It’s not just the economy, stupid.
It’s everything, stupid.

Via How Liberals Distort Austrian Economics – Reason Magazine:

The earliest Austrian economists did not make their mark by advocating free markets and other classical-liberal ideas. They did so by proffering a revolutionary positive (not normative) theoretical approach to understanding how markets work, focusing on value, price, and capital, theory. …

Yglesias thus conflates Austrian economic theory with libertarian political theory. In fairness, he is not alone in committing this error. Many libertarians do the same, which is unfortunate. Austrian economic theory describes how purposive action by fallible human beings unintentionally generates a grand, complex, and orderly market process. An additional ethical step is required to pronounce the market process good. Economic theory per se cannot recommend but only explain markets. This is what Ludwig von Mises meant when he insisted that Austrian economics is value-free. Anyone of any persuasion ought to be able to acknowledge that economic logic indicates that imposing a price ceiling on milk will, other things equal, create a shortage of milk. But that in itself is not an argument against the policy. Mises assumed the policymaker would have thought that result bad, but the economist qua economist cannot declare it such. As Israel Kirzner likes to say, the economist’s job in the policy realm is merely to point out that you cannot catch a northbound train from the southbound platform.

The whole article is thoroughly readable and recommended.

I spoke last night in the general debate on the economy, saying*:

As I rise to speak I am reminded of a quotation from an economist who was a fierce critic of Keynes, a chap called Henry Hazlitt, who said:

“Today is already the tomorrow which the bad economist yesterday urged us to ignore.”

We have heard today some moving accounts of individual and collective suffering in different regions of the country and among different sections of the public. We should be asking ourselves why, oh why, have we been delivered into this misery, which looks as if it will extend over years. Much of the conversation we have heard has been along the lines of aggregates, coarse economic aggregates, and has tended to stray away from individual choices and consequences. We have talked about markets in the abstract, and it is a pity that we seem to have forgotten that markets are a social phenomenon, and that they are about people co-operating. When we talk about markets, we tend to imagine overpaid people, high-frequency trading and those who add nothing to society.

I am reminded of something a constituent said to me recently after hearing a Minister’s speech. He asked, “Why is it that everything always seems to get harder for the working man, whoever is in power?” Indeed, in my constituency unemployment is up by 6.3% among the over-50s, up by 9.5% among those aged 25 to 49 and, scandalously, up by 23% among the young. We have heard that child poverty increased by 200,000 under the previous Government and that it is likely to increase by up to 100,000 under this Government. In the 21st century, that should not be our economic position.

Why are we in this debt crisis? I have just checked the M4 money supply figures—I am sorry to return to aggregates, but needs must. When Labour came to power the money supply was about £700 billion and it is now about £2.1 trillion, so it has tripled over the past 14 years. Unfortunately, most economists talk about money flowing into the economy as if it were water poured into a tank that found its own level immediately, but what if it is like treacle or honey? What if it builds up in piles when poured into the economy and takes a while to spread out? What if that money was loaned into existence in response to individual choices led by the excessively low interest rates pushed by the central bank? What if it was loaned into existence in particular sectors, such as the housing sector, where prices have more than doubled over the same period, and what if it was the financial sector that received the benefit of that new money first? Would that not explain why financiers and bankers are so much wealthier than everyone else, and why economic activity and wealth has been reorientated towards the south-east?

Unfortunately, the idea that money takes some time to move around the economy is lost on most economists, which I very much regret. Why did most economists not see the crisis coming? I put it to the House that it is because their theories of credit are mistaken. They make fundamental errors. Unfortunately I do not have time to go into that, but the fundamental point is that credit is a choice to consume more now and less later. It is about the exchange of present goods for future goods, and co-ordinating the economy through time, and I am afraid that the current intellectual mainstream in economics has dropped us into this desperate mess.

Opposition Members criticise the Thatcher and Reagan years. I think that there was much to applaud in those years, but unfortunately their intellectual underpinning was monetarism, which, like Keynesianism, is infected with those dreadful mistakes. People in the Occupy movement, and our constituents, are right to question the justice of our economic processes. The hon. Member for Penistone and Stocksbridge (Angela Smith) said earlier that the system cannot endure, and I am inclined to agree. I agree that the current debt-based and—I am afraid to say—statist system cannot endure. However, if this system is not to endure, which way should it fall? [Humanity] tried the statist direction in the past and it led to misery and murder. I stand for free markets and free co-operation, but I say this to the House: if this is capitalism, I am not a capitalist.

* (I have made a small correction to the quote and a clarification in [], both of which I have requested from Hansard)

Related reading can be found here:

• Hazlitt, Economics in One Lesson (buy, PDF), chapters 1, 6 and 23 in particular.
• Mises, Human Action (buy, online), especially chapter 20 “Interest, Credit Expansion, and the Trade Cycle”
• Hulsmann, The Ethics of Money Production (buy, PDF).

The Bank of England’s money supply measure M4, which I referred to, may be found here. I used M4 in this context because it is the conventional mainstream measure, but I prefer Kaleidic Economics’ MA for reasons explained on that site (Notes and Coins is too narrow and M4 too broad). MA tells a clear story of where jobs and growth came from and where they went – money supply growth created the illusion of prosperity, broke the banking system and collapsed, taking the illusion with it:

Year on year change in Kaleidic Economics' MA - click for source

Update: Video here. My delivery picked up after about the first minute.

Part I, the price system:

Part II, profit and loss:

See also, Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery (PDF), which is a wonderful rebellion against the over-simplification of neo-classical economics. For example:

Austrian theory, as presented here, places great weight on ‘entrepreneurial discovery’ which enables decentralised decision-makers to recognise when present decisions can be improved upon, and to anticipate future changes in the decisions being made by others. Movements in prices, production methods, choices of outputs, and resource owner incomes generated by entrepreneurial discovery tend to reveal where current allocation patterns are faulty, and to stimulate changes in the corrective direction.

In other words, don’t tinker with the complex, dynamic, creative process that is life in society: it’s not helpful. And if contemporary mainstream theorists had understood the application of this idea to interest rates, we might not be in this mess.

Via The Austrians Were Right, Yet Again, Jeffrey A. Tucker sets out the way it is in the USA:

After three-plus years of floundering around, a consensus has finally arrived that we are back in recession. Growth is not happening. The meager statistical growth of the past few years — no one dared claim it amounted to full recovery — was probably illusory.

He goes on to catalogue the government interventions which have been a failure before quoting some of the many Austrian-School commentators who explained why that would be so. Finally, he writes:

Why does anyone continue to take Krugman and company seriously? In fact, why does anyone take seriously those who warned that unless we tried the Keynesian plan, the world would end and we would miss an opportunity for a glorious recovery? It’s not just the New York Times; it’s also the Wall Street Journal and the entire financial press that continues to be enthralled with the absurdities of Keynesian theory.

Let’s rub it in a bit more: The Austrians were also correct that the boom before 2008 was unsustainable. See “The Bailout Reader.” There is no joy in being right here. It is pathetic really that any informed observer of events would not be correct in light of experience and the common-sense observation that government can’t make prosperity appear no matter how many kabuki dances Treasury officials do.

On the winning team are those who understand sound economics. On the losing team are those who keep thinking that poison can cure the patient. So we say again: the stasis and depression will continue until the system is allowed to correct itself.

I’m glad to see Douglas Carswell MP making the case that the mainstream commentators have comprehensively failed us. I explained some of the reasons why they do so on ConservativeHome in December: they lack an adequate theory of capital, amongst other things.

No single school of thought has an absolute monopoly on correctness, but when one school is consistently closer to correctness than another, maybe it’s time to look at the relevant ideas. For example, given a robust theoretical understanding of money, it’s possible to produce a measure of money supply growth which gives a good basis for analysing monetary effects on the economy:

The rate of change of the supply of Sterling

That astonishing precipice in money supply growth happened before Lehman Brothers’ collapse and the tightening of credit conditions. That doesn’t justify QE, which redistributes wealth towards those who receive the money first, or further artificial lowering of interest rates, which further distorts the structure of the economy. It does illustrate the importance of having the right theoretical equipment when analysing practical events. Without that, how can we expect good quality policy recommendations?

A primer on the Austrian School is here and these are some of the better blogs:

• The Cobden Centre
• The Ludwig von Mises Institute
• The Foundation for Economic Education
• Coordination Problem

This weekend, I am speaking on the financial system at a conference in Bulgaria organised by Istituto Bruno Leoni. The tenor of the conference may be indicated by this abstract of Bruno Leoni’s Freedom and the Law:

The greatest obstacle to rule of law in our time, contends the author of this thought-provoking work, is the problem of overlegislation. In modern democratic societies, legislative bodies are increasingly usurping functions that were and should be exercised by individuals or groups rather than government. The result is an unwieldy surfeit of laws and regulations that by their sheer volume stifle individual freedom.

via the Online Library of Liberty – Freedom and the Law.

Looking forward to it. I’m currently in Vienna airport, en route, and it’s good to be in the city which incubated the Austrian School of social and economic thought.