Category: Austrian economics

Slouching towards depression: The advice of the great Austrian economists goes unheeded

The three most prominent Austrian economists were clear on the correct policy response to an economic crisis – non-intervention:

The appearance of periodically recurring economic crises is the necessary consequence of repeatedly renewed attempts to reduce the “natural” rates of interest on the market by means of banking policy. The crises will never disappear so long as men have not learned to avoid such pump-priming, because an artificially stimulated boom must inevitably lead to crisis and depression… All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates.

~ Ludwig von Mises, The Causes of the Economic Crisis (1931)

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion….

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end…. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

~ Friedrich Hayek, Prices and Production and Other Works (1932)

So now we see, at last, that the business cycle is brought about,
not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play… what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, “laissez-faire” policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue. The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

~ Murray Rothbard, “Economic Depressions: Their Cause and Cure,” 1969

Sadly, the political class, mainstream media, investor class, and a variety of economic charlatans failed to get the memo. Continuing to pursue the current course of relentless and audacious interventions virtually guarantees depression. Mises, Hayek, and Rothbard must be rolling in their graves. Will we ever learn?

Mixing politics and capital preservation

We’d like to say a few words about two topics: economics and politics. (Unfortunately, the two are intertwined.) As our clients are well aware, we believe strongly in having a sound intellectual foundation to help us filter information and base our investment decisions, thus the choice of “bearing” as our company name. Our compass is Austrian economics which essentially sees government intervention as the greatest threat to your wealth. In contrast, nearly every politician who ever walked the earth is an interventionist and a promoter of Santa Claus economics. Not surprisingly, in this country the size and intrusiveness of government has inexorably grown under both Democrats and Republicans.

During this presidential election, we find ourselves on unfamiliar ground: willing to endorse a candidate wholeheartedly. Ron Paul is a long-time student of Austrian economics. How do we know? He has written several books on the subject. He speaks at conferences (we’ve listened to him several times). He mentioned Austrian economics as his inspiration behind getting into politics while Jay Leno’s guest on The Tonight Show.

Ron Paul understands the two greatest threats to your wealth (and liberty): the Fed and war. He is the only candidate who has consistently opposed both on principled grounds. His message is resonating on college campuses, of all places. “Here’s a man who served his country in the Air Force, delivered thousands of babies, has been married to the same woman for 50 years, has never taken a congressional junket, has never voted to raise taxes, has never voted for an unbalanced budget, refused to take a congressional pension, voted against the Iraq War, and returns some of the money given to him to run his office in Washington back to the Treasury every year,” to quote a good friend and local history professor. Yet the mainstream media takes every opportunity to smear him or ignore him – the ultimate endorsement.

Ron Paul is 72 years old. This is a rare opportunity that may not come along for quite some time. Heaven help us if we squander it.

Austrian economics celebrates 25 year anniversary of its rebirth

We just returned from a weekend in NYC, taking the pulse of the Ron Paul campaign and the intellectual movement that spawned it – Austrian economics. The seeds of this movement were planted by Lew Rockwell 25 years ago when he founded the Ludwig von Mises Institute. Joining Rockwell at the beginning were Ron Paul, Mises’ greatest student – Brooklyn-born Murray Rothbard, and Mises’ widow Margit. Margit gave her blessing to the Institute as long as Rockwell promised to dedicate the rest of his life to the cause.

Through serendipity, I discovered the ideas of the Austrian school 18 years ago after watching Lew Rockwell defend Exxon in the Valdez oil spill on CNN’s “Crossfire.” Not too long after, Forbes ran articles about Rothbard and Friedrich Hayek, another of Mises’s students who received the Nobel Prize in 1974. The Austrian movement has grown exponentially since, reaching the mainstream financial press and either heavily influencing or providing the intellectual anchor for such independent financial thinkers as Jim Grant, Bill Fleckenstein, Paul Kasriel, Fred Hickey, Marc Faber and Fortune’s Peter Eavis.

The Mises Institute has always believed ideas matter and that an intellectual shift must take place before a political shift. In his lunch talk, Ron Paul believed the success of the campaign was a sign the seeds planted over the past 25 years were bearing fruit.

Probably the most obvious takeaway from this weekend was the number of bright young people involved, whether the large number of volunteers in the Paul campaign or those attending the conference.

The Paul campaign is across-the-board anti-state, which explains the cold shoulder he’s gotten from the mainstream media. Online, he is by far the most effective of the Republican candidates. In fact, the online response to the CNBC debate shows him winning in a landslide.

His message has been consistent on three fronts: individual liberty, free markets, and anti-imperialism. The failure in Iraq and encroachments on civil liberties with the passage of the Patriot Act have helped. So has the growth of the internet which opened decentralized information channels. If the credit bubble continues to unwind and the economy worsens, his economic message (anti-Fed, anti-Wall Street, anti-tax, anti-spending) will gain further credibility. Ron Paul is an unusual mix of populism with a sound economic foundation which has the MSM baffled. He is Scrooge while the other candidates play Santa Claus. Incredibly, when he speaks to college students he gets the most applause when criticizing the Fed! Students will even burn dollar bills. Bizarre – a politician who actually knows something about money and banking, and isn’t afraid to talk about it. When critics tell him these issues are too complex for the average person, he responds, “how difficult is it to understand counterfeiting?”

The big story here is the Austrian movement and the dedication of one man – Lew Rockwell – to its revival. As state intervention in the economy fails over the next decade, stock in the Austrian school will only go higher… much higher.

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