Economics

"The West has unfortunately already started to go along this path. I know, to many it may sound ridiculous to suggest that the West has turned to socialism, but it's only ridiculous if you only limit yourself to the traditional economic definition of socialism, which says that it's an economic system where the state owns the means of production. This definition in my view, should be updated in the light of current circumstances. Today, states don't need to directly control the means of production to control every aspect of the lives of individuals. With tools such as printing money, debt, subsidies, controlling the interest rate, price controls, and regulations to correct so-called market failures, they can control the lives and fates of millions of individuals. This is how we come to the point where, by using different names or guises, a good deal of the generally accepted ideologies in most Western countries are collectivist variants, whether they proclaim to be openly communist, fascist, socialist, social democrats, national socialists, Christian democrats, neo-Keynesians, progressives, populists, nationalists or globalists. Ultimately, there are no major differences. They all say that the state should steer all aspects of the lives of individuals. They all defend a model contrary to the one that led humanity to the most spectacular progress in its history."

"After Keynes, it was no longer possible to develop economic theory within the old equilibrium framework. The temporal dimension he introduced was there to stay. The next step was logical: the emergence of growth theory as such. Here, however, the inherent limits of orthodox economic theory checked its own spontaneous trajectory. The preoccupation with growth which is the distinguishing feature of post-Keynesian economics should logicallyhave returned it to political economy (and its apex, Marx). For the reproduction of capital was central to Marx’s concerns. But political economy was forbidden, for obvious reasons: it by definition put the socio-economic system as a whole in question."

"Academics who continue to be amused and intrigued with the still-growing literature on the economics of John Maynard Keynes have had to learn to distinguish among the several different schools that draw inspiration from the master. Hyphenated or adjectival Keynesianism includes, for instance, both Neo-Keynesianism, which is based on an assumed wage and price stickiness, and New Keynesianism which attempts to explain the stickiness. Neo- and New Keynesianism share certain methodological presuppositions with Neo- and New Classicism but do not share in the judgment that markets are generally self-equilibrating. Interpreters who prefer to blend Keynes's ideas with those of the old classical school, which featured a cost-based production theory, have adopted "post" as their adjective of choice. … Post Keynesians emphasize Keynes's vision of utopia and the associated reform proposals almost to the exclusion of his diagnosis of depression and prescription of short-run demand-management policies. In fact, standard textbook Keynesianism, whose graphics and equations make the case for monetary and fiscal activism, are repeatedly described in the Davis volume as "bastardized Keynesianism" (Joan Robinson's term) so as to provide an appropriate contrast with the more radical Keynesianism adopted by the volume's contributors. If "post Keynesians" did nothing but embrace these utopian aspects of Keynes, they would more accurately be described as Keynesian fundamentalists."

"I am very unsympathetic to the school that calls itself post-Keynesian. First of all, I have never been able to understand it as a school of thought. I don't see an intellectual connection between a Hyman Minsky, on the one hand, who happens to be one of the oldest friends I have, and someone like Alfred Eichner, on the other, except that they are all against the same thing, namely the mainstream, whatever that is. The other reason why I am not sympathetic is that I have never been able to piece together (I must confess that I have never tried very hard) a positive doctrine. It seems to be mostly a community which nows what it is against but doesn't offer anything very systematic that could be described as a positive theory. I have read many of Paul Davidson's articles and they often do not make sense to me. Some of post-Keynesian price theory comes forth from the belief that universal competition is a bad assumption. I have all my life known that. So I have found it an unrewarding approach and have not paid much attention to it."

"There is a close and important relationship between Kaldor–Hicks efficiency and Posner's assignment rule. By assigning the appropriate entitlement to the party who would have purchased it had it not been for transaction costs, Posner's principle ensures that the entitlement will be secured by a party who would have been able to compensate the loser and still gain by the assaignment."

"[A]mong its many other deficiencies, as spelled out by Mises and his followers, monetarism’s most fundamental flaw is identical to the most fundamental flaw of Keynesian, Post-Keynesian, New Classical, and other theories advanced by macroeconomists during the past seventy or eighty years: not only does the theory leave out critical variables, but it is too simple, being expressed in huge, all-encompassing aggregates that conceal the real economic action taking place within the economic order."

"The Carter Administration, like its predecessors, is not really coping with the causes of unemployment. Under the influence of post-Keynesian conceptions it seeks once again to stimulate the economy through deficit spending and credit expansion, through tax rebates and public works, and talks about raising minimum wages and increasing unemployment compensation. It is resorting to the very measures that create unemployment rather than alleviate it.Throughout the Keynesian and post-Keynesian era, the inexorable laws of economics have not changed. Unemployment still is, and always has been, a cost phenomenon. A worker whose employ ment adds valuable output and is profitable to his employer can always find a job. A worker whose employment inflicts losses is destined to be unemployed."

"Such an emphasis is justified, from an Austrian perspective, because of numerous suggestions made that the two schools would benefit from some sort of “increased intellectual trade.” For instance, no less an authority than John Hicks has “made a case for increased integration” of the viewpoints of John Maynard Keynes and F.A. Hayek (Snowdon, Vane, and Wynarczyk 1994). The Austrians and Post Keynesians, in addition to their criticisms of orthodoxy on the issue of uncertainty, also share non-mainstream perspectives on the importance of monetary institutions (as opposed to strict money neutrality) and transitional states (as opposed to static equilibrium). However, despite their shared recognition of important factors such as ignorance, money, and time, the two schools remain far apart on the nature and significance of these factors within the economic system."

"Davidson's Post Keynesian account suffers from a related problem. Against his enemies, the proponents of efficient markets, Davidson is anxious to assure us that the future is uncertain. But he nevertheless has a mechanical view of what will happen if government spending in a recession takes place as massively as he wishes. Then, he assures us, the economic doldrums will end and all will be well. How does he know that business and consumer confidence will respond so readily to the injection of government money? Evidently, the future is uncertain, but somehow this state of affairs alters when government enters the scene.Why should we believe this? Why assume that business confidence is so rigidly determined? Is it not rather the result of many causes that, if indeed the future is uncertain, cannot be readily specified?"

"Post Keynesian policy recommendations involve limiting the legal ability of individuals to bargain in the marketplace. Such recommendations include traditional demand management and "incomes" policies designed to stimulate expenditures while stifling free wage bargaining (Snowdon, Vane, and Wynarczyk 1994, pp. 367–82). However, a glaring omission in Davidson's chapter is that the link from the Post Keynesian position on uncertainty to the possibility of government action] to "improve the performance of the economy" is never made. Even if one accepts the view of an economy plagued by an all-encompassing uncertainty and entrepreneurs that act without any good reason for doing so, it still does not follow that government is capable of improving upon the results of this economic process.10 In fact, the Post Keynesians' own vision of pervasive uncertainty would seem to lean against such conclusions, for how, in a world of such uncertainty, could the government possibly form policies that are compatible with full employment and price stability? Under uncertainty, there can be no perfect ex ante knowledge of the relationship between actions and particular outcomes. To claim that government can improve upon free-market outcomes by reducing uncertainty, one must somehow infer that the government is able to obtain information that is unavailable to market participants in regard to future prospects. If Davidson has some reason to believe that government does indeed have access to such information, it is not stated here."

"Milton Friedman and Anna Schwartz’s monumental Monetary History of the United States eventually helped to displace Keynesian interpretations with a monetarist interpretation, especially after the stagflation of the 1970s worked to discredit Keynesian macroeconomics."

"Friedman's failure to see that monetarism would ultimately lead to the excesses of Keynesian tinkering in the economy is tragic, but the failure of so many today to recognize this is without excuse."

"Your friend, rather perversely I think, refers to the "disastrous results" that followed the monetary tightening of Volcker and other more monetarist-minded central bankers without even hinting at the facts that that the tightening was aimed at bringing down inflation rates, and that it succeeded remarkably well in doing precisely that. In other words, the tightening did precisely what monetarism said it would do, and what monetarists' critics at the time, wedded to the view that monetary policy was ineffective, and that inflation was entirely caused by OPEC (or by unions, or by anything except monetary policy) insisted it could not do. And yet your friend imagines that the experience proved the monetarists wrong!"

"However, if Friedmanite monetarism was anything, it was naïve about political reality. The fatal flaw of Friedman's famous "monetary rule" of constant growth of the money supply in the 3–4 percent range was premised on the assumption that a machine-like Fed chairman would selflessly pursue the public interest by enforcing Friedman's monetary rule. According to Friedman, Stockman writes, "inflation would be rapidly extinguished if money supply was harnessed to a fixed and unwavering rate of growth, such as 3 percent per annum." This was the fundamental assumption behind monetarism, and it flew in the face of everything the Chicago Schoolers purported to know about political reality. In other words, Friedmanite monetarism was never a realistic possibility, for as Friedman himself frequently said of all other governmental institutions besides the Fed, a government institution that is not political is as likely as a cat that barks like a dog. Friedman's monetary rule, Stockman concludes, was "basically academic poppycock.""

"Monetarism was a powerful force in economic debate for about three decades after Friedman first propounded the doctrine in his 1959 book A Program for Monetary Stability. Today, however, it is a shadow of its former self, for two main reasons.First, when the United States and the United Kingdom tried to put monetarism into practice at the end of the 1970s, both experienced dismal results: in each country steady growth in the money supply failed to prevent severe recessions. The Federal Reserve officially adopted Friedman-type monetary targets in 1979, but effectively abandoned them in 1982 when the unemployment rate went into double digits. This abandonment was made official in 1984, and ever since then the Fed has engaged in precisely the sort of discretionary fine-tuning that Friedman decried. For example, the Fed responded to the 2001 recession by slashing interest rates and allowing the money supply to grow at rates that sometimes exceeded 10 percent per year. Once the Fed was satisfied that the recovery was solid, it reversed course, raising interest rates and allowing growth in the money supply to drop to zero.Second, since the early 1980s the Federal Reserve and its counterparts in other countries have done a reasonably good job, undermining Friedman’s portrayal of central bankers as irredeemable bunglers. Inflation has stayed low, recessions—except in Japan, of which more in a second—have been relatively brief and shallow. And all this happened in spite of fluctuations in the money supply that horrified monetarists, and led them—Friedman included—to predict disasters that failed to materialize. As David Warsh of The Boston Globe pointed out in 1992, "Friedman blunted his lance forecasting inflation in the 1980s, when he was deeply, frequently wrong."

"The world probably would have been much better off had macroeconomics never been devised. Although I have in mind Keynesian macroeconomics above all, I include other types of macro models as well. I even include, somewhat reluctantly, the whole quantity theory approach descended from David Hume to the Friedmanites, now known as monetarism. … In short, among its many other deficiencies, as spelled out by Mises and his followers, monetarism’s most fundamental flaw is identical to the most fundamental flaw of Keynesian, Post-Keynesian, New Classical, and other theories advanced by macroeconomists during the past seventy or eighty years: not only does the theory leave out critical variables, but it is too simple, being expressed in huge, all-encompassing aggregates that conceal the real economic action taking place within the economic order."

"Gore Vidal, the American writer, once described the American economic system as 'free enterprise for the poor and socialism for the rich'. Macroeconomic policy on the global scale is a bit like that. It is Keynesianism for the rich countries and monetarism for the poor."

"In one respect, however, I agree that monetarism was wrong, namely, to the extent that it failed to recognize the need to allow inflation to occur to the extent that it was solely due to falling output or productivity—a case I have argued, along with the symmetrical one for letting prices fall as productivity improves, in my IEA pamphlet Less Than Zero."

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

"Reagan had the opportunity to perform this quick surgery when he came into office. Instead, he turned his economic policies over to the Friedmanite monetarists. Reaganomics is largely monetarism. The monetarist view is that the Fed must only very, very slowly reduce the rate of counterfeiting, and thereby insure a gradual, painless recession with no unemployment or sharp readjustments. The hoax of Reaganomics was that the phony "budget cuts" and "tax cuts" were supposed to provide the razzle-dazzle to give gradualist Friedmanism the time, or the "breathing space," to work its magic. … There were two fundamental reforms the Reagan Administration could have proposed to end our Age of Inflation. First, either the abolition or the brutal checking of the Fed. Nothing was done, since monetarism wishes to give all power to the Fed and then navely urges the Fed to use that power wisely and with self-restraint. Second, the Administration could have followed Reagan's campaign pledge and reinstituted the gold standard. But the Friedmanite monetarists hate gold with a purple passion and wish all power to government fiat money."

"It is indeed true that the reduction of inflation came at a big price—that Volcker's tightening, for instance, succeeded in lowering inflation only in the wake of a severe recession. But this possibility was, first of all, one concerning which monetarists were perfectly aware: they understood the danger that, once inflation, and accelerating inflation especially, came to be anticipated by the public, putting the breaks on money growth would result in prices and wages continuing for some time to rise beyond their new, less-rapidly rising equilibrium values, with a consequent rise in unemployment."

"Although there are deep and abiding differences between Chicago school monetarists and Austrian monetary theorists, there has always been strong agreement among them on one thing: the central importance of the money supply in explaining the purchasing power of money or "price level" in the economy.This does not appear to be the case any longer. The June 2004 cover article of Monetary Trends a publication of the St. Louis Federal Reserve Bank, long a staunch bastion of monetarism, is entitled "How Money Matters." A more accurate description of its contents is "Why Money Doesn’t Matter Anymore." The author, William T. Gavin, emphasizes that "money still matters"—just not its quantity."

"Monetarism means honest money. It means that the money is backed properly by the production of goods and services."

"In the last decade or two there has grown up in this country, principally under the leadership of Professor Milton Friedman, a school calling itself the Monetarists. The leaders sometimes sum up their doctrine in the phrase: "Money matters," and even sometimes in the phrase: "Money matters most.""

"No monetarist, certainly not Friedman, welcomed this side-effect of monetary restraint. But then again, had Friedman been listened to earlier (and had the likes of Paul Samuelson been ignored), things would never have come to this tragic stage. By way of analogy, should we blame those who would end the war in Iraq, and who opposed it all along, for the tragic consequences that are likely to follow any rapid U.S withdrawal?"

"It is with considerable reluctance that I criticize the monetarists, because, though I consider their proposed monetary policy unfeasible, they are after all much more nearly right in their assumptions and prescriptions than the majority of present academic economists. The simplistic form of the quantity theory of money that they hold is not tenable; but they are overwhelmingly right in insisting on how much "money matters," and they are right in insisting that in most circumstances, and over the long run, it is the quantity of money that is most influential in determining the purchasing power of the monetary unit. Other things being equal, the more dollars that are issued, the smaller becomes the value of each individual dollar. So at the moment the monetarists are more effective opponents of further inflation than the great bulk of politicians and even putative economists who still fail to recognize this basic truth."

"I do not mean to suggest that all those who call themselves monetarists make this unconscious assumption that an inflation involves this uniform rise of prices. But we may distinguish two schools of monetarism. The first would prescribe a monthly or annual increase in the stock of money just sufficient, in their judgment, to keep prices stable. The second school (which the first might dismiss as mere inflationists) wants a continuous increase in the stock of money sufficient to raise prices steadily by a "small" amount—2 or 3 per cent a year. These are the advocates of a "creeping" inflation. … I made a distinction earlier between the monetarists strictly so called and the "creeping inflationists." This distinction applies to the intent of their recommended policies rather than to the result. The intent of the monetarists is not to keep raising the price "level" but simply to keep it from falling, i.e., simply to keep it "stable." But it is impossible to know in advance precisely what uniform rate of money-supply increase would in fact do this. The monetarists are right in assuming that in a prospering economy, if the stock of money were not increased, there would probably be a mild long-run tendency for prices to decline. But they are wrong in assuming that this would necessarily threaten employment or production. For in a free and flexible economy prices would be falling because productivity was increasing, that is, because costs of production were falling. There would be no necessary reduction in real profit margins. The American economy has often been prosperous in the past over periods when prices were declining. Though money wage-rates may not increase in such periods, their purchasing power does increase. So there is no need to keep increasing the stock of money to prevent prices from declining. A fixed arbitrary annual increase in the money stock "to keep prices stable" could easily lead to a "creeping inflation" of prices."

"Austrian theory, like the Keynesian and monetarist theories, can give a reason for the start of the Japanese recession. Unlike the other schools, the Austrian policy recommendation of laissez-faire has not been tried."

"Although I realize that Austrian-school economists have themselves been highly critical of monetarism, many of its most fundamental claims are in fact fully consistent with their own understanding of monetary theory. Indeed, back in the 1970s the difference between Austrian and monetarists writings about money seemed trivial compared to the difference between them and the writings of other (broadly "Keynesian") economists. I recall very well how I myself got "deprogrammed" from mainstream thinking about money and inflation by reading Henry Hazlitt's wonderful book, The Inflation Problem, and How to Resolve It . Hazlitt was, of course, a thoroughgoing Misesian. Yet no one who reads his book can fail to note the many crucial similarities between his arguments and those of Milton Friedman concerning the same subject."

"The Austrian description of the boom's timing and cause seems similar to the monetarist theory, but there is an important difference. Both schools agree that the contraction of the monetary expansion triggered the recession, but the monetarists view this contraction as something that should be avoided so that prosperity can continue. In Austrian theory, the contraction is necessary to restore balance to the real economy—the preceding expansion is the problem. This is one reason why the two schools differ in their policy recommendations."

"Accounting for the artificial boom and the consequent bust is not part of Keynesian income-expenditure analysis, nor is it an integral part of monetarist analysis. The absence of any significant relationship between boom and bust is an inevitable result of dealing with the investment sector in aggregate terms. The analytical oversight derives from theoretical formulation in Keynesian analysis and from empirical observation in monetarist analysis. But from an Austrian perspective, the differences in method and substance are outweighed by the common implication of Keynesianism and monetarism, namely, that there is no boom-bust cycle of any macroeconomic significance."

"Moreover, in 'macro', the scholastics, beginning with Buridan and culminating in the sixteenth century Spanish scholastics, worked out an 'Austrian' rather than monetarist supply and demand theory of money and prices, including interregional money flows, and even a purchasing-power parity theory of exchange rates."

"Even more than William Potter, John Law assured the nation that the increased money supply and bank credit would not raise prices, especially under Law's own wise aegis. On the contrary, Law anticipated Irving Fisher and the monetarists by assuring that his paper money inflation would lead to 'stability of value', presumably stability of the price of labour, or the purchasing power of money. … The cataclysm of John Law's experiment and his Mississippi bubble provided a warning lesson to all reflective writers and theorists on money throughout the eighteenth century. As we shall see below, hard-money doctrines prevailed easily throughout the century, from Law's former partner and outwitter Richard Cantillon down to the founding fathers of the American Republic. But there were some who refused to learn any lessons from the Law failure, and whose outlook was heavily influenced by John Law."

"While many of the conflicting claims can be reconciled in terms of the short-run and long-run orientation of Keynesians and monetarists, respectively, and in terms of their contrasting philosophical orientations, neither vision takes into account the workings or failings of the market mechanisms within the investment aggregate.Austrian macroeconomics is set apart from both Keynesianism and monetarism by its attention to the differential effects of interest-rate changes within the investment sector, or—using the Austrian terminology—within the economy's structure of production."

"One of the superb features of Cantillon's Essai is that he was the first, in a pre-Austrian analysis, to understand that money enters the economy as a step-by-step process and hence does not simply increase or raise prices in a homogeneous aggregate.8 Hence he criticized John Locke's naive quantity theory of money—a theory still basically followed by monetarist and neoclassical economists alike—which holds that a change in the total supply of money causes only a uniform proportionate change in all prices. In short, an increased money supply is not supposed to cause changes in the relative prices of the various goods."

"But this brings us to what I consider the fatal flaw in the monetarist prescriptions. If the leader of the school cannot make up his own mind regarding what the most desirable rate of monetary increase should be, what does he expect to happen when the decision is put in the hands of the politicians? … The fatal flaw in the monetarist prescription, in brief, is that it postulates that money should consist of irredeemable paper notes and that the final power of determining how many of these are issued should be placed in the hands of the government—that is, in the hands of the politicians in office. The assumption that these politicians could be trusted to act responsibly, particularly for any prolonged period, seems incredibly naive. The real problem today is the opposite of what the monetarists suggest. It is how to get the arbitrary power over the stock of money out of the hands of the government, out of the hands of the politicians."

"John Wheatley's exclusive emphasis on the money supply and unitary price levels foreshadowed the modern severe monetarist and macroeconomic split between the monetary and real realms. More pointedly, his mechanistic emphasis on the price level also foreshadowed the unfortunate Fisherine, Chicagoite and later monetarist preoccupation with stabilizing the 'price level' and with fanatically opposing any and all changes in such 'levels'. Even in his early books of 1803 and 1807, Wheatley denounced the alleged evils of falling prices as well as of inflation, and indeed claimed that falling prices were even more damaging. Indeed, the influence of Wheatley's early tracts was gravely weakened by his being soft-core and timid in drawing any policy conclusions from his hard-core analysis. Instead of returning to the gold standard, Wheatley could only suggest the withdrawal of note issue powers from the country banks and the redemption of all small bank notes under £5. … [A]s in the case of all too many monetarist and mechanistic quantity theorists, Wheatley began as an ardent hard-money bullionist, and was driven over the years by his frenetic hatred of deflation to wind up as a fiat money inflationist."

"Christiernin, however, was far from a hard-core hard-money man. He defended bank notes as useful, increasing activity and employment, and opposed deflation because, he pointed out, prices and wages were sticky downward. It is doubtful, however, that downward stickiness could last for long in the eighteenth century. But Christiernin's main objection to deflation was that his ideal was not sound, metallic money but a pre-Friedmanite desire to stabilize the value of the daler and make the price level constant. In pursuit of that goal, he urged open market operations by the central bank. Furthermore, again in anticipation of the monetarists, he admittedly preferred inflation to deflation, if that was the choice."

"Goneril: What need you five-and-twenty? Ten? Or five? To follow in a house where twice so many Have a command to tend you? Regan: What need one? Lear: O, reason not the need: our basest beggars Are in the poorest thing superfluous: Allow not nature more than nature needs, Man’s life is cheap as beast’s. Thou art a lady; If only to go warm were gorgeous, ... But, for true need,— You heavens, give me that patience, patience I need!"

"The cultivation and expansion of needs is the antithesis of wisdom. It is also the antithesis of freedom and peace. Every increase of needs tends to increase one’s dependence on outside forces over which one cannot have control, and therefore increases existential fear. Only by a reduction of needs can one promote a genuine reduction in those tensions which are the ultimate causes of strife and war."

"In the last analysis, the question of what are true and false needs must be answered by the individuals themselves, but only in the last analysis; that is, if and when they are free to give their own answer. As long as they are kept incapable of being autonomous, as long as they are indoctrinated and manipulated (down to their very instincts), their answer to this question cannot be taken as their own."

"Andrea: Unglücklich das Land, das keine Helden hat. Galilei:Nein. Unglücklich das Land, das Helden nötig hat."

"For want of a Nail the Shoe was lost; for want of a Shoe the Horse was lost; and for want of a Horse the Rider was lost; being overtaken and slain by the Enemy, all for want of Care about a Horse-shoe Nail."

"The Earth provides enough to satisfy every man's need but not for every man's greed."

"So far no chemist has discovered exchange value either in a pearl or a diamond."

"Economic doctrine is ... not a body of concrete truth but an engine for the discovery of concrete truth, similar say to the theory of mechanics."

"John Stuart Mill 1848 [1965], The Principles of Political Economy Book 3. University of Toronto Press, p. 594"

"The fact that economics is not physics does not mean that we should not aim to apply the same fundamental standards for what constitutes legitimate argument; we can insist that the ultimate criterion for judging economic ideas is the degree to which they help us order and summarize data, that it is not legitimate to try to protect attractive theories from the data."

"[A]lmost every statement which we — or for that matter anyone else — runs afoul of some existing opinion, and, by the very nature of things, most opinions thus far could hardly have been proved or disproved within the field of social theory. It is therefore a great help that all our assertions can be borne out by specific examples from the theory of games and strategy."

"Happily there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete."