indeed very powerful. However, to think that such an extreme is the ideal does not follow from this. The dire situation of the U.S. health system, the most privatised in the world, is proof that markets do fail - some goods are indeed public goods which should be provided/supported by the state.

  Humans do indeed act, but why do humans act? Welfare in the real world is defined over more things than just consumption possibilities!

  Published: November 14, 2008 8:47 PM

• cglace

  saildog,

  Are you implying that the problems in the US health system stem from the fact that it is privatized? I believe I read that 50% of health care costs are paid for by the government. Then if you throw in all the government regulations it hardly sounds privatized to me.

  Also, I see how you are crying about all of these people being hurt form this debacle but I don't see why you imply that more harm has to be done by the government. Austrians claim that this is just the culmination of a massive business cycle and that the malinvestments must be purged from the market. Sure its going to hurt a lot of people but I don't see why we have to punish the people that acted prudently to help those that didn't

  Austrian economics rests on axiomatic propositions and draws conclusions based on those propositions. Like it or not but all systems of thought empirical or otherwise trace back to some claim that is made axiomatically. The propositions can be disproved only if contradiction results.

  Published: November 14, 2008 9:52 PM

• David C.

  Gary's article concludes with a suggestion for politicians to align their policies with what is natural. I'm afraid this misses the point; there is no theoretical rationale for the political process when one is discussing economics. Politics means government, which means a territorial monopolist of ultimate decision-making in the hands of certain individual people. It is always tyranny and cannot be otherwise. The moment one discusses government one is outside the realm of economics. One does not discuss rational allocation of resouces and allocation of resources at gunpoint in the same sentence. It's like trying to discuss a free market in slavery.
  As to Saildog; Dude? What are you reading? For instance, the foreclosure mess was amplified by pushing the already insane Community Redevelopment Act (Carter) to absurd lengths (under Clinton). Your bleeding heart for those getting kicked out of homes they didn't own, kicked out by the OWNERS (AKA banks), should be angry at the politicians who used legislative fiat to buy votes by promising money from the U.S. Treasury to groups like Acorn. As to the claim that the US health system is the most private, I guess Saildog is unfamiliar with Certicates of Need (granted by committees appointed by politicians) or a thousand other regulations, threats, guides, and other interferences that render laugable any notion that the U.S. health care delivery system is a free market in any remote way.

  Saildog...read more at the Mises site and at lewrockwell.com and you will discover a whole continent of which you seem unaware.

  Published: November 14, 2008 10:01 PM

• RWW

  Saildog seems the type to claim that mathematics is not scientific. After all, it cannot be disproved. THe problem lies in scientism -- the belief that all valid science is empirical. Mathematics and praxeology are axiomatic (aprioristic).

  Published: November 14, 2008 10:01 PM

• Inquisitor

  "This article elegantly confirms what we already know: that Austrian economics, like religion, ultimately relies on circular arguments; and therefore cannot be disproved. So what?"

  And your comment elegantly confirms you know absolutely nothing of what you speak. So what? Just a barrage of ignorant assertions. Read some Hoppe, Mises, Barry Smith or Martin Hollis, then come back. Until then, you're just another clueless troll.

  "Humans do indeed act, but why do humans act? Welfare in the real world is defined over more things than just consumption possibilities!"

  Duh. Illuminating. We already knew that. Now why don't you go read up, like a good little boy, whilst the adults talk?

  "To argue simply that all intervention is necessarily bad because it creates unforseen and/or unknowable (a priori) effects, which exacerbate rather than relieve fluctuations in a free market environment is not meaningful; this hypothesis can never be tested, therefore can never be proved, nor disproved."

  Ipse dixit. Meaningless assertion.

  Published: November 14, 2008 10:43 PM

• saildog brother (NB/ Not Saildog)

  "Duh. Illuminating" are exactly the words that i would use to describe the fundamental basis of Austrain economics. Humans act. Whoop-de-doo.

  "Meaningless assertion" it is certainly not. To simply say that governments should not step in, whatever the circumstance, when people of the population who have elected that government are suffering in some way, shape or form, based purely on an unprovable hypothesis that intervention always leads to a worse outcome than what would be achieved under zero intervention, is absolutely absurd. This is why Austrain economics has gone nowhere, and will never go anywhere.

  Just because the US health care system is not 100% privatised, does not mean that it is not the most, or one of the most, privatised in the Western world. Too assert anything else is ridiculous, and to suggest that government intervention per se is the problem, is even more ridiculous. Much more highly government funded health care systems in the Western world function much much better than the US system.

  
  "..but I don't see why we have to punish the people that acted prudently to help those that didn't". Those people who are now out of job because their firm cannot access required funding to maintain investment and profitability, are hardly those that didnt act prudently. But hey, lets not intervene to try and stimulate economic activity; lets just go through another Great Depression in order to 'purge all of the malinvestments' from the economy!

  
  And to Miss Inquisitor, no need to get upset and stoop to an attempted cheap blow (which actually says alot more about you than me) when somebody has a different opinion and view of the world than your own. That's hardly being an 'adult' now is it?
  

  Published: November 14, 2008 11:42 PM

• saildog

  I do not know my brother!

  Anyway, lots more has been extrapolated from my post than what I said. My point is simple. People do act, but as a subset of the biosphere; and most definitely not the other way round as Austrian school economists assert.

  For example lets consider oil. It most definitely is NOT just another commodity, like tin, as I have read here more than once. It fundamentally underpins our economy and there are no substitutes (there goes price theory!). Oil is part of our biosphere and it now appears we cannot produce any more per day than we do now. We may use what we can produce more efficiently, but even that is questionable. Oil production has been 4.5 barrels per person per year for 30 years and there are sound thermodynamic reasons for this.

  Without a growing population our entire western economic model is toast.

  Published: November 15, 2008 12:18 AM

• Inquisitor

  "are exactly the words that i would use to describe the fundamental basis of Austrain economics. Humans act. Whoop-de-doo."

  Deflection. My point is you are not mentioning something that is unknown to Austrians, yet you act as though you are.

  '"Meaningless assertion" it is certainly not. To simply say that governments should not step in, whatever the circumstance, when people of the population who have elected that government are suffering in some way, shape or form, based purely on an unprovable hypothesis that intervention always leads to a worse outcome than what would be achieved under zero intervention, is absolutely absurd. This is why Austrain economics has gone nowhere, and will never go anywhere.'

  Yet again, meaningless assertion.

  "Just because the US health care system is not 100% privatised, does not mean that it is not the most, or one of the most, privatised in the Western world."

  So? The US is also one of the "freest" countries in the world. Means very little if it is the freest of the unfree.

  "Too assert anything else is ridiculous, and to suggest that government intervention per se is the problem, is even more ridiculous. Much more highly government funded health care systems in the Western world function much much better than the US system."

  Assertion.

  "Those people who are now out of job because their firm cannot access required funding to maintain investment and profitability, are hardly those that didnt act prudently. But hey, lets not intervene to try and stimulate economic activity; lets just go through another Great Depression in order to 'purge all of the malinvestments' from the economy!"

  Hyperventilating nonsense/hysteria based on ignorance.

  You're a troll.

  
  "And to Miss Inquisitor, no need to get upset and stoop to an attempted cheap blow (which actually says alot more about you than me) when somebody has a different opinion and view of the world than your own. That's hardly being an 'adult' now is it?"

  Difference in opinion is not an excuse for utter ignorance. I am no "Miss", but this is obviously a trollish attempt to anger me. Which fails.

  "Anyway, lots more has been extrapolated from my post than what I said. My point is simple. People do act, but as a subset of the biosphere; and most definitely not the other way round as Austrian school economists assert."

  Prove it. And not by recourse to a commodity that is just like any other commodity, i.e. oil.

  "It fundamentally underpins our economy and there are no substitutes (there goes price theory!)."

  Prove it.

  Published: November 15, 2008 12:40 AM

• Gil

  "Without a growing population our entire western economic model is toast."

  What does that mean exactly?

  Published: November 15, 2008 12:56 AM

• Inquisitor

  You seek meaning where it is not to be found.

  Published: November 15, 2008 1:04 AM

• saildog brother

  Inquisitor:

  "hysteria based on ignorance". If you do not seriously think that the world economy would have seen another Great Depression if it wasnt for the trillions of dollars pumped into the financial markets to provide some liquidity when there was none and to try and stimulate economic activity, then you are blind to the severity of the current turmoil. The western world is in recession. Liquidity/credit is scarce (despite interventions); businesses are struggling to meet basic operational expenses like payroll because they are struggling to access credit. This is the biggest economic/financial crisis since the Great Depression. Thank goodness this time around we have the knowledge from history and the insights of great economists like Keynes to help steer us through these rough seas.

  Saildog:
  I know you dont know me. I just thought id provide some support to a fellow more open minded poster. You seem to be a big fan of the Ecological school.

  Published: November 15, 2008 5:27 AM

• Connie Koch

  commenting on the comment ....
  "program selling hit and the market fell like a rock. Then support formed and program buy programs hit causing a 800 point swing".
  The stock market ... did it not come to be as a win-win for the organization selling stock and the individual investing in that company through the purchase of that stock? And was it not the objective of those companies to profit and grow through the investing of those individuals' funds. And was it not the obligation of those companies to share with those who invested, the profits that they earned? Was there an objective anywhere in the formation of the stock market to create a situation whereby brokers would lend shares of other people's investments to others? Does such lending fit any sort of rational "market system" definition considering that the lending of goods (shares in a company's business ... profit, loss, production capital, materials, human capital, labor) are not met (except in the future when it is hoped that the value is deflated) with the requisite exchange of something of value (money)? Does the covering of those loaned shares through the future purchase of them at a deflated value have any basis in logic? Is it ethical for the recipient of the loaned shares to pocket the "value difference" and consider that his profit? Does the short sale fit any definition of a market system transaction other than that which is tantamount to a game of risk? Is a set of transactions that is such a diversion from the stock market's initial objective anything more more than that which is tantamount to a casino came? I am not a student of economics but I believe that if there in any such thing as financial control that should be exerted by government meddling it is in the banning of any playing around with the stock market that is contrary to it's organizational objective.

  Published: November 15, 2008 7:35 AM

• newson

  biosphere = finite resources
  so what, saildog? economic law via human action will still dictate how scarce donkies are to be allocated amongst the starving, post oil-age.

  Published: November 15, 2008 7:47 AM

• Arend

  "# Gil
  #

  "Without a growing population our entire western economic model is toast."

  What does that mean exactly?"

  As the welfare state is inherently inefficient the only way to 'sustain' the pyramid game is to add more taxpayer subjects.

  That's why suchs things as the bailout will not work in the end, implicitly these schemes are relying on subjects actually paying for the thing in the future, by taxes (incuding inflation taxes). As these consequences, or necessities are somewhat far away in the future they are far away from the time horizon of the ruling parasites of society, i.e. politicians.

  To saildog: to engage in a discussion in a certain 'narrative' (wrong word, I know), one at least has to prove one knows the stylized facts therein. You did not show any such thing (you reason from a school of thought that is not incompatible with Austrian Economics per se, but you do not seem to want to put much effort in levelling these two distinct school of thought, that's why you were labelled as a troll).

  Published: November 15, 2008 10:11 AM

• Inquisitor

  "If you do not seriously think that the world economy would have seen another Great Depression if it wasnt for the trillions of dollars pumped into the financial markets to provide some liquidity when there was none and to try and stimulate economic activity, then you are blind to the severity of the current turmoil."

  Or know more about history than you do. I'll go with that possibility.

  "The western world is in recession. Liquidity/credit is scarce (despite interventions); businesses are struggling to meet basic operational expenses like payroll because they are struggling to access credit. This is the biggest economic/financial crisis since the Great Depression. Thank goodness this time around we have the knowledge from history and the insights of great economists like Keynes to help steer us through these rough seas."

  Yep. Definitely a troll. And, with the "insights" of great cranks like Keynes, we will repeat it all over again.

  Published: November 15, 2008 12:47 PM

• Walt D.

  Dan said
  
  "Maybe I'm not understanding, but whether shorting a stock, or naked shorting a stock, there still must be a buyer right? So both supply and demand increase in a naked short...so how can one come to the conclusion that naked shorting always drives down prices?"
  
  It doesn't - nearly all shorts on the futures market are naked in the sense that the seller either can not or has no intention of delivering the underlying commodity. If naked shorting caused prices to decline, nearly all futures markets would collapse. What we saw in the stock markets was companies that were for all intents and purposes bankrupt seeing their stocks decline to single digits. All the naked shorting did was to make the market efficient - the prices adjusted to "fair" levels almost immediately. Since the short sales have been curtailed we have seen unprecedented increase in volatility with daily price ranges in the Dow of 500+ points.
  
  Blaming short sales for the fall in prices is like blaming the Las Vegas bookies for the Oakland Raiders poor season.

  Published: November 15, 2008 5:51 PM

• newson

  walt d says:
  "nearly all shorts on the futures market are naked in the sense that the seller either can not or has no intention of delivering the underlying commodity."

  no sales on the futures exchanges are naked! whether the intention is to hold to delivery or cover the short by buying, there is a bona fide contract, with an initial margin posted and the requirement to post further margin, should there be an adverse move. there are limits to the short positions per market and per contract.

  a naked short-sale on the stock-exchange is basically an operation in counterfeiting, and does not assist in price-discovery. by naked short-selling vastly more shares than are on issue, the price can be forced down to a level where the stock may be delisted, or breach finance convenants. in this situation, the long-term is irrelevant as the company can be busted short-term.

  naked short sales on stocks remind me of how house auctions use to be when unscrupulous agents used to employ "dummy bidders" to get the price up (ie bids would be made with no intention of being honoured). friends and relatives got to earn pocket money, and the price discovery process was gamed.

  covered short-sales, on the other hand, are not fraudulent and do speed market readjustment, whilst damping volatility.

  Published: November 16, 2008 12:46 AM

• Jonathan Atkins

  Gary: Great article, but I remind you of one important and also immutable truth, in response to your statement that "Economic law is immutable; it will have its way for better or for worse. Politicians would do well to align public policy with what is natural, true, and unbeatable." Politicians don't care! Their incentives are not aligned with the expected outcomes of public policy. Even if we assume that they are all astute enough to understand cause and effect (which is not always the case), it's naive to think that this will change their behavior. They are motivated by the appearance of doing something, not actually doing it. In the end, it doesn't matter what theory tells us if we don't take into account the incentives faced by the participants in the "game". (Third-year PhD, Johns Hopkins)

  Published: November 17, 2008 7:06 AM

• Stanley Pinchak

  Jonathan Atkins,
  you are quite right, I recommend the recently posted talk from Hoppe for further insight into this issue (in addition to his book, "Democracy, the God that Failed). The incentive to betray economic law for personal benefit is too great for politicians. The rest of the economy be damned.

  Published: November 17, 2008 12:56 PM

• peter helbich

  this is vienna austria where it all began.
  mozart, menger, mises ,hayek etc

  this theorem is the mathematical proof of the austrian school of economics. that the are right.

  send this theorem to all your friends and spread it in the internet

  regards peter helbich

  Published: November 18, 2008 6:08 PM