One life. Live it.

This article originally appeared at cobdencentre.org.

Via Thrifty families accused of prolonging the recession – Times Online, yet more crass Keynesianism:

Anxious families are repaying debts instead of spending in the shops, amid concern over the uncertain economic outlook. The share of income saved in banks and building societies has risen to its highest level in more than a decade, heightening fears that faltering consumer demand could prolong the recession.

But see also Correction, Mr. Bernanke:

It is real savings that fund economic activity. The increase in the pool of real savings is the key behind sustained real economic growth.

These two authors make fundamentally different diagnoses and policy prescriptions because economics is not a positive applied science comparable to, say, physics. There are at least four schools of economic thinking, as Jeffey Tucker explains, but only one school predicted the bust.

This conflict over whether saving promotes recovery really matters: if the wrong side win and policy makers take heed, the recession will be deeper and longer than necessary.

Further reading

• Now it’s looking like V for victory over recession – Times Online — including links to technical explanations of the differences between Keynesian and Austrian macroeconomics.
• Material Evidence – Recovery or crisis?
• Bastiat’s Iceberg: A Sean Corrigan Masterpiece for Christmas
• The Errors of Posen, New MPC Recruit
• The economic paradigm and its shift
• America’s Great Depression, by Murray N. Rothbard

From an interview with ex-IMF economist Gunnar Tómasson:

Does this mean that generations of students have been brought up on nonsense ideology? For this is ideology, of course.

Gunnar:

Yes, nonsensical ideology. The root of the problem goes back to a point made in the mid-19th century by John Stuart Mill, one of the sharpest minds of all time, in an overview article on unresolved methodological aspects of economics. Mill viewed economics as a branch of logic and noted that the least error in the premises of any logical argument would infect with like error the whole superstructure built thereon. A seemingly small error is embedded in the premises of modern monetary economics. Paul Samuelson noted it very briefly in his Ph.D. thesis in 1942 and said it didn’t matter. Today, this small error is destroying the world’s monetary system.

via The End of Mainstream Economics: An Interview with Gunnar Tómasson – Gunnar Tomasson – Mises Institute . The small error infecting today’s mainstream system of economic thinking from its foundations — the error which has caused this crisis — is an inadequate understanding of the source of interest.

Economics is not a natural science. Unlike physics, you cannot reliably say things like:

For a fixed amount of an ideal gas kept at a fixed temperature, P [pressure] and V [volume] are inversely proportional.

(That is, halve the volume and the pressure will double.)

Unfortunately, many economists and other social scientists think otherwise. Some believe the individual actions of large numbers of humans can be treated scientifically. They use terms like “aggregate demand” as if the actions and aspirations of millions of individual people should be averaged. In “Human Action”, von Mises argued otherwise.

The Ludwig von Mises Institute explains further:

The opinions of economists are not random. They can be classified into schools of thought, and to schools within schools. It’s too bad that the radio and television announcers can’t just say this before the economist ever opens his mouth.

“Now we have a word from Professor Jones, who was trained according to the Keynesian tradition, and advocates Keynesian-style policies as dictated by a Keynesian model.”

Or, “Now we turn to Professor Smith, who adheres to a Marxian paradigm that regards capitalism as a moral outrage that is destined to collapse according to the implacable laws of history.”

Or, “Professor Walker is a Chicago-school economist who generally appreciates markets but believes in monetary intervention based on a positivist understanding of economic method.”

But of course the economists themselves do not want to be so classified. They would rather be seen as objective scientists — and anyone who disagrees with them to be guilty of fallacy or to be inadequately familiar with empirical reality.

So we begin to understand the character of the present economic debate: participants state their opinions as facts and deride opponents as fools, when such an approach is not justified. Economics is necessary and difficult, but it does not produce reliable scientific laws.

The Institute has produced a quiz which highlights the differences between the Austrian School and the other key schools of thought (Marxist/institutionalist, Keynesian/neoclassical and Chicago/RatEx). The question is, Are you an Austrian?

read more | digg story | the quiz

The Guardian reports:

The prospects of a bleak Christmas on the high street are rising sharply as a survey out today shows a big fall in consumer spending in spite of lower interest rates and petrol prices.

Downing Street’s hopes for a consumer-led recovery fired by a cut in VAT will also be further damaged by another report that shows hiring intentions by firms have collapsed, adding to fears that unemployment will rise. In the wake of the news of 2,000 job losses on Monday, 1,200 more jobs were under threat yesterday.

Repeat after me: Keynes was wrong.

read more | digg story