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Raiders Move to Vegas Gives Tax Payers Reason to Boo, Players Reason to Cheer

Tue, 28/03/2017 - 20:00
By: Tho Bishop
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Yesterday the NFL granted Mark Davis his request to move the Raiders from Oakland to Las Vegas. The move creates multiple losers: Las Vegas hotel customers who will see room taxes rise to pay for the $750 million in subsidies for the new stadium, the city of Oakland who still carries debt from the Raiders old venue, and the infamous fans that made up the Raiders’ iconic “Black Hole” who are losing their football team just after witnessing their first playoff performance in almost 15 years.

Beyond the blatant crony capitalism of government-financed stadiums, there are many reasons to doubt the wisdom of the team’s decision. After all, unlike the Rams and Chargers move to Los Angeles, Las Vegas has no history of supporting professional football. The most significant attempt, the Las Vegas Outlaws of the XFL, only averaged 22,619 fans, ranking 5th out of the league’s 8 teams. Other attempts, including multiple Arena League teams and the short lived UFL, were financial flops. Of course, none of these products have the power of the National Football League, so perhaps this time will be different.

At league meetings, a key part to selling relocation was the idea that fans of other teams would travel to Las Vegas to enjoy the city’s attractions along with the game. Of course, if the market had faith in this business model, investment wouldn’t have needed politicians to find investment. It is worth noting that the new Las Vegas NHL team will be playing at a facility backed entirely by private investment. Maxing out at 20,000 seats, it has one-third of the capacity of the Raiders venue — but cost less than a quarter of the projected costs of the Raiders’ future facility.

Beyond Davis and the cronies involved in the new stadium, the true winners of the Raiders move are NFL players. One athlete who quickly realized the benefits of Nevada’s 0% income tax rate over California’s 13% was Takk McKinley, a pass rusher from UCLA who expects to enter the league next month through the NFL draft. He shared a video celebrating the move shortly after the move was made official.

While its possible Takk may be drafted by the Raiders, he doesn’t actually have to play for the team to benefit from the new tax rate. California is one of multiple states that has a “jock tax” which taxes revenue made in its jurisdiction. The Golden State’s tax policy actually managed to make Super Bowl 50 all the more bitter for Carolina quarterback Cam Newton, who was forced to pay $87,800 on the $51,000. No wonder he wasn’t in the mood for post-game interviews after the game.  

Of course, if Mr. McKinley is concerned about his tax liability, he should hope to be drafted by the AFC South. That division consists of three teams in income tax-free states (Florida, Tennessee, Texas) and the Indianapolis Colts, whose state government just lowered their rate to 3.22% (with an additional county tax of less than 2%).

Now that the NFL has followed the XFL’s lead in planting a franchise in Vegas, and given their love of selling novelty jerseys, it would be great to see Roger Goodell follow Vince McMahon’s lead and allow players to put nicknames on the back of their uniforms. It would be great to see Takk McKinley sack a quarterback with TaxationIsTheft on his nameplate.

After all, given that the NFL continues to use government power to finance its stadiums, it’s clear the league needs the reminder. 



Categories: Current Affairs

How the Left Learned to Love States' Rights

Tue, 28/03/2017 - 04:00
By: Andrew Syrios
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Over the course of approximately six hours, the Left in the United States made a spectacular, 180 degree turn on federalism and states’ rights without even recognizing it. Although this lack of self-awareness shouldn’t be particularly surprising coming from the modern Left, which seems to have missed the irony when it goes about shutting down debates on free speech.

I’m old enough to remember when the Tea Party was making hay about nullifying Obamacare and Rick Perry even floated the idea about Texas seceding from the union. Not surprisingly, the Left was rather opposed to such antiquated ideas.

Rachel Maddow referred to talk of nullification as “confederates in the attic,” Chris Matthews described it as the “terms of Jim Crow” and Princeton professor Sean Wilentz referred to the doctrine of nullification as “the essence of anarchy” and “neo-Confederate dogma.” I’m sure nullification and states’ rights are also sexist, homophobic, transphobic, and Islamophobic, but these are short segments so they had to be concise.

Apparently, we were told, the Supremacy Clause of the Constitution stated not just that “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land,” but also “that this includes any law, no matter how blatantly unconstitutional passed by Congress or executive order issued by the president or signing statement or edict from an unconstitutional bureaucracy made of unelected administrators as long as it’s part of the federal government.”

Then all of a sudden, on November 8th, 2016, Donald Trump beat out all the predictions and won the presidency. Suddenly, states’ rights became rather appealing to the Left (and lost their allure to much of the Right).

The rallying cry for the Left so far has been “resistance” and that includes more than just protesting in the street. The Hill notes that “In blue states, agenda is clear: Resist Trump.” The New Republic ran an article titled “10 Ways to Take Trump on” and item number 3, written by California Lieutenant Governor Gavin Newsom is “Look to the Cities and States.” He notes,

We’re not a monarchy. We’re a representative democracy, so we have agency, we have a voice. We have the ability not just to navel gaze, but to act, to be engaged — to resist. We’ve got to dust ourselves off and step up, and not just roll over and act as if we don’t have a very potent role to play in our democracy, particularly at the city level … if he does try to build a wall, there is legislation in California to challenge the administration, by requiring the construction of the wall to be put to a vote of the people of California.

In other words, Newsom will recommend nullifying a federal order with a state referendum.

And the whole Calexit movement would quite obviously be much more similar to the secession of the southern Confederacy (hopefully without the war) than Britain leaving the EU. Yet liberals seem to be rather silent on this obvious point. If Calexit succeeded, it would also be the virtual end of the Democratic party in the United States, but that’s another matter.

Indeed, nullification in everything but name has been tried or successfully used on all sorts of issues such as gun laws and Real I.D laws and a host of issues most liberals generally support, such as marijuana legalization and sanctuary cities, which we shall return to shortly.

Indeed, in the mid-nineteenth century, many states, particularly Wisconsin, nullified the Fugitive Slave Act of 1850 and, as Tom Woods notes,

New England states … appealed to nullification (or interposition) against President Jefferson’s embargo, against what they considered the unconstitutional calling up of the New England militia during the war of 1812, against the use of military conscription, and against a law providing for the enlistment of minors.

American history is littered with examples of nullification. Obviously not all were for good causes, but many were. Fortunately, some liberals, such as Kirkpatrick Sale and Jeff Taylor recognized this prior to sometime in the late evening of November 8th, 2016.

If this point isn’t obvious enough, a thought experiment regarding the reason liberals generally dislike federalism, that I put forth in my review of Tom Woods’ book Nullification, should clear it up,

Let’s say it was the federal government that had mandated segregation and not the states. Do you believe for one second that Martin Luther King Jr. would have opposed states nullifying that particular federal law? Martin Luther King Jr. was trying to crush segregation and I find it patently absurd that he would neglect a non-violent method of doing so if the situation had been as described.

I think it’s safe to say that it was less the how (other than nonviolence) and more the what that civil rights activists cared about.

And the same goes for secession. Indeed the United States wouldn’t even be a country if it weren’t for secession! In addition, Eastern Europe would also still be a collection of Russian satellites and much of South America would still be part of Spain, etc. And now that the Left has finally embraced states’ rights, at least that puts them on the opposite side of that Adolf Hitler guy many liberals like to accuse others of literally being,

National Socialism must claim the right to impose its principles on the whole German nation, without regard to what were hitherto the confines of federal states …

And pretty much every other totalitarian dictator agreed with Hitler on that matter.

So federalism and localism are critical to a free society in general. But let’s return to the present and the whole matter of the so-called “sanctuary cities” that thumb their nose at federal immigration law. Indeed, even the conservative Helen Rittelmeyer observed that “In the absence of a federal solution, state and local governments have begun to take matters into their own hands. This may be a blessing, too.” The reason being that, “If cities wishing to drive illegal immigrants from their communities have the freedom to do so, then it follows that those cities wishing to draw illegal immigrants into theirs must have that freedom, too, within the bounds of the law.”

But one should look even further than Rittelmeyer’s “nullification for both sides” concept then just immigration. Perhaps neither liberals nor conservatives have gone far enough with their federalism.

Right now the United States is extremely divided and growing more so with every passing day. There are massive differences of opinions between north and south, the coasts and flyover country, urban, suburban and rural and regarding race, religion, and political beliefs.

Pew notes that "Democrats and Republicans [are] More Ideologically Divided than in the Past." And it’s not just politically divided, Republicans and Democrats are becoming far more geographically divided as well. Over the past 40 years, Republicans and Democrats have moved to communities of more like-minded people. According to Bill Bishop in The Big Sort, “… [in] 1976 … Just over 26 percent of the nation’s voters lived in landslide counties [counties where one party won by 20 percentage points or more] … By 2000, the number had risen to 45.3 percent.”

And it’s only gotten worse since then.

The average New Yorker has much more in common with the average Londoner than the average person in Topeka, Kansas. Other than language, the same would probably go for Berlin, Madrid, or Paris as well. We may all be part of one political union, but it’s hard to make the case we’re all part of one country.

Perhaps it’s time we looked to localism instead of Washington. Perhaps it is time to ask whether 320 million people should be governed by one swamp on the East Coast.

April Fools Day is coming. Prank your friends opening a never ending fake update screen on their computer. Sit back and watch their reaction.



Categories: Current Affairs

The Government Spies on All of Us — So Why Not Spy on Trump?

Tue, 28/03/2017 - 03:45
By: Ron Paul
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There was high drama last week when Rep. Devin Nunes announced at the White House that he had seen evidence that the communications of the Donald Trump campaign people, and perhaps even Trump himself, had been “incidentally collected” by the US government.

If true, this means that someone authorized the monitoring of Trump campaign communications using Section 702 of the FISA Act. Could it have been then-President Obama? We don’t know. Could it have been other political enemies looking for something to harm the Trump campaign or presidency? It is possible.

There is much we do not yet know about what happened and there is probably quite a bit we will never know. But we do know several very important things about the government spying on Americans.

First there is Section 702 itself. The provision was passed in 2008 as part of a package of amendments to the 1978 FISA bill. As with the PATRIOT Act, we were told that we had to give the government more power to spy on us so that it could catch terrorists. We had to give up some of our liberty for promises of more security, we were told. We were also told that the government would only spy on the bad guys, and that if we had nothing to hide we should have nothing to fear.

We found out five years later from Edward Snowden that the US government viewed Section 702 as a green light for the mass surveillance of Americans. Through programs he revealed, like PRISM, the NSA is able to collect and store our Internet search history, the content of our emails, what files we have shared, who we have chatted with electronically, and more.

That’s why people like NSA whistleblower William Binney said that we know the NSA was spying on Trump because it spies on all of us!

Ironically, FISA itself was passed after the Church Committee Hearings revealed the abuses, criminality, and violations of our privacy that the CIA and other intelligence agencies had been committing for years. FISA was supposed to rein in the intelligence community but, as is often the case in Washington, it did the opposite: it ended up giving the government even more power to spy on us.

So President Trump might have been “wiretapped” by Obama, as he claimed, but unfortunately he will not draw the right conclusions from the violation. He will not see runaway spying on Americans as a grotesque attack on American values. That is unfortunate, because this could have provided a great teaching moment for the president. Seeing how all of us are vulnerable to this kind of government abuse, President Trump could have changed his tune on the PATRIOT Act and all government attacks on our privacy. He could have stood up for liberty, which is really what makes America great.

Section 702 of the FISA Act was renewed in 2012, just before we learned from Snowden how it is abused. It is set to expire this December unless Congress extends it again. Knowing what we now know about this anti-American legislation we must work hard to prevent its renewal. They will try to scare us into supporting the provision, but the loss of our liberty is what should scare us the most.

Originally published by the Ron Paul Institute. 



Categories: Current Affairs

Ludwig von Mises and Trash TV

Mon, 27/03/2017 - 22:30
By: Tho Bishop
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According to reports, Danielle Bregoli, the 14-year-old girl who became a popular internet meme this year due to a failed intervention on the Dr. Phil show, has signed a deal for her own reality television show. On a personal level, there is much to find offensive in Bregoli’s fame, in spite of her obvious marketing prowess. She is, after all, internet-famous simply for her improper English, toxic personal behavior, and apparent lack of respect for anyone around her. On an economic level, however, her rise is an interesting example of how capitalism rewards the interests of the masses, regardless of the opinion of the cultural elite.

Criticism of trashy pop culture is, of course, nothing new. Ludwig von Mises, for example, felt the need to defend commercial literature from socialist criticism. In The Anti-Capitalist Mentality he wrote:

What characterizes capitalism is not the bad taste of the crowds, but the fact that these crowds, made prosperous by capitalism, became “consumers” of literature — of course, of trashy literature. The book market is flooded by a downpour of trivial fiction for the semibarbarians. But this does not prevent great authors from creating imperishable works.

The term “semibarbarian” perhaps describes Ms. Bregoli’s TV persona as accurately as the excerpt describes the success of “trashy” reality TV. Capitalism has made access to television programming (and its internet equivalent) as large as it has ever been before. This constant competition for content has not only opened the doors to innovation — from the growth of cable and satellite networks, to the rise of Netflix and Amazon as content producers, to social media live streaming challenging traditional cable news — but it has also led to producers throwing money at content appealing to all sorts of demographics, apparently including those who’d want to watch the life of a troubled 14 year old.

Of course, it’s quite possible that the show’s producers have erred in their entrepreneurial judgment. TV shows fail all the time, with the industry known to jump at such bizarre concepts as a sitcom based on auto insurance commercial character, to one based on a lead character whose mother was reincarnated as a talking car. Even reality shows, whose popularity with producers is largely driven by a budget-friendly format, have had their own market failures — such as when Monica Lewinsky hosted a dating show, or The Baby Borrowers, a British series based on teenage couples looking after other people’s kids.

Just as in any other sector of the economy, capitalism incentivizes producers to create content for the masses, but doesn’t dictate that the masses have taste.  As Mises put it:

Capitalism could render the masses so prosperous that they buy books and magazines. But it could not imbue them with the discernment of Maecenas or Can Grande della Scala. It is not the fault of capitalism that the common man does not appreciate uncommon books.

In spite of the fact that Dr. Phil’s show is spawning cringeworthy spin offs, an argument can be made that the television trends of Americans actually demonstrate a growing appreciation for quality television. Last year seven of the top 10 most watched shows have won Emmy’s during their run. Meanwhile, AMC, the network credited for creating a “golden age of television” by creating a number of critically acclaimed television dramas, has been rewarded with commercial success — including three of the top cable television premiers last year. Even Downton Abbey, the PBS period piece about British aristocrats and their staff, has enjoyed ratings of 10 million views — roughly three times more than Here Comes Honey Boo Boo ever enjoyed. 

Capitalism cannot give consumers taste, just as democracy cannot give voters wisdom. What capitalism does do, however, is give consumers choice — and creates the incentives necessary for producers to meet the desires of the people. Democracy simply offers the masses the ability to enforce the whims of the majority against the wishes of the minority. In America no one will be forced to watch a minute of a reality show about Danielle Bregoli, but should it find commercial success, its viewers will have the ability to shape American policy going forward.

If someone wants to defend the merits of democracy after coming to grips with that reality, perhaps it’s time for their own intervention on Dr. Phil. 



Categories: Current Affairs

Steve Bannon Dismisses Austrian Economics

Mon, 27/03/2017 - 22:00
By: Jeff Deist
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Writing in The New York Times Magazine about last week's stillborn RyanCare bill, Robert Draper recalls a conversation he had with White House strategist Stephen Bannon earlier this year. Bannon, lamenting the ability of both congressional Democrats and Republicans to get things done, contrasts the identity-obsessed progressives with the one-trick pony conservatives:

What’s that Dostoyevsky line: Happy families are all the same, but unhappy families are unhappy in their own unique ways?” (He meant Tolstoy.) “I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government- which just doesn’t have any depth to it. They’re not living in the real world.

There's quite a lot to consider in these few sentences. For starters, Bannon clearly is not as familiar with the mindset of congressional Republicans as he imagines. They are primarily concerned with how the whole "repeal and replace" debacle plays back home. Bannon seems wholly unaware that incentives matter, that his only carrot or stick with regards to individuals members is getting them reelected or un-elected. While Trump remain is likely to remain popular in deep red counties and states, it's doubtful Bannon can leverage this to create an effective "enemies list" of GOP recalcitrants. For the majority of congressional Republicans the only existential threat to their jobs comes from their right flank in a potential primary, and supporting a watered-down version of the ACA may well hurt them worse than Bannon's wrath. The only incentive that matters is reelection, not having "adult conversations or "governing." Is the wizened Bannon, architect of the brilliant Trump campaign, really so naive about Congress? 

Second, Republicans in Congress hardly are under the spell of the Cato Institute or Austrian economics (undoubtedly Bannon sees these two things as synonymous, although they are not). We know Bannon has read Sun-Tzu and Aristotle, but has he read the Austrian literature he dismisses so casually? His notion that the GOP conference is full of ideologues, much less libertarian ideologues, is just flat false. The GOP is the party of trillion dollar military budgets, the party that wants to protect Social Security and Medicare-provided prescription drugs, the party that won't even kill an openly cronyist program like the Export-Import Bank. The House Freedom Caucus, which arose from the remnants of Ron Paul's liberty caucus, shows occasional libertarian tendencies. It has a worthy role to play as spoiler for bad bills like RyanCare, but it's hardly an ideological driver in Congress. And Bannon, like so many political observers in the media, fails to understand how little think tanks influence policy in the Beltway. Organizations like the Brookings Institute, the American Enterprise Institute, and the Heritage Foundation are orders of magnitude larger than Cato, yet few in Congress really read their material more than superficially. The real game in DC doesn't involve think tanks and public policy, it involves lobbyists quietly putting language into authorization and appropriations bills at the committee level. An anti-establishment maven like Bannon should know this.

Third, Bannon's use of the word "depth" belies a progressive longing for merging the nation with the state. And of course he's right: Austrian economics per se, or any brand of economics, has very little to say about blood, culture, soil, language, and nationhood. Social science, at least honest social science, is not prescriptive. Economics can't provide  a normative system, political science can't Make America Great Again. But the libertarian response to this is simple and direct-- nation is not state. Greatness, even goodness, is outside the purview of government. Culture is beyond the realm of politics. Work, family, markets, and civil society are the foundations of a robust civilization, not the state. The deeper the state, the shallower the civilization-- and vice versa. To the extent Bannon sees "limited government" and laissez-faire economics as abstractions that fail to provide a satisfactory worldview, it's because he see government as the organizing principle for society. It's a grandiose view of statecraft that libertarians reject.

Finally, there's the old "not living in the real world" chestnut. How many times have libertarians heard this one? All around us are the almost unimaginable benefits of markets, cooperation, and technology, yet somehow we're naive if we don't want to funnel human activity through government cattle chutes. The vast material and digital abundance we enjoy every day is provided without any state apparatus, in fact in spite of that apparatus. Is this private world not part of reality? Government is the artifice, and statists are the utopian dreamers who imagine that individuals acting under the magical banner of government can plan, coerce, and coordinate millions of lives. Realpolitik, Bannon's idea of real-world governance, created a pile of several million bodies in the 20th century. If that's the real world, perhaps it's time to give libertarian theory a try.

Jeff Deist is president of the Mises Institute. He previously worked as a longtime advisor and chief of staff to Congressman Ron Paul. Contact: email; twitter.

 



Categories: Current Affairs

Why Angela Merkel Hates Tax Competition

Mon, 27/03/2017 - 20:45
By: Ryan McMaken
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European political leaders gathered in Malta last month to discuss the future of the European Union. During the meeting, German Chancellor Angela Merkel made sure to denounce any post-Brexit move on the part of the United Kingdom to lower corporate taxes. (Merkel condemned efforts by the US to cut corporate taxes as well.) Merkel called any such move a "race to the bottom." 

With these comments, Merkel; was echoing earlier comments by German Finance Minister Wolfgang Schäuble who in January employed the same "race to the bottom" phrase and harangued the UK on the matter, claiming that any attempt to lower taxes would be in violation of international agreements. Besides, lowering taxes is retrograde and non-progressive thinking, Schäuble noted, stating that "A truly global economy must think of global governance." 

This controversy helps to reveal how the European Union has been a useful tool in preventing tax competition between member states. 

By threatening retaliation from EU institutions, and by resorting to claims that international agreements cancel out national policy, EU bureaucrats have long used the EU as a stick to beat potential tax-cutters into submission. 

What Is Tax Competition? 

Richard Teather explains

Tax competition occurs when a government uses its tax system to try to attract capital, business activity, or wealthy individuals from other countries. At its most obvious this could be a "tax haven" with very low (or even zero) tax rates, but it could include more subtle provisions such as tax breaks for specific businesses relocating into a country. Game theory suggests that if the low-tax countries successfully attract international investment then other governments will respond, leading to a competitive spiral of tax reductions as they all compete for mobile capital.

Once upon a time, Europe was notable for its frequent use of tax competition. As Ralph Raico noted in his seminal essay "The European Miracle," a central phenomenon behind the unprecedented economic growth and wealth-building that occurred in early-modern Europe was the common use of tax competition. 

Thanks tothe presence of a very large number of small states in Europe at the time, many European political rulers competed with each other to attract the most productive people and the most productive enterprises. Those tone-deaf princes and rulers who insisted on raising taxes to levels higher than their neighbors lost both residents and profitable businesses to neighboring states. 

The European Union, on the other hand, has long attempted to end this sort of tax competition, as Louis Rouanet recently noted

It has now become clear that in many ways the European Union is a cartel of high-tax governments whose goal is to restrain tax competition. The EU's supposedly free — this is, regulated — trade policy is none other than an excuse to homogenize the tax and regulatory regimes of the nation-states.

The ultimate goal of the high-tax member states such as France is to use the EU to milk as much as possible from the productive members of society without losing their tax base. 

Thus, no one should be surprised that Europhiles like Merkel and Schäuble are now condemning the very idea of a "rogue" government like that of the United Kingdom lowering taxes. 

Indeed, so long as the EU included the UK — one of the worlds largest and most productive states — the EU could exercise a degree of control over domestic tax policy above and beyond the expected tax-funded remittances the UK government was expected to pay into the EU's common purse. 

Now, with the UK on its way out of the EU, the EU faces the threat of a competitor right next door which might entice EU businesses and citizens to relocate to the UK in order to escape higher taxes in the EU. Nor is this any minor threat, considering the UK's advantages as an island of English-speakers with easy access to global shipping lanes. 

Even worse for the Europhiles is the fact that the US now might be headed in the direction of reducing some taxes as well. Trump has expressed an interest in reducing the US government's corporate taxone of the highest in the world — to attract businesses to the United States. This would come as a break with the policies of Barack Obama who was committed to both high tax rates and working in concert with his fellow interventionists in the EU establishment. 

Such a move by the US would present an additional threat to the EU's hegemony, and thus Merkel has hit the panic button, declaring tax cuts to be a "race to the bottom" as if tax cuts were anything but a laudable move upward into the light. 

Moreover, the entire affair illustrates yet again that one of the biggest problems with states in the world is that there are too few of them. To the extent that the EU constitutes a single state on tax policy, the creation of another state through the UK's secession created competition for the EU and increased the potential to reduce taxes and create more tax competition. One could only imagine how much worse tax policy would be if the US had to reply on approval from the EU to engage in its own tax cuts. To further increase the potential for greater tax competition, of course, both the US and the UK should be broken up into still smaller states, thus further reducing the monopoly powers currently enjoyed by the mega-states that rule us from Brussels and Washington, DC. 



Categories: Current Affairs

How to Interpret the Shape of the Yield Curve

Mon, 27/03/2017 - 18:30
By: Frank Shostak
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Historically most recessions in the US are preceded by significant declines in the differential or interest rate spread between the 10-year T-bond and the 3-month Treasury security. Typically, this narrowing in the spread occurs many months before the onset of the recession.

Conversely, the widening in the spread occurs many months before the beginning of the economic recovery.

What is the reason for these changes in the interest rate spread?

The Conventional View

The most popular explanation of the factors that determine the shape of the yield curve is provided by expectation theory (ET).

According to ET, the key to the shape of the yield curve is that long-term interest rates are the average of expected future short-term rates.

If today’s one year rate is 4%, and next year’s one year rate is expected to be 5%, then the two year rate today should be 4.5% (4+5):2=4.5. Here the long-term rate (i.e., the two year rate today) is higher than the short term (i.e., one year) rate.

It follows then that expectations for rises in short-term rates will make the yield curve upward sloping, as long-term rates will be higher than short-term rates.

Conversely, expectations for a decline in short-term rates will result in a downward sloping yield curve, as long-term rates will be lower than short-term rates.

If today’s one year rate is 4% and next year’s one year rate is expected to be 3%, then the two year rate today should be 3.5% (4+3):2=3.5. The long-term rate (i.e., the two year rate today) is lower than the short term. 

According to ET followers, whenever investors expect economic expansion they also expect rising interest rates.

To avoid capital losses, investors will move their money from long term securities to short-term securities. (A rise in interest rates will have a greater impact on the values of long-term securities versus short term securities). This shift will bid short term securities prices up and their yields down. With respect to long term securities the shift of money away from them will depress their prices and raise their yields.

Hence we see a fall in short term yields and a rise in long term yields — an upward sloping yield curve emerges.

Conversely, an economic slump is associated with falling interest rates. Thus, whenever investors expect an economic slowdown or a recession they will also expect a decline in short term interest rates. Consequently, they will shift their money from short-term securities towards long-term bonds. As a result the selling of short term assets will result in a fall in their prices and a rise in their yields. A shift of money towards long term assets will result in the increase in their prices and a decline in their yields.

Hence this shift in money raises short-term yields and lowers long-term yields i.e., an inverted yield curve emerges.

Note that in this framework the formation of expectations regarding short term interest rates in accordance with the expected economic environment determines long term interest rates and in turn the shape of the yield curve.

Shape of the Yield Curve in an Unhampered Market

In his writings, Murray Rothbard argued that in a free, unhampered market economy an upward sloping yield curve could not be sustained for it would set in place an arbitrage between short and long term securities.

This would lift short-term interest rates and lower long-term interest rates, resulting in the tendency towards a uniform interest rate throughout the term structure. Arbitrage will also prevent the sustainability of an inverted yield curve by shifting funds from long maturities to short maturities and thereby flattening the curve.1

Similarly, Ludwig von Mises concluded that in a free, unhampered market economy the natural tendency of the shape of the yield curve is neither towards an upward slope nor towards a downward slope but rather towards flattening.

On this Mises wrote,

The activities of the entrepreneurs tend toward the establishment of a uniform rate of originary interest in the whole market economy. If there turns up in one sector of the market a margin between the prices of present goods and those of future goods which deviates from the margin prevailing on other sectors, a trend toward equalization is brought about by the striving of businessmen to enter those sectors in which this margin is higher and to avoid those in which it is lower. The final rate of originary interest is the same in all parts of the market of the evenly rotating economy.2

Following Mises and Rothbard we suggest that in a free, unhampered market economy a prolonged upward or downward sloping yield curve cannot be sustained.

What then is the mechanism that generates a sustained upward or downward sloping yield curve?

Mises and Rothbard have concluded that this must be the result of the central bank tampering with financial markets by means of monetary policies.

How Fed’s Tampering Generates Upward or Downward-Sloping Yield Curves

While the Fed can exercise control over short-term interest rates via the federal funds rate, it has lesser control over longer-term rates. In this sense long-term rates can be seen as reflecting, to a greater degree, the underlying time preferences of individuals. 

The Fed’s monetary policies disrupt the natural tendency towards uniformity of interest rates along the term structure. This disruption leads to the deviation of short-term rates from the natural rate (i.e., from individuals’ time preferences as partially mirrored by the less-manipulated long-term rate).

When the Fed lowers the policy interest rate target this almost instantly lowers short-term interest rates, whilst to a lesser degree affecting longer-term rates. As a result, an upward sloping yield curve develops.

Conversely, when the Fed reverses its stance and lifts the policy interest rate target this lifts short-term interest rates. As a result, a downward sloping yield curve emerges.

As a rule Fed policy makers decide about their interest rate stance in accordance with the observed and the expected state of the economy and price inflation.

Whenever the economy is starting to show signs of weakening whilst the rate of increase of various price indexes start to ease, investors in the market begin to form expectations that in the months ahead the Fed is going to lower its policy interest rate.

As a result, short term interest rates begin to move lower. The spread between long-term rates and short-term rates widens — the process of the development of an upward sloping yield curve is set in motion. This process cannot be sustained without the Fed’s policy of lowering the policy interest rate. Once the Fed has lowered the policy interest rate the widening in the yield spread gets consolidated.

Conversely, whenever economic activity shows signs of strengthening, coupled with a rise in price inflation, investors’ in the market start to form expectations that in the months ahead the Fed is going to lift its policy interest rate.

As a result short term interest rates begin to move higher. The spread between long term rates and short term rates narrows – the process of the development of a downward sloping yield curve is set in motion. Also here this process cannot be sustained without the Fed’s policy of raising the policy interest rate. Once the Fed raises the policy interest rate, the narrowing in the yield spread consolidates.

Note that using Mises-Rothbard ideas, we have concluded that an upward sloping yield curve is the result of investors’ expectations of an easy-money interest rate policy. These expectations are then followed by the central bank actually easing the policy interest rate. This is contrary to the ET framework where the upward sloping curve emerges on account of investors expecting an increase in short term interest rate.

With respect to a downward sloping yield curve we have explained that it emerges as a result of investors’ expectations of a tighter interest rate stance by the central bank. These expectations are then followed by the central bank actually raising the policy interest rate. Again, this is contrary to the ET framework where the downward sloping yield curve emerges on account of investors’ expecting a decline in short term interest rates.

Why Changes in the Shape of the Yield Curve Precede the Pace of Economic Activity

Whenever the central bank reverses its monetary stance and alters the shape of the yield curve it sets in motion either an economic boom or an economic bust. 

However these booms and slumps arise with lags — they are not immediate. The reason for this is the fact that the effect of a change in monetary policy shifts gradually from one market to another market, from one individual to another individual.

It is this gradual migration and increase in the effect of a change in monetary policy that makes the change in the shape of the yield curve a good predictive tool. 

For instance, during an economic expansion, if the central bank raises its interest rates and flattens the yield curve, the effect is minimal as economic activity is still dominated by the previous easy monetary stance. It is only later, once the tighter stance begins to dominate the scene, that economic activity begins to weaken.



  • 1. Murray Rothbard Man, Economy, and State Nash Publishing p 384

  • 2. Ludwig von Mises Human Action third edition p536


Categories: Current Affairs

Browse the Quarterly Journal of Austrian Economics

Mon, 27/03/2017 - 16:45
By: Ryan McMaken
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We've recently made it easier for readers to browse the Quarterly Journal of Austrian Economics

You can now browse all issues in chronological order here, and you can download full issues or individual articles as PDFs. 

Right now, all articles are linked going back nine years, and we'll continue to add more links. In either case, all articles are listed going back to 1998. 

If you've never checked out the QJAE before, I invite you to take a look and take greater advantage of this resource, which includes many rejoinders, book reviews, and commentaries in addition to the technical articles most often used by professional scholars.

To find the QJAE at any time, simply type "QJAE" in the mises.org search box or click on "library" on the front page, then "institute publications." 

 



Categories: Current Affairs

Six Graphs that Reveal Big Problems for Student and Auto Loans

Mon, 27/03/2017 - 04:00
By: Jonathan Newman
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The New York Fed’s most recent household debt report showed ballooning debt and delinquency in student and auto loans. Total household debt has just about reached its previous late-2008 high of over $12.5 trillion.

You’ll notice that housing debt (blue) has not increased much since its 2013 low, meaning that the increases in total debt have mostly come from non-housing debt (red). A closer look at the composition of non-housing debt reveals that the biggest increases in debt have come from student and auto loans (red and green, below).

In fact, the numbers make it look like the housing bubble was almost exactly replaced by new bubbles in education and cars. From 2008 to 2016, housing debt has decreased by $1.01 trillion, while student and auto loan debt together have increased by $1.04 trillion. The Board of Governors of the Federal Reserve has an even higher estimate than the NY Fed for current student loan debt, at $1.41 trillion.

Shahein Nasiripour at Bloomberg showed the relative changes based on the same data this way:

While both student and auto loan debt have increased substantially, delinquency rates are higher for student loans. In 2012, student loan delinquency spiked up enough to claim the top spot, probably due to the number of people who chose more school over searching for employment during the bust. The graph below shows that student and auto loan delinquency rates are the only ones not decreasing.

Of course, this is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped. Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.

The redirection is mostly guided by new government interference in markets. Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts, and income-based student loan repayment have funneled spending, borrowing, and increasing prices into education and autos.

Some recent headlines already signal a collapse in used car prices this year. Meanwhile, college tuition increases are still the norm every year, despite the decreasing value of a diploma. According to this AP report, “the average amount owed per borrower rose to $30,650 in 2016, after rising steadily for years. In 2013, borrowers on average owed $26,300.”

Another recent release by the NY Fed contains data on labor outcomes for college graduates versus all other laborers. There have been dramatic swings in employment across the board since 2008, but comparing September 2008 to September 2016 on net, the unemployment rate for college graduates has increased while the unemployment rate for all other workers has decreased. The underemployment rate (“defined as the share of graduates working in jobs that typically do not require a college degree”) for recent graduates has hovered around 45% since 2008. An indexed measure of job postings indicates that demand for laborers with a college degree has not increased as much as demand for laborers that don’t need a college degree, though both reached a peak late 2015.

The overwhelming conclusion from all of this data is that we almost certainly have new bubbles in education and the auto industry. A trillion dollars of housing debt has been replaced by a trillion dollars (or more) of student and auto loan debt. Delinquency rates are increasing for student and auto loans, while other loan types have seen a decrease in delinquency. Finally, the value of both the university education and the automobiles people are buying don’t seem to justify the amount being borrowed and spent, from a big picture perspective. Their prices are artificially inflated due to the Fed and the federal government teaming up to create new bubbles, just like they did to create the housing bubble.



Categories: Current Affairs

Week in Review: March 25, 2017

Sat, 25/03/2017 - 03:00
By: Mises Institute
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Our guest on Mises Weekends is Professor Per Bylund, a man who studies entrepreneurship for a living. Why is the role of the entrepreneur — the individual who risks capital, time, and energy to build a business — almost completely disregarded by most economists? Does the Austrian focus on individual human action explain why business schools are far more willing to embrace Austrian principles? Can real-world entrepreneurs improve their business skills in traditional university settings, or are much-hyped campus incubators a waste of time? Why do progressives dismiss entrepreneurs with their "You didn't build that" mentality? And how do socialist policies in places like Dr. Bylund's native Sweden kill the spirit that makes us rich? Join Jeff and Per for an insightful discussion of "Who Built That?"

And in case you missed any of them, here are the articles featured this week on the Mises Wire:



Categories: Current Affairs

Idaho Politician Opposes Removing Tax on Gold for a Very Odd Reason

Sat, 25/03/2017 - 03:00
By: Jp Cortez
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The Dunning-Kruger effect is the idea that low-ability people tend to suffer from illusory superiority. The phenomenon, first studied by David Dunning and Justin Kruger, says that people who know the least tend to overvalue their own competence, and tend to believe that they are experiencing some sort of upper-echelon level of thinking.

While the original study was conducted in 1999, we witnessed what appeared to be the Dunning-Kruger effect in action earlier this month on the floor of the Idaho House of Representatives.

And while it’s only March, we also have identified the front-runner for our “Aurophobe of the Year” award. (Aurophobia is the irrational fear of gold.)

RELATED: "Sound Money Is Rising at the State Level

During the March 14th floor debate on Idaho’s House Bill 206, a measure that promotes sound money by removing Idaho income taxation from precious metals, Democrat Representative Mat Erpelding — the House Minority Leader — couldn’t help himself and had to share his two cents, even after asserting that he had no opinion on the bill (but then voted against it).

Thank you, Mr. Speaker. I don’t have an opinion on this bill. However, I do have an opinion on facts. Facts are somewhat important,” Representative Erpelding said with an air of superiority. “If we say that gold is going to protect us from inflation, I want to point out that in 1868, gold was $27 an ounce, and today gold is $1,218 an ounce. So, we can’t say that gold is going to protect us from inflation when you have that type of a price range over the last hundred years. So, I just want to point out that facts are important.

Huh? The purchasing power of the dollar versus gold has fallen nearly 98% and gold therefore offers no protection against inflation?

Despite Minority Leader Erpelding’s objection, House Bill 206 overwhelmingly passed in the House 56–13. Next, sound money supporters hope to receive a hearing and a vote in the Idaho Senate.

See the video: 

 



Categories: Current Affairs

The Right to Discriminate Is a Basic Property Right

Sat, 25/03/2017 - 02:45
By: Laurence M. Vance
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Back in 2013, Barronelle Stutzman, the owner of Arlene’s Flowers in Richland, Washington, refused to provide flowers for a gay friend’s same-sex wedding. The legal battle that ensued has now ended: The Washington State Supreme Court just unanimously ruled that the florist violated the state’s anti-discrimination law.

The case has given rise to some misconceptions about discrimination.

Here is the back story.

In 2012, the state of Washington enacted Senate Bill 6239, which recognized same-sex marriage. Gay men Robert Ingersoll and Curt Freed, who had been a couple since 2004, decided to get married in September of 2013. At the time of his engagement, Ingersoll had been a customer of Arlene’s Flowers and Gifts for at least nine years. Stutzman, an active member of a Southern Baptist church who believed that marriage can exist only between a man and a woman, knew that Ingersoll was gay and in a relationship with Freed. When Ingersoll spoke with Stutzman about providing flowers for his wedding, she told him that she would be unable to do so because of her religious beliefs. She gave Ingersoll the names of other florists who might be willing to serve him and hugged Ingersoll before he left the store.

Stutzman said she “draws a distinction between creating floral arrangements — even those designed by someone else — and selling bulk flowers and ‘raw materials,’ which she would be happy to do for Ingersoll and Freed.” But she said she believes that “to create floral arrangements is to use her ‘imagination and artistic skill to intimately participate in a same-sex wedding ceremony.’”

Ingersoll maintains that he left “feeling very hurt and upset emotionally.” His partner Freed posted something on Facebook about the incident and the story “drew the attention of numerous media outlets.” Ingersoll and Freed then “lost enthusiasm for a large ceremony” and got married in July in “a modest ceremony at their home.”

That, of course, should have been the end of it. But

after the state became aware of Stutzman’s refusal to sell flowers to Ingersoll and Freed, the Attorney General’s Office sent Stutzman a letter. It sought her agreement to stop discriminating against customers on the basis of their sexual orientation and noted that doing so would prevent further formal action or costs against her. The letter asked her to sign an “Assurance of Discontinuance,” which stated that she would no longer discriminate in the provision of wedding floral services.

Stutzman refused.

The state then filed a complaint about injunctive and other relief against both Stutzman and Arlene’s Flowers under the Consumer Protection Act (CPA) and the Washington Law Against Discrimination (WLAD). Stutzman answered by “asserting, among other defenses, that her refusal to furnish Ingersoll with wedding services was protected by the state and federal constitutions’ free exercise, free speech, and freedom of association guarantees.” Ingersoll and Freed then filed a private lawsuit against Stutzman and Arlene’s Flowers, which the trial court consolidated with the state’s case.

The trial court ultimately decided against the defendant and awarded “permanent injunctive relief, as well as monetary damages for Ingersoll and Freed to cover actual damages, attorneys’ fees, and costs.” The court ruled not only that Stutzman violated the WLAD’s “public accommodations” provision, violated the CPA by refusing to sell floral services, and was personally liable, but also made five constitutional rulings. It concluded that the application of the WLAD’s “public accommodations” provision to Stutzman in this case:

(1) did not violate Stutzman’s right to free speech under the First Amendment to the United States Constitution or article I, section 5 of the Washington Constitution,

(2) did not violate Stutzman’s right to religious free exercise under the First Amendment,

(3) did not violate her right to free association under the First Amendment,

(4) did not violate First Amendment protections under the hybrid rights doctrine, and

(5) did not violate Stutzman’s right to religious free exercise under article I, section 11 of the Washington Constitution.

Stutzman appealed to the Washington State Supreme Court, which affirmed the trial court’s rulings last month.

There are a number of misconceptions that people have about discrimination, including Barronelle Stutzman, the attorneys who represented her, and the state’s attorney general.

Stutzman contended that her floral arrangements were “artistic expressions protected by the state and federal constitutions and that the WLAD impermissibly compels her to speak in favor of same-sex marriage.” She contended that her floral arrangements are “speech” for purposes of First Amendment protections “because they involve her artistic decisions.” She argued that the WLAD violated her First Amendment protections against “compelled speech” because it “forces her to endorse same-sex marriage.” She sought “an exemption permitting discrimination in public accommodations.” She argued, “discrimination cannot be ‘invidious’—and thus subject to governmental prohibition—if it is based on religious beliefs.”

RELATED: "The Trouble with "Public Accommodation"

The Alliance Defending Freedom (ADF) attorneys who represented Stutzman argued: “It’s wrong for the state to force any citizen to support a particular view about marriage or anything else against their will. Freedom of speech and religion aren’t subject to the whim of a majority; they are constitutional guarantees.”

Washington’s attorney general, Bob Ferguson, said that “Arlene’s Flowers in Richland doesn’t have to sell wedding flowers at all.” However, “if they choose to sell wedding flowers, they cannot choose to sell wedding flowers only for heterosexual couples and deny that same service to gay couples.”

We Don't Need a Special Right to Speech when We Have Property Rights 

Let’s clear up these and other misconceptions about discrimination from the libertarian perspectives of property rights, the non-aggression principle, and individual liberty.

Designing, making, selling, or not selling floral arrangements has nothing to do with free speech or speech. The U.S. Supreme Court has greatly erred by labeling certain actions as a form of speech in order to protect them instead of just recognizing property rights.

Refusing to sell a product has everything to do with property rights. Since no potential customer has a claim on the property of any business owner, he has no legal recourse if the owner of the property refuses to sell it to him.

Selling someone a product has nothing to do with endorsing the buyer’s opinions or use of the product.

Discrimination is a crime in search of a victim. Every real crime needs a tangible victim with measurable damages. Discrimination is not aggression, force, or threat. It should never be a crime.

To outlaw discrimination is to outlaw freedom of thought.

Public accommodations are still private businesses. Just because they serve the public by offering to sell them goods and/or services doesn’t mean that they should be regarded as public libraries, public parks, and public buildings that have to accept all members of the public.

If discrimination is wrong, immoral, unjust, hateful, and bigoted, then it doesn’t suddenly cease to be these things because the entity doing the discriminating is religious in nature or the person doing the discriminating is doing it for religious reasons.

There is no “right to service.” In a free society, business owners have the right to refuse service to anyone for any reason on any basis.

If a florist can choose not to sell a particular type of flower arrangement, then why can’t it choose not to sell a flower arrangement to a particular person? If the government is so interested in stamping out discrimination, they why doesn’t it mandate that florists sell every type of flower arrangement for every situation? Aren’t florists who don’t sell flower arrangements for weddings discriminating against customers who want to buy them and suppliers who want to provide the necessary raw products to the florists?

If an individual can discriminate against a business owner in any way, for any reason, and on any basis, then why can’t a business owner likewise discriminate against an individual?

That discrimination may be based on based on stereotypes, prejudice, hate, sexism, xenophobism, homophobism, bigotry, or racism is immaterial.

That discrimination may be because of race, creed, religion, sex, color, age, national origin, political ideology, IQ, physical appearance, marital status, socio-economic status, disability, gender identity or sexual orientation is irrelevant.

That someone thinks an act of discrimination is unfair, illogical, irrational, nonsensical, unreasonable, or just plain stupid is of no consequence.

Barronelle Stutzman should be able to choose to whom she will sell flowers or floral arrangements. Discrimination is the exercise of freedom.

Originally published by LewRockwell.com. 



Categories: Current Affairs

Per Bylund: Who Built That?

Fri, 24/03/2017 - 22:00
By: Per Bylund, Jeff Deist
Per Bylund on Mises Weekends

Our guest this week is Professor Per Bylund, a man who studies entrepreneurship for a living. Why is the role of the entrepreneur—the individual who risks capital, time, and energy to build a business—almost completely disregarded by most economists? Does the Austrian focus on individual human action explain why business schools are far more willing to embrace Austrian principles? Can real-world entrepreneurs improve their business skills in traditional university settings, or are much-hyped campus incubators a waste of time? Why do progressives dismiss entrepreneurs with their "You didn't build that" mentality? And how do socialist policies in places like Dr. Bylund's native Sweden kill the spirit that makes us rich?



Categories: Current Affairs

Fed Financial Statements: $6 Billion Drop in Fed Remittances

Fri, 24/03/2017 - 19:15
By: C.Jay Engel
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As the Fed continues to increase the rate of interest it pays on excess reserves, the Fed's profits that are left over are slowly going to shrink in size. Since the Fed sends its profits to the US Treasury each year, the US Treasury will be receiving less. The Wall Street Journal reported on Friday:

The Federal Reserve sent $91.5 billion in profits to the Treasury Department last year, a $6 billion decline that officials have long expected as a result of rising interest rates.

The Fed’s total net income declined by $7.6 billion, to $92.4 billion, according to the Fed’s audited financial statements released Friday. The decline was primarily the result of higher interest payments it made to banks on the reserves they keep at the central bank.

David Howden has explained this process– and the implications for "Fed independence"– rather nicely:

Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding.

For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.

As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.

The slowly decreasing profits remitted to the Treasury each year is going to have implications for the increasing tension between the Trump administration and the Fed. If Trump wants to get his tax cuts through, he's going to need all the revenue help he can get. It may be even worse:

The payments are likely to shrink in the coming years as the Fed raises short-term interest rates—a process that involves paying banks higher interest on reserves they keep at the Fed—and when it eventually shrinks its balance sheet. Fed economists estimate the payments will fall to around $40 billion annually by 2020 but would likely rebound to about $65 billion a year by 2025.

A $40 billion payment in 2020 is less than half this year's $91.5 billion payment, which means that, assuming today's budget levels there's a massive $50 billion drop in revenue for the Federal Government, all things equal. Of course, spending goes up every year and so by 2020, who knows what may happen. 

In the meantime, will the Fed eventually be "forced" reverse course on interest rates to put a band-aid on the absurd Federal budget?  



Categories: Current Affairs

How the Global Drug War Pushed Down Heroin Prices

Fri, 24/03/2017 - 03:00
By: Chris Calton
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In the 1950s, Corsican gangsters such as Lucky Luciano created a mafia empire by smuggling morphine base from Turkey to Sicily, where it was refined into heroin, then shipped to France and finally to the United States. This was the infamous "French Connection" that supplied the bulk of the heroin supply that the United States received through the early 70s.

When Nixon took office, he pressured the Turkish government to outlaw poppy production, and the enforcement of these new laws largely shut down the Turkish opium trade in 1972. Nixon's "War on Drugs" looked like it was going to be a short one.

But where there is a market, there will always be a supply. The Mafia abandoned Turkey as their source for opium and found a new supply in the "Golden Crescent," referring primarily to Iran, Afghanistan, and Pakistan. Southeast Asia's "Golden Triangle" — being Laos, Thailand, and Burma — was another source for opiates that the Mafia was able to turn to, as well. The heroin trade quickly rebounded from the Turkish setback and even exceeded previous production levels.

As I detailed in a previous article, the US government tolerated the Asian heroin trade during the Vietnam War because they wanted to stay on good terms with their allies (primarily the Hmong) against the communists. After the Vietnam War was over, the DEA turned their attention on the East Asian drug trade, which was now the major world supplier of opiates, and the increased enforcement of drug laws yielded a reduction of Asian heroin by more than two-thirds.

With the drug trade pushed down in Asia, it quickly popped up in Mexico. This was a region that was easier for the United States to control, and enforcement efforts quickly and successfully shifted to Mexico. But a regime change in Afghanistan allowed the suppression of Mexican poppy to pop back up in the Golden Crescent with a force unseen in the early 70s. Opium production in the Middle East doubled between 1982 and 83.

No matter how successfully drug laws were enforced in one region, drug production always seemed to pop up elsewhere to fill the newly created void in the heroin market. In Drug War history lingo, this is called the "Push Down Pop Up Effect." In economics, this is little more than comparative advantage in action.

Comparative Advantage in the Drug Trade

The concept of comparative advantage has never, to my knowledge, been applied to the "Push Down Pop Up" phenomenon, but I am convinced that this economic concept better explains what we've seen in the global War on Drugs over the past several decades.

According to the Push Down Pop Up doctrine, when drug production is "pushed down" in one region through heavier enforcement, it will simply "pop up" somewhere else. This is empirically true when looking at the history of the Drug War. My issue with this doctrine is that it does not contain the full implication of these enforcement policies.

For one thing, the Push Down Pop Up theory cannot explain the trend of heroin prices over the past several decades. The United Nations started documenting global heroin prices in 1990, and since then, heroin prices have consistently dropped (and other quantitative data shows the same trend going back as far as the 1970s). Push Down Pop Up explains why heroin production continues despite enforcement efforts, but it gives no insight as to why prices actually fall.

The theory of comparative advantage, combined with an understanding of capital accumulation, answers both questions. Heroin production is dominated by a given region because that region is uniquely suited for it, obviously. This may mean that the lands are particularly fertile for poppy cultivation, or it might mean that the farmers have developed skills or tools particularly suited for this crop. In the case of Laos, for example, it came from technological innovations in heroin refinement that produced a purer substance. It can also mean, of course, that lighter enforcement of drug laws (or even the absence of such laws) lowers the relative cost of production through reduced risk of operating illegally. This last point is obviously the relevant variable in this analysis.

Every time enforcement increases in a specific region, this raises the cost of production in the target region and thus raises every other country's comparative advantage in heroin production. As a result, whatever region was previously the second most efficient producer of heroin now becomes the first most efficient producer. Turkish suppression meant East Asian advantage. East Asian suppression meant Mexican advantage. Mexican suppression meant Afghan advantage. And so the pattern continues.

The reason capital theory and the theory of comparative advantage actually explain the reduction in heroin prices is because each time the comparative advantage shifts, whichever new country takes the top spot of efficient heroin production makes capital investments in the heroin trade. Examples of these investments would be the construction of refinement facilities or the individual learning of agricultural practices for growing poppy. As drug law enforcement jumps from place to place, an increasing number of countries make these kinds of capital investments.

Once a country has made these capital investments, the long-term costs of heroin production decrease in absolute terms. This means that even once enforcement shifts to this newly dominant market, the cost of heroin production ends up being lower than it would have been had there never been the incentive to invest capital outlays to begin with. What we see in the Push Down Pop Up doctrine is that the dominant region of heroin production is constantly jumping around as the market adapts to the capricious enforcement practices of the various governments. But the overall cost of heroin production, globally speaking, is actually driven down by the ongoing incentive for more and more countries to make capital investments in heroin production. After all, even when a country is "pushed down" from its dominant position, it still continues to produce nominal levels of heroin.

In economic lingo, this means that global drug enforcement has made the heroin supply more elastic. When the Push Down Pop Up effect circles back around to a country that had previously enjoyed the dominant position, it is able to resume heroin production with at least some of its previous capital investments already in place, and the other countries are continuing nominal levels of production with the capital they invested during their own dominant production period.

The concept of comparative advantage also better explains the War on Drugs because it illustrates the unavoidable futility in any attempts to suppress drug production. In the Push Down Pop Up framework, it is at least theoretically plausible that world governments coordinate together and invest enough resources to push down poppy production in all relevant regions at the same time, leaving no region left for new production to pop up. Comparative advantage theory addresses this possibility with a simple answer: because the market still exists, if costs of production increase equally in all regions of production, the comparative advantage — and thus the dominant production — would simply remain in the same region that is currently dominant. Suppressing heroin production is therefore entirely futile when analyzed through this economic lens.

Instead of stymying the heroin trade, government efforts to enforce drug laws only helped to encouraged global capital investment in heroin production and thus helped created a more elastic heroin supply and continually falling drug prices. As these enforcement efforts continue, with an increasingly elastic supply curve, police resources will have to increase exponentially to even maintain the same poor results seen in the past as capital investment continues to increase regardless. Economically speaking, it is literally impossible to win the global War on Drugs.



Categories: Current Affairs

Ryancare is Failing — What Should Happen Next?

Fri, 24/03/2017 - 02:00
By: Tho Bishop
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The beltway Republicans are scrambling now that it seems the Obamacare replacement package put forward for Paul Ryan and endorsed by Donald Trump can’t get enough support to get through the House. The failure of the American Health Care Act should surprise no one, as it is a piece of legislation that managed to please no one. The Freedom Caucus, made up of the “true believers” of the Tea Party, balked at its similarities to Obamacare, while more moderate members found the bill’s modest change to the ACA too radical for their tastes. 

While the failure of the Ryan/Trump/Whatevercare represents a political defeat for the president and GOP leadership, it is probably a net-win for those who oppose socialized healthcare. After all, nothing could be more beneficial to the Bernie Sanders-wing of the Democratic party than for the nominally “free market” Republicans passing its own brand of reform that fails to fix America's insurance market. Much like the 2008 financial crisis, its collapse would absurdly be seen as a defeat for “capitalism” and be used as justification for even more government control.

The unfortunate reality going forward is that more significant approaches to healthcare reform, such as the bill pushed by Senator Rand Paul and his allies in the House, are unlikely to find enough support in the Senate. Further, considering the way the media portrayed the Congressional Budget Office’s analysis of the ACHA, which noted that 14 million consumers may no longer purchase healthcare without an individual mandate and therefore are “losing coverage,” any healthcare plan that comes close to pricing real healthcare risks (like properly accounting for the costs of those with pre-existing conditions) will be skewered relentlessly. This is all before even addressing the problems caused by Medicare and Medicaid.

This is precisely why attempts to push grand “free market” reforms in the Federal government end in failure. Few politicians in DC have the economic lens required to appreciate how necessary these tough decisions are, so Federal politics simply becomes a race to see which party can buy more votes than the other.

Given this grave reality, is there anything that can be done to improve American healthcare?

The answer is it is already happening because of the market.

Increasingly, doctors are abandoning the broken insurance model and claiming their own independence by offering direct patient care. As Business Insider profiled recently, around 1,000 doctors (and counting) are moving toward charging patients a monthly membership fee for service and then patients pay a la carte for the services they actually need. This allows clinics to eliminate most of the administrative costs and it restores the relationship between doctor and patient that has been undermined by a century of government intervention. For more specialized care, clinics such as The Surgery Center of Oklahoma, also use a cash-for-service business model without the monthly fee. 

Given that this is happening naturally on the market already, the legislative focus for those in Washington concerned about American healthcare should be preventing any future laws and regulations that would destroy this model going forward. Further, rather than trying to completely overhaul Obamacare, simply eliminating the individual mandate tax and allowing Health Savings Accounts to be used for healthcare membership would be subtle ways of empowering the market to revolutionize American medicine. This should be coupled with real tax cuts, not “revenue neutral reform” to help Americans keep their own hard-earned money to help pay for it.

Steps can also be taken on the state level to further empower medical professionals. For example, expanding the abilities of medical practitioners would help mitigate doctor shortages. Reforms to medical licensing — such as recognizing the real-world experience of military trained medics — would also make it easier for skilled individuals to enter the market.

This more modest approach to healthcare reform shouldn’t be seen as a defense of Obamacare or the status quo. It’s not. Obamacare was a deplorable piece of legislation, designed by people who were either utterly delusional or intentionally crafting a framework that would fail. In a just world, everyone who played a hand in crafting it should be forever stuck with the fruits of their labor for their own personal care.

Yet we can’t be blind to the realities of modern politics — Washington is dominated by progressive ideology in both parties. While the long-term solution to this has to be political decentralization, in the short term we can settle by defending the ability of markets to compete along side government regulated disasters. This was how Ron Paul sought to destroy the Fed, it’s how homeschooling parents are able to free their children from public education, it’s how Patrick Byrne plans to undermine government cronies on Wall Street.  

As the Soviet Union was collapsing, Murray Rothbard wrote a paper outlining how to desocialize an economy. Gradual reform would fail, he noted, because “the giant socialist bureaucracy will only seize upon such delay to obstruct the goal altogether.” Instead, he advocated prioritizing the protection and normalization of already established black markets.

America doesn’t yet have completely socialized medicine, but the same approach is true here. As long as we preserve the functioning markets that currently exist, and allow them to grow, Americans can maintain hope for a functioning healthcare system in the future.

The same cannot be said for Washington politics. 



Categories: Current Affairs

Ryancare Failed — What Should Happen Next?

Fri, 24/03/2017 - 02:00
By: Tho Bishop
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The beltway Republicans are scrambling now that it seems the Obamacare replacement packaged put forward for Paul Ryan and endorsed by Donald Trump can’t get enough support to get through the House. The failure of the American Health Care Act should surprise no one, as it is a piece of legislation that managed to please no one. The Freedom Caucus, made up of the “true believers” of the Tea Party, balked at its similarities to Obamacare, while more moderate members found the bill’s modest change to the ACA too radical for their tastes. 

While the failure of the Ryan/Trump/Whatevercare represents a political defeat for the president and GOP leadership, it is probably a net-win for those who oppose socialized healthcare. After all, nothing could be more beneficial to the Bernie Sanders-wing of the Democratic party than for the nominally “free market” Republicans passing its own brand of reform that fails to fix America's insurance market. Much like the 2008 financial crisis, its collapse would absurdly be seen as a defeat for “capitalism” and be used as justification for even more government control.

The unfortunate reality going forward is that more significant approaches to healthcare reform, such as the bill pushed by Senator Rand Paul and his allies in the House, are unlikely to find enough support in the Senate. Further, considering the way the media portrayed the Congressional Budget Office’s analysis of the ACHA, which noted that 14 million consumers may no longer purchase healthcare without an individual mandate and therefore are “losing coverage,” any healthcare plan that comes close to pricing real healthcare risks (like properly accounting for the costs of those with pre-existing conditions) will be skewered relentlessly. This is all before even addressing the problems caused by Medicare and Medicaid.

This is precisely why attempts to push grand “free market” reforms in the Federal government end in failure. Few politicians in DC have the economic lens required to appreciate how necessary these tough decisions are, so Federal politics simply becomes a race to see which party can buy more votes than the other.

Given this grave reality, is there anything that can be done to improve American healthcare?

The answer is it is already happening because of the market.

Increasingly, doctors are abandoning the broken insurance model and claiming their own independence by offering direct patient care. As Business Insider profiled recently, around 1,000 doctors (and counting) are moving toward charging patients a monthly membership fee for service and then patients pay a la carte for the services they actually need. This allows clinics to eliminate most of the administrative costs and it restores the relationship between doctor and patient that has been undermined by a century of government intervention. For more specialized care, clinics such as The Surgery Center of Oklahoma, also use a cash-for-service business model without the monthly fee. 

Given that this is happening naturally on the market already, the legislative focus for those in Washington concerned about American healthcare should be preventing any future laws and regulations that would destroy this model going forward. Further, rather than trying to completely overhaul Obamacare, simply eliminating the individual mandate tax and allowing Health Savings Accounts to be used for healthcare membership would be subtle ways of empowering the market to revolutionize American medicine. This should be coupled with real tax cuts, not “revenue neutral reform” to help Americans keep their own hard-earned money to help pay for it.

Steps can also be taken on the state level to further empower medical professionals. For example, expanding the abilities of medical practitioners would help mitigate doctor shortages. Reforms to medical licensing — such as recognizing the real-world experience of military trained medics — would also make it easier for skilled individuals to enter the market.

This more modest approach to healthcare reform shouldn’t be seen as a defense of Obamacare or the status quo. It’s not. Obamacare was a deplorable piece of legislation, designed by people who were either utterly delusional or intentionally crafting a framework that would fail. In a just world, everyone who played a hand in crafting it should be forever stuck with the fruits of their labor for their own personal care.

Yet we can’t be blind to the realities of modern politics — Washington is dominated by progressive ideology in both parties. While the long-term solution to this has to be political decentralization, in the short term we can settle by defending the ability of markets to compete along side government regulated disasters. This was how Ron Paul sought to destroy the Fed, it’s how homeschooling parents are able to free their children from public education, it’s how Patrick Byrne plans to undermine government cronies on Wall Street.  

As the Soviet Union was collapsing, Murray Rothbard wrote a paper outlining how to desocialize an economy. Gradual reform would fail, he noted, because “the giant socialist bureaucracy will only seize upon such delay to obstruct the goal altogether.” Instead, he advocated prioritizing the protection and normalization of already established black markets.

America doesn’t yet have completely socialized medicine, but the same approach is true here. As long as we preserve the functioning markets that currently exist, and allow them to grow, Americans can maintain hope for a functioning healthcare system in the future.

The same cannot be said for Washington politics. 



Categories: Current Affairs

Are Central Banks Worthy of Trust?

Thu, 23/03/2017 - 18:45
By: C.Jay Engel
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In an essay on Edmund Burke's view of the nature of government, Murray Rothbard quoted him as saying:

In vain you tell me that Artificial Government is good, but that I fall out only with the Abuse. The Thing! the Thing itself is the Abuse!" 

That is, our complaint isn't just with "abuse of the system," it is with the system itself! The system is the abuse. Everything else is a symptom, a surface issue.

Thus, when BOE Governor Mark Carney spoke on various banking sector abuses at the Banking Standards Board Panel, he misses the entire point. The title of the speech is “Worthy of trust? Law, ethics and culture in banking” and he is concerned that such abuses have produced a "crisis of legitimacy."

"This immense progress has been overshadowed by a crisis of legitimacy. A series of scandals ranging from mis-selling to manipulation have undermined trust in banking, the financial system, and, to some degree, markets themselves."

Bad behaviour went unchecked, proliferated and eventually became the norm.

What can we say? When you place one institution in charge of the entire monetary sector within a given economy, abuses should hardly be a surprise. But rather than questioning the government-granted monopoly, the outlawing of free competition in money and banking, Carney and others of the Bureaucratic persuasion can see only one solution: more regulations and more oversight. He states:

Changes to incentives, new codes and a clearer mapping of responsibilities will all help improve conduct and lay the groundwork for better culture.

We are seeking to raise expectations and norms by using a combination of hard and soft law, with much of the latter developed by the private sector.

They are trying to address various manipulations in the foreign exchange markets, interest rate controversies, and crony business relationships. But how could any of these things be a problem if central banks were not granted exclusive legal control over money and interest rates in the first place? These crony relationships and backroom deals are merely symptomatic of the mandated existence of these monopoly banking institutions. 

More laws which aim to stem abuses of the system presuppose that the system itself is ethically pure. Opponents of central banking should not be mere opponents of abuses, but opponents of central banking itself!

Carney characterizes himself as wanting to issue a hard crack down on the "bad apples," but the solution should simply be to eradicate any possibility of these bad apples getting these positions in the first place. How can a bad apple fill a bureaucratic position that does not exist?



Categories: Current Affairs

Celebrating Murray!

Thu, 23/03/2017 - 03:00
By: Llewellyn H. Rockwell Jr.
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35 years ago, I was worried. I was working at a free-market think tank at a university, and I could see that Austrian economics was becoming less and less influential.

Who would speak for untrammeled freedom and capitalism? Sound money and no central banking? Would economics entirely betray its great advocates of liberty from Menger to Mises, in favor of monsters like Keynes and Marx?

Who would teach students the truth, and inspire them never to give up or give in? To dedicate their lives to the ideas that build civilization, and fight the left-wing destructionists?

Just as bad, for me, was the lessened interest in Mises himself. I had worked with him 14 years before, and although I was very young, the experience changed my life.

Here was the economist of the century, a world-class genius in his writing and teaching, and a hero in his deeds besides.

Progressives, New Dealers, Communists, Nazis — nothing could stop him. Neither could the resulting hardship.

When a boy, he had adopted a motto from Virgil: “Do not give in to evil, but proceed ever more boldly against it.” Until his dying day at 92, despite oppression and proffered inducements to compromise, he never betrayed that principle.

I knew that not only did we need his monumental scholarship, we needed his personal example.

Yet just 9 years after his passing, there was a palpable lack of much interest in the ideas and the man.

I determined to do something about it. First, I invited Margit von Mises, his widow, to lunch at her favorite restaurant, the Russian Tea Room in New York City.

As you can imagine, I was on tenterhooks as I asked for her blessing in establishing a Mises Institute. She was delighted, and enthusiastically served as our chairman as well.

Next I approached Mises’s greatest associate, a world-class genius himself, Murray N. Rothbard.

We were walking in Manhattan at the time, and when I told Murray of my plans, he turned to me and clapped his hands in joy.

Ron Paul was a huge help, as were Henry Hazlitt and F.A. Hayek. I was surrounded by giants, while defending one.

Over those 35 years, what fun all of us at the Institute have had. Fun in achievements. Fun in fighting the bad guys.

Of course, we could have done nothing without our benefactors. As Mises noted, entrepreneurial ideas are a dime a dozen. Having the necessary capital is both rarer, and all-important.

Our faculty, students, and supporters in all walks of life have also been essential.

Thanks to you, and so many others, we have been able to do much good. Through teaching, research, conferences, publishing, social media and the internet, we have been able to touch the minds and hearts of millions. As a result, Mises and Austrian economics are far better known and therefore far more influential. How that is needed!

We have taken on the Fed, the welfare state, the warfare state, the power elite, Keynesianism, socialism, and every other excrescence that afflicts society.

We do not compromise with the state, nor those who promote it. As a result, young people all over the world — not to speak of teachers, business leaders, and writers — look to the Mises Institute for leadership. There are now 26 Mises Institutes in as many countries.

Where Austrian economics was once a dwindling school of thought, now it flourishes here and in Europe, Asia, and South America, especially in the next generation. On our 35th anniversary, we remember all this with great gratitude, and plan for far more success in the years ahead. Won’t you help us continue our work? Certainly our ideas have never been more timely.

With your generous tax-deductible donation, you can help build the foundations of liberty for the future. You can help us make sure that we can reach all the good students and young professors who are dedicating their lives to freedom, private property, and free markets.

With your help, we are determined to fight and win the intellectual battle. Government cannot defeat ideas, and our ideas are both right and necessary.



Categories: Current Affairs

For Keynesians and Austrians, "Uncertainty" Means Two Different Things

Thu, 23/03/2017 - 02:45
By: G. P. Manish, Felicia Cowley
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Keynesian economics has witnessed a remarkable resurgence since the crisis of 2008. The inability of mainstream economics to predict or explain the crisis led many economists to become skeptical of its core macroeconomic tenets. Several have turned the clock back to the ideas of Keynes to make sense of the housing bubble and the ensuing recession.

One such explanation inspired by the General Theory emphasizes the endemic uncertainty of the future and its implications for market stability. Championed by Paul Davidson1 and popularized by Robert Skidelsky,2 this line of thought blames the crisis and recession on the fickle expectations and “animal spirits” that guide investment in a market economy.3

Per this thesis, in an uncertain world, entrepreneurs and investors suffer from mood swings. Optimism regarding the future abruptly gives way to pessimism. Fluctuations in economic activity are the result of these variations in outlook.

With its focus on uncertainty, this line of thought bears a striking resemblance to Austrian ideas. Moreover, its rejection of mathematical probability as a foundation for expectations is echoed by several prominent Austrian economists.

Nevertheless, while Keynesians conclude that the uncertainty of the future renders a market economy inherently unstable, Austrians embrace uncertainty without losing faith in the order generated by a market economy. What lies at the root of this puzzle?

Keynes on Expectations, Uncertainty, and Market Stability

Think of Mary, a plastic bottle manufacturer drawing up plans to open a new factory. Given the durability of the investment, her decision is based on a set of long-term expectations. How does Mary arrive at these estimations of future prices?

In a neo-classical world, she does so by absorbing as much information as possible regarding past prices. Using this information, she calculates the numerical probabilities associated with various prices and forms her expectations based on these probability distributions.

In such a world, expectations share a deterministic relationship with the past. The numerical probabilities associated with future prices are inferred mechanistically from those associated with past prices. Thus, Mary’s expectations of the future are objective in nature. Anybody else in her place would have come to identical conclusions regarding the future with the information at hand.

Keynes sharply disagreed with this approach. Long-term expectations, he argued, are formed in a fog of uncertainty. This renders mathematical probability useless as a basis for forming one’s expectations. Since the future may differ significantly from the past, information about past prices provides “no scientific basis on which to form any calculable probability whatever” regarding the likelihood of future prices.4

Entrepreneurs and investors cannot mechanically extrapolate probability judgments regarding the future from an analysis of information regarding the past. As a result, their expectations are subjective in nature. Mary’s expectations now bear a personal stamp.

These subjective expectations share no connection to the past. The inability to use probability to form expectations renders the future unknowable to entrepreneurs and investors. Unable to turn to the past to assess the likelihood of future events, they find themselves confronted by a radical uncertainty.

In such a world, Mary’s decision to build a new factory is not the “outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” Instead, it is governed by her “animal spirits;” by a sense of “spontaneous optimism” that results in an “urge to action rather than inaction.” 

Nevertheless, even in a radically uncertain world, investments must be guided by some expectations regarding the future. Instead of grounding them in an analysis of the past, Mary bases her expectations on an assessment of what others believe regarding the future.

Lurking behind her animal spirits are expectations formed as the result of an attempt on her part to “conform with the behavior of the majority or the average.” A similar striving on the part of everyone else gives rise to a “conventional judgment” regarding the future, shared by the overwhelming majority of entrepreneurs and investors. 

Based on the flimsy foundations of the psychology of opinion and with no moorings in experience, this conventional judgment is subject to sudden and violent change. Like a school of fish, investors and entrepreneurs swim this way and that, always taking their cues on what to do from others, without recourse to any solid foundations in which to ground their expectations.

Buoyed by an optimistic conventional judgment, investors, with positive animal spirits pumping through their veins, rush to produce more capital goods, lifting the fortunes of workers with them. Soon the judgment turns and pessimism sets in. Investors no longer have the urge to act. They become quiescent, and unemployment increases.

Thus, for Keynes the endemic uncertainty that surrounds the future gives rise to an inherently unstable market economy. Fluctuations in output and employment are endogenous to the market and are ultimately to be traced to the shifting sands that underlie the prevailing conventional judgment regarding the future.

The path to greater market stability requires heavy government intervention. It is the job of the state to counter the waxing and waning of animal spirits and help stabilize the level of investment, output and employment.

Uncertainty and Subjective Expectations in the Austrian Framework

Prominent Austrian economists such as Mises,5 Lachmann,6​ and Rothbard7​ agree with Keynes’s rejection of a mechanistic relationship between past and future prices.

This rejection is the result of a consistent application of the subjective theory of value. The prices of the past result from the individual valuations that prevail in a specific set of circumstances. Two individuals, however, can form different valuations in the same circumstances. Moreover, the same individual may react differently to identical conditions at two different points in time.

It follows that the reemergence of a similar set of conditions in the future need not result in the reappearance of the same set of prices as in the past. Thus, there is no simple, deterministic relationship between the past and the future. Instead, the future is inherently uncertain.

This has implications for the formation of expectations. Entrepreneurs cannot study past prices, calculate the numerical probability associated with them and then simply extrapolate these numbers into the future. As a result, mathematical probability is not a suitable foundation on which to base expectations. However, this does not imply that we know nothing about the future. The past can still serve as a guide to action.

Entrepreneurs can still estimate the likelihood of future events. They do so by trying to understand the motivations underlying the valuations of market participants in specific situations in the past. They must peer beneath the veil of past prices and must analyze why market participants acted the way they did under the given conditions.

This analysis of unique, heterogeneous situations as they arose in the past, and not the numerical probabilities associated with past prices, provides the raw material to appraise the valuations and prices that will prevail in the future in a different set of conditions. Thus, in the Austrian framework, expectations do not rest on utilizing numerical probability but on interpreting and understanding the past.

This, as in the case of Keynes, lends them a subjective flavor. Nevertheless, the subjective expectations of entrepreneurs do not coalesce into a homogenous and ever-shifting conventional judgment regarding the future. Instead, these expectations are heterogeneous. Two entrepreneurs may come to different conclusions regarding why individuals behaved the way they did in the past. Moreover, their grounding in the past gives them a basis in reality. Thus, they are not whimsical and subject to random fluctuations.

Subjective Expectations, Profit and Loss, and Market Order in the Austrian Framework

The expectations of entrepreneurs, while subjective, exhibit a discernible pattern. The ability to appraise the future is not distributed evenly across market participants. Instead, in a market economy there are leaders, or those who are better able to formulate a judgment of the future based on the past, and there are others who are less proficient at doing so.

The profit and loss system ensures that the better appraisers are rewarded for their more successful judgments and accumulate capital. Those who are less successful at this endeavor are, meanwhile, gradually stripped of their capital. Thus, they lose influence in shaping the course of the market.

This process of entrepreneurial selection allows for the coordination of the decisions of producers and consumers. It ensures that, at any given moment in time, the best appraisers of the future are in control of making the key production decisions in the economy. Thus, in the Austrian framework, uncertainty and subjective expectations are compatible with market order and stability.

The key to ensuring this is a price system that results from the voluntary decisions of market participants to engage in mutually beneficial exchange. The prices that emerge on the various factor markets must reflect the appraisements of the participating entrepreneurs. Any interference with such a system of prices can interfere with this process of coordination and the order generated by the market.

An artificial reduction of the interest rate that results from an expansion of the money supply is an example of such an intervention. The increase in liquidity interferes with the process of entrepreneurial selection. In fact, it turns this system on its head.

Profits no longer reward those entrepreneurs who allocate scarce resources to the highest ranked ends of the consumers. Instead, they reward those who, misled by the artificially low interest rate, embark on production projects that are unsustainable. Those entrepreneurs who correctly perceive the underlying unsustainability now lose control of the capital at their disposal and gradually lose the ability to influence the course of affairs.

Thus, it is monetary expansion and an artificially low interest rate and not the endemic uncertainty of the future that generates booms and busts and market instability. In a free market, thanks to the profit-loss system, resources are allocated primarily by those who are best at grappling with uncertainty. In a world of artificially cheap credit, however, the very same system rewards those entrepreneurs who engage in the consumption of capital and the malinvestment of scarce resources.



  • 1. Davidson, Paul. 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective." Journal of Economic Perspectives, 5(1): 129-143 and Davidson, Paul. 2009. The Keynes Solution: The Path to Global Prosperity. St. Martin’s Press.
     

  • 2. Skidelsky, Robert. 2010. Keynes: The Return of the Master. Public Affairs.

  • 3. Keynes, John M. 1936. The General Theory of Employment, Interest and Money. Palgrave Macmillan.
     

  • 4. Keynes, John M. 1937. “The General Theory of Employment.” The Quarterly Journal of Economics, 51(2): 209-223.
     

  • 5. Mises, Ludwig v. 1998. Human Action: The Scholar’s Edition. The Mises Institute.
     

  • 6. Lachmann, Ludwig. 1943. “The Role of Expectations in Economics as a Social Science.” Economica, 10(37): 12-23.
     

  • 7. Rothbard, Muray N. 2009. Man, Economy and State. The Mises Institute.


Categories: Current Affairs

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