3 posts tagged “hayek”

(The Financial Boom was Bad [An Example of Not Allowing the Market to Work!])

The prophetic Mr. Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse (2007), talks at the Mises Institute's Austrian Scholars Conference.

I hope you have some gold under your mattress.

Oh, by the way, I wonder. Who has a better track record: Mr. Greenspan----or, maybe I should call him, Mr. Monopoly Man----or, say, the Austrian economists?

Hmm. What did Greenspan say in 2003 about housing and what did the Austrians say? Why, let's time travel back and read, how about, "Housing Bubble: Myth or Reality?" by Dr. Frank Shostak.

Or, even more generally, who has a better track record: The typical Keynesian economists you see on TV----who say they have the answer, even though they did not see this coming----or the Austrians?

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Without Mr. Monopoly Man there would not have been any bubble in housing, as Dr. Thomas Woods says:

The housing bubble could not have arisen without the Federal Reserve. Had people started buying houses at unusually high rates, banks' loanable funds would have begun to deplete, interest rates would have shot up, and that would have been the end of it. That would have discouraged any additional speculation in real estate. But Alan Greenspan and the Fed could create money out of thin air, thus giving the banks more to lend and driving interest rates down, thereby perpetuating the destructive bubble in housing.

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Despite the earnest intentions of those who call for a return to a "gold standard," perhaps they do not realize how severe this economic crisis is and is becoming (thanks to those in power who will not allow the market to rid itself of the various malinvestments that occurred in the artificial "boom"). Government with the gold standard abused it, more or less, from day one. Given its top-down and centralized nature, it was a system that was waiting to be abused. As a matter of fact, the prerequisite to have a gold standard is abuse, fraud, and anti-market interventionism! Because of this, nothing will suffice but the complete privatization of money production.

As Woods points out in his excellent book Meltdown, F. A. Hayek argued that this is exactly what needs to be done (read Hayek's "Toward a Free Market Monetary System"): "I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else. . ."

(At the end of my blog essay "Money and Civilization" I give a quick outline on how this can be done.)

And, do I really need to type this? (OK. I guess I do, given what President Bush on steroids Obama is doing.) Economic progress comes from capital accumulation; not spending. Read Dr. George Reisman's brilliant essay on that here.

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A Note on Deflation and Inflation.

We all have to be careful with the terms inflation and deflation because they are defined differently by different people. But the best definitions are, as is usually the case, the classical definitions: Inflation is nothing but an increase in the money supply via fiduciary media (put bluntly: counterfeiting). Deflation is nothing but the decrease in the money supply. In this very specific sense, therefore, deflation is practically always a statist phenomenon. A recession or depression often sees some fiduciary media extirpated. (This is not a bad thing, for both ethical and economic reasons.) On the other hand, deflation qua the overall fall in prices (we'll call it: "definition 2") is more generally and often a free market phenomenon. (Though, definition 2 often follows definition 1 in a recession or depression.) For instance, imagine that we have a robust economy with a free market money that is by and large gold as its medium of exchange, with no fiduciary media, and thus a banking system based on 100% reserves. Naturally, then, man would see overall deflation in this very specific sense. Gold would of course increase, but extremely slowly as compared to the increase in the amount of goods being produced. Hence, purchasing power would go up, prices would go down, and saving and investment would be encouraged. This would be a magnificent thing. Deflation is not evil. In contrast, inflation qua the overall increase in prices is, ultimately and generally, a statist phenomenon. It would not be something we would see in a free society.

On the Mises Institute's blog Mr. Jeffrey Tucker quotes F.A. Hayek from the newly reissued book Prices and Production [Buy It | Download It]:

“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. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”

(Next month I plan to buy and read Hayek's book.)

The fear that the world as we have known it will completely end if it is not for government bailouts (a.k.a. "welfare for the rich") is ridiculous, even if we assume the very worst. Under the assumption of the very worst, so to speak, it is especially essential and vital that the market allow the failures to take place and to then allow the market to readjust to reality.

That the government, its left-neocon bodyguards, and those who are at the receiving end of the bailouts paint such a picture should not be surprising. All that needs to explain this is that they gain at the expense of the public at large by painting this "world-is-going-to-end" picture. To be sure, this doomsday rhetoric is very common among the statist establishment. Just recall the pictures that were painted by those who demanded a "preemptive" war with Iraq.

However, as great economists like Murray Rothbard have shown, by not allowing the market to readjust to reality, which requires a non-interventionist government policy, it will take that much longer for reality to set in. The economic crisis will thus be deeper and longer than it otherwise would be if the current statist ideas succeed. Since the artificial "boom" resulted in massive misallocations in various temporally unsustainable lines of production, the "bust" must be allowed to happen. (That, in fact, is a "good" thing.) Trying to hold together all of these various bubbles (which were all created by the government) or, worse, trying to inflate them to a larger size is going to only delay the inevitable. It will make that inevitable result only worse. The unsound must be allowed to fall and the sound must be allowed to rise. Resources, capital, and labor must be able to move accordingly. Therefore if one was to ridiculously assume the very, very worst possible ("the world is going to end"), it would only be prudent, and even more so in this case, to let the market readjust and liquidate what it needs to liquidate. The worst thing to do is to follow what Hoover and FDR did. Doing that would truly create a crisis of gloom and doom.

Indeed, if Hoover copied what occurred in the depression of 1920-1921, the economic crash that occurred in 1929 would have ended swiftly. There would have been no Great Depression, which lasted a full decade. The crash in 1920 was by all statistics worse than the first year of the Great Depression and, despite this, it ended very fast. Why? The government did nothing. Notwithstanding the historically erroneous idea that Hoover was a "free market" guy, Hoover instead interfered with the market's adjustment process, and such interference only continued and intensified with FDR.

'We' better not make the same mistake. ...Though I fear that we will.

Another article of note from the Journal of Libertarian Studies is "Hayek on Tradition" by Edward Feser. Download the PDF here.

It has opened a new door for me to explore. I am aware of F. A. Hayek's classic The Road to Serfdom, but have not read it or any of his other works. It turns out Hayek had some good insights in understanding the importance of traditionalism.

Despite Hayek's rejection of the term "conservative" to describe his political views, he defended traditional moral institutions. At the root of his views was a very Burkean outlook. In fact, the author of the article goes as far to say that perhaps Hayek's arguments for tradition are more powerful, systematic, and convincing than Edmund Burke's and his famous Reflection on the Revolution in France.

Here is what Edward Feser writes on tradition:

For it turns out that where rational judgment is concerned, it is precisely the traditionalist, and not his modern critic, who has the upper hand. Tradition, being nothing other than the distillation of centuries of human experience, itself provides the surest guide to determining the most rational course of action.

Also worthy to mention here, in Walter Block's article "Libertarianism and Libertinism," he mentions the role tradition plays. Read the PDF here. As the title of the article suggests, he differentiates libertinism and libertarianism. He also explains why he is personally a cultural conservative, and against the libertine. One aspect of his cultural conservatism is understanding the importance of tradition:

At one time I would have scoffed at the idea of doing something merely because it was traditional, and refraining because it was not. My every instinct would have been to do precisely the opposite of the dictates of tradition.

But that was before I fully appreciated the thought of F. A. Hayek. From reading his many works (for example, Hayek, 1973), I came to realize that traditions which are disruptive and harmful tend to disappear, whether through voluntary change, or more tragically, by the disappearance of societies that act in accordance with them. Presumably, then, if a tradition has survived, it has some positive value, even if we cannot see it. It is a “fatal conceit” (Hayek, 1989) to call into question everything for which good and sufficient reason cannot be immediately given. How else can we justify the “blindly obedient” practice of wearing ties and collars, for example?

Tradition, however, is just a presumption, not a god to be worshipped. It is still reasonable to alter and abolish those traditions which do not work. But this is best done with an attitude of respect, not hostility, for that which has worked for many years.

As the first article on Hayek and tradition says, the "educated modern" attacks tradition as irrational, obsolete, superstitious, et cetera. However, tradition should by default get the first word. It might not always be correct, but tradition should be the first answer before attempting to peer beyond it.

Not only does tradition bring a stable environment for man to interact and a sense of belonging and community, but such is what allows man to thrive. For Hayek, tradition shows some independent intrinsic value.

But, take note, some traditions are superior to others, of course. Hayek did not believe in a cultural relativism or that all cultures are "equal."

For Hayek, tradition, in a nutshell, arrives via spontaneous order. It comes about through a kind of cultural evolution, which results from a competition between traditions in a local and non-local sense. Rules and practices, writes Feser, "evolve from within, as well as compete with other traditions without, over time." As a result, bad traditions tend to die out.

In a sense, there is a market competition at work here. Just as the good companies tend to win and expand and the bad ones do not, the same is generally true with traditions. This process, furthermore, is conservative in nature versus revolutionary because tradition unfolds organically. It is not abrupt.

For a counter-example of tradition, think of the sexual revolution. It turns over tradition. In particular, it has hurt the family institution. The "educated modern" either has not thought about the consequences of this revolution or does not care. I hope this goes without saying, but these days you never know, family is an institution that is the fundamental building block to society. It needs to be in a healthy condition for the future of society. But the sexual revolution has attacked it. And if we look at the results, it has helped alter Western civilization into self-destruction. (Read Pat Buchanan's The Death of the West.)