Transcript The Austrian Theory of Economics

It helps to think
Printing Presses are evil
Gold is Real Money
The Austrian Theory
of the Business Cycle
An overview study of the effects of the Federal
Reserve and Modern Implications
Animal Spirits
Ben “Helicopter” In the long run, we are not all
Bernanke
dead- we live in the meantime
After 15 million human beings had perished in the war, the foremost statesmen of the world were
assembled to give mankind a new international order and lasting peace . . . and the British Empires
financial expert [Keynes] was amused by the rustic style of the French Prime Minister’s footwear.
Background
Mises

Built upon
 Smith
 Say

Important People
 Carl
Menger
 Ludwig von Mises Quotes
 Murray Rothbard
 Fredrick Hayek –
Nobel Prize Winner
Rothbard
Lenin’s ideal was to build a nations production effort according to the model of
the post office.
Business Cycle vs Business
Fluctuations

Business Fluctuations
 Entrepreneurs
forecast
 Predict consumer demand
 They try hard, but fail often
 Not a problem – even a “farm depression”

Business Cycle
 General
decline in business activity
He who proclaims the godliness of the State and the infallibility of its priests,
the bureaucrats, is considered as an impartial student of the social sciences.
Business Cycle?
Some businesses are always failing
 Why are there a cluster of errors at the
same time??

 Good

Businessmen are good at forecasting
Why did they fail all at once?
This is an important question!!!
A most popular doctrines is crystallized in the phrase: A public debt is no
burden because we owe it to ourselves. If this were true, then the wholesale
obliteration of the public debt would be an innocuous operation, a mere act of
bookkeeping and accountancy.
Banking

Originally:
 Deposit
money with goldsmith for safe
keeping
 A fee would be paid for this service
 The depositor would receive a certificate
(claim check)
 The certificate traded on par or even a
premium to physical gold
Interventionism begets economic nationalism. It thus kindles the antagonism
resulting in war. An abandonment of economic nationalism is not feasible if
nations cling to interference with business. Free trade in international
relations requires domestic free trade
Federal Reserve
Passed December 23, 1913
 Centralized Banking

 Monopoly
on note issue
 Compelled banks to join
 Fixed minimum reserve ratios

Inherently inflationary
The assertion that there is irrational action is always rooted in an evaluation of a
scale of values different from our own. Whoever says that irrationality plays a role
in human action is merely saying that his fellow men behave in a way that he does
not consider correct.
Fractional Reserve Banking
You go to PNC and deposit your paycheck
as a demand deposit
 A credit is made to your account
 About 90% is loaned out
 Two entities have title to the same money
 The bank can not guarantee your deposit
 IT IS BANKRUPT

It is not in the power of the government to make everybody more prosperous.
Time

Pretend there is $X
 $Y
will be spent on consumption
 $X-Y will be saved


This is the time preference
Prefer future goods with interest to present goods
 Lower


time preference
More investment vs consumption
“Lengthening of the structure of production”
 Converse
is true for high time preference
"inflation is always and everywhere a monetary phenomenon." – Milton Friedman
Natural Rate of Interest

Aggregate time
preference value scale
 Supply
and Demand
 Entrepreneurial Risk
 Expected change in
purchasing power

NOT FISHER EFFECT
The factory owners did not have the power to compel anybody to take a factory
job. They could only hire people who were ready to work for the wages offered to
them…. Their only refuge was the factory. It saved them, in the strict sense of the
term, from death by starvation.
Money Creation

Banks create money
 Modern
day “open market operations”
 Fractional Reserve Banking

New money lowers the rate of interest
 Appears
that the supply of investment funds
increased

People are saving (deferring current consumption)
Mahatma Gandhi expresses a loathing for the devices of the petty West and of devilish
capitalism. But he travels by railroad or by motor car and, when ill, goes for treatment
to a hospital equipped with the most refined instruments of Western surgery.
Effects

Businessmen lengthen the capital structure
 Laymen’s
terms: THEY INVEST
 Prices of capital goods increase
 Shifts investment toward higher ordered capital goods

Farther from consumer goods
 New

funds flow around economy
Increase in wages, prices, rents (INFLATION)
How pale is the art of sorcerers, witches, and conjurors when compared
with that of the government's Treasury Department!
Downward Effects

People return to their old ways
 There
was no real demand for new capital
goods
Demand for CG’s declines
 CG industries must liquidate
“malinvestments”

To assign to everybody his proper place in society is the task of the
consumers. Their buying and abstention from buying is instrumental
in determining each individuals social position.
OH NO – The D Word

Here comes the crisis
 Finally
the end of distortions
 Comes when banks curtail credit expansion

Depression
 Liquidates
malinvestments
 Reestablishes efficient service of genuine consumer
desires
 Is needed to realign the economy
 “Soft Landing” just tries to prevent the inevitable
We owe the origin and development of human society and, consequently, of
culture and civilization, to the fact that work performed under the division
of labor is more productive than when performed in isolation.
Depression #2
Interest rate must go up
 Fall in the price of goods

 Especially

Realignment of labor force
 There

higher ordered CG
will be unemployment
The quicker the realignment
 Quicker
to prosperity
Assistance granted to the unemployed does not dispose of unemployment.
It makes it easier for the unemployed to remain idle.
Depression can not be
prevented

The market adjusts itself
 DON’T

INTERFERE - IT ONLY MAKES IT WORSE
Government can:
 Prevent
or delay liquidation
 Inflate Further
 Minimum Wage
 Maintain Prices
 Stimulate Consumption

Discourage Saving
 Subsidize
Unemployment
Those politicians, professors and union bosses who curse big business are fighting for a lower standard of living.
Don’t Fear the Reaper
(Deflation)

Deflation speeds adjustment
 Increases
reserve ratios
 Increases confidence in money (gold)

Bank runs are good
 Liquidate bankrupt banks
 Banks are inherently bankrupt under Fractional Reserve
Banking

Gov’t should reduce taxes and spending
 Encourage
proper savings and investment
If one rejects laissez faire on account of mans fallibility and moral weakness, one
must for the same reason also reject every kind of government action.
Some Theories of Depression:
Overproduction
Economic desires are always unfulfilled
 “Surplus” stock can always be sold at a
lower price
 Entrepreneurs made poor forecasts

 Why?

Answered by the Austrian theory
Even the manifest futility of the International Monetary Fund does not
deter authors from indulging in dreams about a world bank fertilizing
mankind with floods of cheap credit.
Under consumption
Somehow consumer demand becomes
insufficient during boom
 There will always be consumer demand
i.e.. Food
 Prices will change- Supply=Demand
 Entrepreneurs predict demand
 Others?

If a man drinks wine and not water I cannot say he is acting irrationally. At
most I can say that in his place I would not do so. But his pursuit of
happiness is his own business, not mine.
Conclusion

Government intervention in the market
place:
 Creates
intertemporal misallocations of capital
 Misallocations must be liquidated
 Causes the business cycle
The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and
dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their
feeling of frustration.
A BANK HAS LESS THAN 10% OF YOUR DEPOSITS!!!!!!!!!!!!
The Future
Expect the USD to weaken significantly
 Expect the value of real money (gold) to
go up
 Expect many bank failures

Keynes did not add any new idea to the body of inflationist fallacies, a thousand times refuted by economists… He merely
knew how to cloak the plea for inflation and credit expansion in the sophisticated terminology of mathematical economics.
Sources

This presentation was adapted from
America’s Great Depression by Murray
Rothbard
 All
charts can be found in the online version
 www.mises.org

Quotes are from Ludwig von Mises
 The
Quotable Mises