, , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

video on bloomberg of Philip Manduca  – aired US 3.44 amET – 01-14-09

This man actually showed very accurate insight into the current situation during his interview last night (3.44 a.m. here) on bloomberg from London.

I woke up to watch it because something was different in the quality of what he was saying and there were many valuable points which were accurate rather than whatever it is that other analysts are using.

For one thing, it is finally being said that projections based on yesterday’s numbers cannot accurately predict what is in front of us. And, that is part of what is causing analysts and economists to forecast incorrectly to such a dismal extent.

I collected these few resources today about macro-economic theory in light of differing schools of thought – particularly the Austrian school. It is very enlightening, although I don’t fully agree that it is one or the other.

What I do believe is that we have every opportunity now to study the true evolution of macro-economics in reality. These are events that have not been written and cannot be tallied nor projected by previous theoretical models and analysis predicated upon yesterday’s numbers.

This is why economics must be studied in the real world, in real time and not in the classroom. And, it is why economics and macro-economics are taught in the classroom to students of many varied and specialized focuses.

We are in a most exciting time where new influences can be constructed, applied and the results charted, analyzed, studied and perhaps, changed to something else in real time applied economic science.

– cricketdiane, 01-14-09

Some things I found –

The Austrian School has consistently argued that a  traditionalist  approach to inflation yields the most accurate understanding of the causes (and the cure) for inflation. Austrian economists maintain that inflation is always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.

Given that all major economies currently have a central bank supporting the private banking system, almost all new money is supplied into the economy by way of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles (see Austrian Business Cycle Theory) and maintain that this  wave-like  or  boomerang  effect on economic activity is one of the most damaging effects of monetary inflation.

According to the Austrian Business Cycle Theory, it is the central bank’s policy of ineffectually attempting to control the complex multi-faceted ever-evolving market economy that creates volatile credit cycles or business cycles, and, as a necessary by-product, inflation (especially in asset markets). By the central bank artificially  stimulating  the economy with artificially low interest rates (thereby permitting excessive increases in the money supply), the government-sponsored central bank itself allows debasement of the means of exchange (inflation), often focused in asset or capital markets, resulting in  false signals  going out to the market place, in turn resulting in clusters of malinvestments, and the artificial lowering of the returns on savings, which eventually causes the malinvestments to be liquidated as they inevitably show their underlying unprofitability and unsustainability.[23]

Contemporary neo-Austrian economists claim to adopt economic subjectivism more consistently than any other school of economics and reject many neoclassical formalisms. For example, while neoclassical economics formalizes the economy as an equilibrium system with supply and demand in balance, Austrian economists emphasize its dynamic, perpetually dis-equilibrated nature.

This is the one area where Austrians differs most significantly from other schools of economic thought. Mainstream schools such as the neoclassical economists, the Chicago school of economics, the Keynesians and New Keynesians, adopt mathematical and statistical methods, and focus on induction and empirical observation to construct and test theories; while Austrians reject this approach in favor of deduction and logically deduced inferences. Austrians stress deduction because deduction, if performed correctly, leads to certain conclusions and inferences that must be true. Though Austrians do not discount induction, they hold that it does not assure certainty like deduction. Mainstream economists do not argue with this assertion, but believe the conclusions that can be reached by pure logical deduction are limited and weak.[19]

Austrian School theorists, like Ludwig von Mises, insist that praxeology must be value-free—that the method does not answer the question  should this policy be implemented? , but rather  if this policy is implemented, will it have the effects you intend ? However, Austrian economists often make policy recommendations that call for the elimination of government regulations and their policy prescriptions often overlap with libertarian or anarcho-capitalist solutions. These recommendations are similar to, but further reaching than the minarchist ideas of Chicago School economists, and frequently address topics other schools avoid, such as monetary reform.[17] Both schools advocate strict protection of private property, and support for individualism in general,[18] and are often cited by libertarian, classical or laissez-faire liberal, fiscal conservative, and Objectivist groups for support.

The influence that Austrian school ideas have had on Keynesian macroeconomics is often overlooked[citation needed]. Keynes himself acknowledged being exposed to the Misesian notion that “nominal” values could have “real” effects. A further source of this influence is the period of time when the London School of Economics brought in Hayek and other “continental” economists.[citation needed]While their students, though initially receptive, ultimately were drawn to the new Keynesian doctrines, many of the Hayekian concepts, particularly those relating time to the value of capital and its importance, would find their way into the work of Keynesians, especially by way of John Hicks (who, while distancing himself from Keynesianism, nonetheless made the most influential attempt to formalize it).[citation needed]

The former U.S. Federal Reserve Chairman, Alan Greenspan, speaking of the originators of the School, said in 2000, “the Austrian school have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.”[11] Republican U.S. congressman Ron Paul is a firm believer in Austrian school economics and has authored six books on the subject.[12][13] Paul’s former economic adviser, Peter Schiff,[14] is an adherent of the Austrian school.[15]

Austrian economics was ill-thought of by most economists after World War II because it rejected observational methods.[citation needed] Its reputation rose somewhat in the late 20th century with the work of Israel Kirzner and Ludwig Lachmann, as well as a renewed interest in Hayek after he won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (a.k.a. the Nobel Prize in Economics).[9] However, it remains a distinctly minority position, even in such areas as capital value. Currently, universities with a significant Austrian presence are George Mason University and Loyola University New Orleans in the United States, and Universidad Francisco Marroquín in Guatemala. The library of Universidad Francisco Marroquín is named after Ludwig von Mises, and the university also provides seminars and lectures through a program named for Austrian School proponent Henry Hazlitt. Austrian economic ideas are also promoted heavily by bodies such as the Mises Institute and the Foundation for Economic Education.

[edit] Influence

According to the Austrian economist Peter J. Boettke, during its history the position of the Austrian school within economics profession has changed several times from the center to the fringe of the mainstream, and currently its position lies between mainstream and heterodox economics.[10] While often controversial, the Austrian School has been historically influential due to its emphasis on the creative phase (i.e. the time element) of economic productivity and its questioning of the basis of the behavioral theory underlying neoclassical economics.[citation needed]


Ludwig von Mises was one of the last members of the original austrian school of economics. He earned his doctorate in law and economics from the University of Vienna in 1906. One of his best works, The Theory of Money and Credit, was published in 1912 and was used as a money and banking textbook for the next two decades. In it Mises extended Austrian marginal utility theory to money, which, noted Mises, is demanded for its usefulness in purchasing other goods rather than for its own sake.

In that same book Mises also argued that business cycles are caused by the uncontrolled expansion of bank credit. In 1926 Mises founded the Austrian Institute for Business Cycle Research. His most influential student, Friedrich Hayek, later developed Mises’s business cycle theories.

Another of Mises’s notable contributions is his claim that socialism must fail economically. In a 1920 article, Mises argued that a socialist government could not make the economic calculations required to organize a complex economy efficiently. Although socialist economists Oskar Lange and Abba Lerner disagreed with him, modern economists agree that Mises’s argument, combined with Hayek’s elaboration of it, is correct (see socialism).

LIBRARY of Economics and Liberty

Ludwig von Mises
Jan 13, 2009 … The Ludwig von Mises Institute is the research and educational center of classical liberalism and the Austrian School of economics.

Falling Prices Are the Antidote to Deflation

Daily Article: Wednesday, January 14, 2009 by George Reisman

A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented. Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system.


Contemporary neo-Austrian economists claim to adopt economic subjectivism more consistently than any other school of economics and reject many neoclassical formalisms. For example, while neoclassical economics formalizes the economy as an equilibrium system with supply and demand in balance, Austrian economists emphasize its dynamic, perpetually dis-equilibrated nature.


Following their definition, Austrian economists measure the inflation by calculating the growth of what they call ‘the true money supply’, i.e. how many new units of money that are available for immediate use in exchange, that have been created over time.[27][28][29]

This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply.[30] In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.[31]

Austrians claim that the state uses inflation as one of the three means by which it can fund its activities, the other two being taxing and borrowing.[32] Therefore, they often seek to identify the reasons for why the state needs to create new money and what the new money is used for. Various forms of military spending is often cited as a reason for resorting to inflation and borrowing, as this can be a short term way of acquiring marketable resources and is often favored by desperate, indebted governments.[33] In other cases, the central bank may try avoid or defer the widespread bankruptcies and insolvencies which cause economic recessions or depressions by artificially trying to  stimulate  the economy through  encouraging  money supply growth and further borrowing via artificially low interest rates.[34]

Austrian economists focus on the amplifying,  wave-like  effects of the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set  artificial  interest rates too low for too long, resulting in excessive credit creation, speculative  bubbles  and  artificially  low savings.[41]

According to the Austrian business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable  monetary boom  during which the  artificially stimulated  borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. The global economic crisis of 2008 represents, according to some pundits, an example of the Austrian business cycle theory’s dependability.[42]

Austrian economists argue that a correction or  credit crunch  – commonly called a  recession  or  bust  – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally  clear , causing resources to be reallocated back toward more efficient uses.

The economic calculation problem is a criticism of socialist economics. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek.[43][44] The problem referred to is that of how to distribute resources rationally in an economy. The capitalist solution is the price mechanism; Mises and Hayek argued that this is the only viable solution, as the price mechanism co-ordinates supply and investment decisions most efficiently (provided there is no distortion of the price mechanism by government or by the banks through fractional reserve banking).

In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.[21] He has also criticized the school for rejecting on principle the use of mathematics or econometrics. In response, Austrians argue that neoclassical economists are innumerate and do not understand the mathematics they rely on.[49] Austrians also claim that econometrics is fundamentally based on mathematically and logically invalid summation and averaging of demonstrably non-additive personal utility functions, and therefore is subjective.[50]

There are also criticisms of specific Austrian theories. For example, Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[51] Austrian theorists argue a recession can result from a monetary contraction or a  credit crunch  that causes the investment boom not to shift but simply to disappear.[52] Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that  The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false. [53][54]

Economist Jeffrey Sachs asserts that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that von Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.[55] In response to Sachs’ article, William Easterly noted that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of  the ongoing global industrial revolution  which is responsible for abolishing much of the world’s poverty.[56]

[edit] Seminal works

* Principles of Economics (1871) by Carl Menger
* Capital and Interest (1884-1921) by Eugen von Böhm-Bawerk
* Human Action (1940-1949) by Ludwig von Mises
* Economics in One Lesson (1946) by Henry Hazlitt
* Individualism and Economic Order (1948) by Friedrich Hayek
* Man, Economy, and State (1962) by Murray N. Rothbard
* Competition and Entrepreneurship (1973) by Israel M. Kirzner
* Capitalism (1998) by George Reisman

[edit] See also
Economics portal

* Newtonian time in economics, a debate concerning whether Newtonian time is an appropriate concept to use in economics
* Quarterly Journal of Austrian Economics, one of the most prominent organs of the Austrian School in academia
But it is in the macro sphere, unwisely hived off from the micro by economists who remain after sixty years ignorant of Ludwig von Mises’s achievement in integrating them, it is here that Friedman’s influence has been at its most baleful. For we find Friedman bearing heavy responsibility both for the withholding tax system and for the disastrous guaranteed annual income looming on the horizon. At the same time, we find Friedman calling for absolute control by the State over the supply of money – a crucial part of the market economy. Whenever the government has, fitfully and almost by accident, stopped increasing the money supply (as Nixon did for several months in the latter half of 1969), Milton Friedman has been there to raise the banner of inflation once again. And wherever we turn, we find Milton Friedman, proposing not measures on behalf of liberty, not programs to whittle away the Leviathan State, but measures to make the power of that State more efficient, and hence, at bottom, more terrible.


And so, as we examine Milton Friedman’s credentials to be the leader of free-market economics, we arrive at the chilling conclusion that it is difficult to consider him a free-market economist at all. Even in the micro sphere, Friedman’s theoretical concessions to the egregious ideal of  perfect competition  would permit a great deal of governmental trust-busting, and his neighborhood-effect concession to a government intervention could permit a virtual totalitarian state, even though Friedman illogically confines its application to a few areas. But even here, Friedman uses this argument to justify the State’s provision of mass education to everyone.

One of Friedman’s crucial errors in his plan of turning all monetary power over to the State is that he fails to understand that this scheme would be inherently inflationary. For the State would then have in its complete power the issuance of as great a supply of money as it desired. Friedman’s advice to restrict this power to an expansion of 3–4% per year ignores the crucial fact that any group, coming into the possession of the absolute power to  print money,  will tend to . . . print it  Suppose that John Jones is granted by the government the absolute power, the compulsory monopoly, over the printing press, and allowed to issue as much money as he sees fit, and to use it in any way that he sees fit. Isn’t it crystal clear that Jones will use this power of legalized counterfeiting to a fare-thee-well, and therefore that his rule over money will tend to be inflationary? In the same way, the State has long arrogated to itself the compulsory monopoly of legalized counterfeiting, and so it has tended to use it: hence, the State is inherently inflationary, as would be any group with the sole power to create money. Friedman’s scheme would only intensify that power and that inflation.

The only libertarian solution, in contrast, is to make the State disgorge its hoards of commodity money. Franklin Roosevelt, under cover of a  depression emergency,  confiscated all of the gold held by the American people in 1933, and nothing has been said for nearly four decades about giving our gold back. In contrast to Friedman, the genuine libertarian must call upon the government to give the people back their stolen gold, which the government had seized from us in return for its paper dollars.

A Return to the Gold Standard

There is no question about the fact that the present international monetary system is an irrational and abortive monstrosity, and needs drastic reform. But Friedman’s proposed reform, of cutting all ties with gold, would make matters far worse, for it would leave everyone at the complete mercy of his own fiat-issuing state. We need to move precisely in the opposite direction: to an international gold standard that would restore commodity money everywhere and get all the money-manipulating states off the backs of the peoples of the world.

Under a fiat system, the currency name – dollar, frank, mark, etc. – becomes the ultimate monetary standard, and absolute control over the supply and use of these units is necessarily vested in the central government. In short, fiat currency is inherently the money of absolute statism. Money is the central commodity, the nerve center, as it were, of the modern market economy, and any system that vests the absolute control of that commodity in the hands of the State is hopelessly incompatible with a free-market economy or, ultimately, with individual liberty itself.

Yet, Milton Friedman is a radical advocate of cutting all current ties, however weak, with gold, and going onto a total and absolute fiat dollar standard, with all control vested in the Federal Reserve System.* Of course, Friedman would then advise the Fed to use that absolute power wisely, but no libertarian worth the name can have anything but contempt for the very idea of vesting coercive power in any group and then hoping that such group will not use its power to the utmost. The reasons that Friedman is totally blind to the tyrannical and despotic implications of his fiat money scheme is, once again, the arbitrary Chicagoite separation between the micro and the macro, the vain, chimerical hope that we can have totalitarian control of the macro sphere while the  free market  is preserved in the micro. It should be clear by now that this kind of a truncated, Chicagoite micro- free market  is  free  only in the most mocking and ironic sense: it is far more the Orwellian  freedom  of  Freedom is Slavery.

In short, while Milton Friedman has performed a service in bringing back to the notice of the economics profession the overriding influence of money and the money supply on business cycles, we must recognize that this  purely monetarist  approach is almost the exact reverse of the sound – as well as truly free-market – Austrian view. For while the Austrians hold that Strong’s monetary expansion made a later 1929 crash inevitable, Fisher-Friedman believe that all the Fed needed to do was to pump more money in to offset any recession. Believing that there is no causal influence running from boom to bust, believing in the simplistic  Dance of the Dollar  theory, the Chicagoites simply want government to manipulate that dance, specifically to increase the money supply to offset recession.

During the 1930s, therefore, the Fisher-Chicago position was that, in order to cure the depression, the price level needed to be  reflated  back to the levels of the 1920s, and that reflation should be accomplished by:

1. the Fed expanding the money supply, and
2. the Federal government engaging in deficit spending and large-scale public works programs.

In short, during the 1930s, Fisher and the Chicago School were  pre-Keynes Keynesians,  and were, for that reason, considered quite radical and socialistic – and with good reason. Like the later Keynesians, the Chicagoans favored a  compensatory  monetary and fiscal policy, though always with greater stress on the monetary arm.

It was Irving Fisher, his doctrines, and his influence, which was in large part responsible for the disastrous inflationary policies of the Federal Reserve System during the 1920s, and therefore for the subsequent holocaust of 1929. One of the major aims of Benjamin Strong, head of the Federal Reserve Bank (Fed) of New York and virtual dictator of the Fed during the 1920s, was, under the influence of the Fisher doctrine, to keep the price level constant. And since wholesale prices were either constant or actually falling during the 1920s, Fisher, Strong, and the rest of the economic Establishment refused to recognize that an inflationary problem even existed. So, as a result, Strong, Fisher, and the Fed refused to heed the warnings of such heterodox economists as Ludwig von Mises and H. Parker Willis during the 1920s that the unsound bank credit inflation was leading to an inevitable economic collapse.

So pig-headed were these worthies that, as late as 1930, Fisher, in his swansong as economic prophet, wrote that there was no depression, and that the stock market collapse was only temporary.13

This article originally appeared in The Individualist in 1971, and was reprinted in the Journal of Libertarian Studies in the Fall 2002 issue.

Chicago or Austrian Schools of Free Market Economy?
Milton Friedman Unraveled

by Murray N. Rothbard

*This is, in fact, exactly what happened within a few years of this article’s original publication. See Murray N. Rothbard, What Has Government Done To Our Money? (Auburn, Ala.: Ludwig von Mises Institute, 1990). – Ed.

(From the Journal of Libertarian Studies, Volume 16, no. 4 (Fall 2002), pp. 37–54)

Murray N. Rothbard (1926–1995), the founder of modern libertarianism and the dean of the Austrian School of economics, was the author of The Ethics of Liberty and For a New Liberty and many other books and articles. He was also academic vice president of the Ludwig von Mises Institute and the Center for Libertarian Studies, and the editor – with Lew Rockwell – of The Rothbard-Rockwell Report.

Copyright © 2003 Ludwig von Mises Institute
All rights reserved.

Murray Rothbard Archives