Mathematics brought rigor to Economics.
Unfortunately, it also brought mortis.

This post originally appeared at The Cobden Centre.

Following his introduction to Mises, Dr Eamonn Butler has released his latest book, Austrian Economics – A Primer. I recommend it strongly if you want to grasp the fundamentals of the Austrian School of Economics as quickly as possible: at just 118 pages, this pamphlet can be tackled in one sitting.

With Keynesian-inspired policies which ‘spend your way out of recession’ clearly not working, the Austrian School provides a better explanation for recent events than more ‘mainstream’ thinking, whether Keynesian or Monetarist.

Over the course of the book, Eamonn explains the Austrian view of the importance of human agency, values and knowledge in shaping the markets, that is social cooperation. Vitally, it explains the origin of the present cycle of boom and bust: the government’s cheap credit policies, which encouraged people to borrow and discouraged saving, creating an artificial boom that inevitably ended.

For many years, the Austrian School of Economics has been sidelined, but it’s great to see that it is now rising in popularity as people become increasingly critical of the way governments and central banks have handled the economy.

Butler’s systematic and simple yet comprehensive primer is a great addition to a stable which also includes The Austrian School: Market Order and Entrepreneurial Creativity by Jesus Huerta de Soto. While Huerta de Soto’s first-class book is perhaps aimed at a more technical audience, Butler has made the Austrian School highly approachable. A strength shared by both works is to be measured and inclusive where “Austrians” can be confrontational.

Eamonn has made a superb job of outlining this important school of thought and his book should prove a great success. You can buy it here.

Highlights from the past week:

• On Monday, I attended the beginning of Armed Forces Week in Wycombe.
• Budget statement on Tuesday by the Chancellor. I spoke in the debate receiving a warm reception from Prof. Kevin Dowd on the Institute for Economic Affairs’ blog. The first Cobden Centre Austrian School Seminar began at the Institute of Economic Affairs.
• Wednesday saw a major post-budget event by the TaxPayers’ Alliance and the IEA, followed by lunch with Secretary of State for Health, Andrew Lansley, to discuss health reform and Wycombe Hospital.
• Writing for ConservativeHome on Thursday, I explained why economists disagree, why they are so often wrong and where economic thinking goes next. I followed this up on Saturday with some essential market analysis of the crisis from The Cobden Centre.
• On Thursday evening, I explained to like-minded comrades over dinner how we might deliver and entrench a new open society.
• On Friday, I visited the magnificent Skidz project, which delivers motor training for young people, before dropping in on the Schools Linking Network Celebration event at Adams Park. The evening was beautifully rounded off with a wonderful Patron’s summer party in Hambleden Valley.
• Yesterday, I visited Desborough Playden before enjoying Marlow Bottom’s Rose Carnival. I ended the day giving prizes to inspiring young people at the Muslim Education Centre on Totteridge Drive.

And all this reminds me: time to begin a new Google map for my work as MP…

Via The Telegraph.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

But this begs the question, “Why is the money supply dependent on interest rates and government spending?”

It turns out the great economist Irving Fisher told us back in the 1930s: banks create and destroy credit money by granting and calling loans. As Fisher wrote:

Thus our national circulating medium is now at the mercy of loan transactions of banks; and our thousands of checking banks are, in effect, so many irresponsible private mints.

He went on (emphasis mine):

As the system of checking accounts, or check-book money, based chiefly on loans, spreads from the few countries now using it to the whole world, all of its dangers will grow greater. As a consequence, future booms and depressions threaten to be worse than those of the past, unless the system is changed.

Fisher set out the problem in the 1930s and a solution, one which offered the possibility of paying off the national debt and largely ending economic cycles: 100% reserves on demand deposits.  We face the same problem today and we have the same tantalising possibilities.

There are politicians who understand: see for example the speech by the Earl of Caithness in the Banking Bill Debate 2009:

The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.

This is why colleagues and I established The Cobden Centre: we need honest money now to end the crisis and set us on a firm foundation for a sustainable and healthy future economy.

In the course of scheduling a series of articles for The Cobden Centre on the Theory of Money and Credit, I found this quote which seems apposite after our recent spell of “quantitative easing”, the injection of new money into the economy, also known in some circles as inflation of the money supply:

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

Emphasis mine.

On Tuesday, I spoke at the IEA’s The State of the Economy conference, participating in a panel discussion on Fiscal Policy and Government Expenditure with Edmund Conway, Sir John Bourn, Graeme Leach and Danny Alexander MP.

Read more via Steve Baker speaks at the IEA on fiscal policy » The Cobden Centre.

This post originally appeared on cobdencentre.org.

Razeen Sally’s Trade Policy, New Century (PDF) succeeds magnificently in explaining the 21st-century case for free trade and, specifically, unilateral trade liberalisation to the interested, non-specialist reader.

From the IEA home page of the book:

The World Trade Organization (WTO) is failing to deliver the trade liberalisation desperately needed to bring prosperity to developing countries, according to a new study released today by the Institute of Economic Affairs. The WTO is hamstrung by a cumbersome negotiating model and the influence of vocal protectionist lobbies who oppose free markets. At the same time, increasingly popular regional ‘free-trade agreements’ often create as many barriers as they remove by erecting new obstacles to trade with countries outside the blocs concerned.

In the context of policy paralysis at the WTO, the author, LSE trade expert Dr Razeen Sally, argues that governments must take back the initiative from supranational institutions. The priority must be unilateral liberalisation – removing trade barriers to benefit domestic consumers rather than waiting for tortuous international negotiations to be resolved. Governments can also help maximise the benefits of free trade by liberalising their economies and strengthening key institutions.

But what is the imperative for the UK? Surely, European Union citizens enjoy free trade?

The EU is a customs union: we trade ostensibly freely within it, but, as can be seen from the EU’s TARIC database, we find ourselves behind a complex system of tariffs on, for example, wheat, notwithstanding the battle long since won by our inspiration, Richard Cobden, to repeal England’s Corn Laws in the general interest.

And this is the key point: free trade is in the general interest. We may make the political and economic arguments in detail, but the public good is our ultimate aim, and not just at home. Razeen Sally explains (pp179-180, emphasis mine):

Adam Smith fortified his presumption in favour of free trade with an explicit political argument. Protectionism is driven by ‘the clamorous importunity of partial interests’ who capture government and prevent it from having ‘an extensive view of the general good’. Free trade, in contrast, tilts the balance away from rent-seeking producer interests and towards the mass of consumers. It is part of a wider constitutional package to keep government limited, transparent and clean, enabling it to concentrate better on the public good.

As important to Smith and Hume was the moral case for free trade, centred on individual freedom. Individual choice is the engine of free trade, and of progressive commercial society more generally. It sparks what Hume called a ‘spirit of industry’; it results in much better life-chances, not just for the select few but for individuals in the broad mass of society who are able to lead more varied and interesting lives.

To sum up: free trade is of course associated with standard economic efficiency arguments. But the classical-liberal case for free trade is more rounded, taking in the moral imperative of individual freedom and linking it to prosperity. Finally, free trade contributes to, though it does not guarantee, peaceful international relations. Freedom, prosperity, security: this trinity lies at the heart of the case for free trade.

In a short article, I can scarcely do justice to this monograph’s insight in relation to the case for classic liberalism nor to its observations on emerging geopolitics: I heartily recommend the book.

Further reading

• Dr Razeen Sally at the European Centre for International Political Economy (ECIPE)
• The ECIPE blog

I subscribe to the view that our present economic and financial woes were caused by the government. Via The Cobden Centre, you can see we are working on doing something about it:

Through tomorrow and Saturday, ESCP Europe and The Cobden Centre are hosting a Colloquium on Sound Money. The Colloquium is to be directed by Founding Fellow Dr Anthony J Evans and chaired by Corporate Affairs Director, Steve Baker.

A team of academics, banking professionals, entrepreneurs and politicians will meet to discuss:

1. What is Money?
2. The Interest Rate and Intertemporal Coordination
3. The Gold Standard and the Great Depression
4. Deflation and Prosperity
5. Free Banking vs 100% Reserves
6. Central Banking
7. Proposals for Reform

The authors whose work will be under consideration are Carl Menger, Joseph Salerno, Frank Shostak, Ludwig von Mises, Friedrich A Hayek, Joan and Richard James Sweeney, Murray Rothbard, Lawrence Reed, Lawrence H White, George Selgin, Vera Smith, Tim Congdon, Richard Salsman and Jesús Huerta de Soto.

Over at The Cobden Centre, my friend and colleague, financial engineer Gordon Kerr, explains how to destroy the British banking system through the use of derivatives which take advantage of the regulatory system, then sets out four measures to solve the problem:

Nine years ago I worked as a structuring engineer in a three-man team within the investment banking unit of a major British bank. One of us was very bright. He stunned me one day with an idea as to how we could:

Produce immediate (but illusory) substantial profits for our bank, thus ensuring that we would enjoy generous personal remuneration;

Generate ‘virtual’ share capital to boost our bank’s capital reserves;

Leave the actual investment risk exposure and profit expectation of our bank almost exactly the same after the transaction as before it.

Was this idea the kind of rocket science derivative engineering that justifies master of the universe labels for the three of us who designed and implemented it? No: it was extremely simple. Here’s how it worked. We transmuted some loan assets into a derivative transaction for regulatory purposes, whilst leaving the actual loan arrangements unaltered.

US Republican Congressman and former presidential candidate Ron Paul has released End the Fed. Paul explains why we should care about central banks, how we got into the present economic mess and why the Federal Reserve should be abolished. It is a brief and enjoyable read with suggestions for more scholarly reading, some of which are on my bookshelf and within my recommendations for rethinking economics.

Today, we take for granted that a government should have a monopoly on the issue of currency and that the quantity of money should be manipulated by committees of wise men for our own good. There is an extensive body of serious literature which suggests we should should think again.

This is why we have established The Cobden Centre. Please take a moment to subscribe to our email updates.

Watch out for the campaign to audit the Fed. If Ron Paul’s bill becomes law, expect reform of the system of money to enter mainstream debate.

An article by my Cobden Centre colleague, Toby Baxendale, exploring whether manipulating the interest rate can create real wealth:

You often hear politicians and economic commentators say that we must have low interest rates to make sure the price of money is as low as possible to allow people to borrow and thus spend. This is very much the common view whatever your political outlook. The thought behind this is the Keynesian notion that one person’s spending is another person’s income. This is the famous circular flow of income. In a further article, I will address the latter notion. The first notion — whether cheaper money will make for greater prosperity — I will address now.

First of all, I would like to recap how we entrepreneurs create wealth.

Of course, those in debt want low interest rates and those saving want them high, but that is not the question before the country… read more here.