Macroeconomics Has Lost Its Way

By Alasdair Macleod – Re-Blogged From Silver Phoenix

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

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Why Bad Economic Theories Remain Popular

By Steve Saville – Re-Blogged From http://www.Silver-Phoenix500.com

Ludwig von Mises and Friedrich Hayek, the most prominent “Austrian” economists of the time, anticipated the 1929 stock market crash and correctly predicted the dire consequences of government attempts to artificially stimulate economic growth in the aftermath of the crash. John Maynard Keynes, on the other hand, was totally blindsided by the stock market crash and the economic disaster of the early 1930s. And yet, Keynes’s theories gained enormous popularity during the 1930s whereas the work of Mises and Hayek was largely ignored. Why was it so?

Keynes became popular because he told the politically powerful what they wanted to hear. In particular, he provided power-hungry politicians with intellectual support for the schemes they not only already had in mind, but in many cases were already putting into practice. Despite being riddled with errors, Keynes’ theories also appealed to many economists because the implementation of these theories would confer a lot more influence upon the economics fraternity. The fact is that in a free economy there wouldn’t be much for an economist to do other than teach economics. He/she would certainly never have the opportunity to be involved in the ‘management’ of the economy.

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Rules Still Matter

By Andy Sutton & Graham Mehl – Re-Blogged From Silver Phoenix

While economics is a science and should be treated as such, economic forecasting is both a science and an art at the same time. However, anyone can forecast. Just like anyone can forecast the weather. To do so accurately and furthermore to do so frequently is a true talent. We think of it along the lines of the ability to hit a major league fastball; a gift granted to maybe 1 in 500 or a thousand babies each year. Then add to that the ability to hit a major league fastball for an average of .300 over an entire career and we’re talking a few babies in an entire generation.

Economic forecasting is no different. Anyone can take the classes, read the textbooks by all the proper authors, write the research papers, the thesis, and the dissertation, and still muddle around in the dark for the entirety of a career, issuing bum forecast after bum forecast. We would surmise at that point that there might be a problem with the assumptions going into the exercise of forecasting. Think of the scientist who starts conducting chemistry experiments without knowing Boyle’s Law or the Ideal Gas Law, etc. Or maybe has no clue about Avagadro, let alone the number ascribed to him. Your scientist is going to waste a lot of time and produce nothing of value.

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Regulation – The Hidden Curse

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

Regulations are nearly always introduced with the best intentions. In financial services, they aim to stop unscrupulous brokers and banks from ripping off the public through bad practices. Manufacturers are banned from making products which are dangerous to children, the environment, or which might fail through shoddy workmanship. However, state intervention in commercial matters is based on shaky grounds, consistent with denial of the role and workings of markets, and an overriding desire to interfere.

This contrasts with a true understanding of why free markets work, and the control the consumer exercises over prices and choice, subordinating them to his subjective decisions. Consequently, regulation is based on an unreasoned belief that the individual needs state intervention to ensure standards are maintained, and that bad practices will be eliminated. The incorrect assumption is that free markets encourage unscrupulous manufacturers and service providers to defraud the consumer, when in fact, reputation becomes the paramount relationship in trade.

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Do We Need The Fed?

By Ron Paul – Re-Blogged From http://www.Silver-Phoenix500.com

Stocks rose Wednesday following the Federal Reserve’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future.

At her Wednesday press conference, Federal Reserve Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, then Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases.

Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase. However, others expressed concern that even this small rate increase will weaken the already fragile job market.

These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening.

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Advice to the Prime Minister/President

By Alasdair Macleod – Re-Blogged From http://www.GoldMoney.com

Your country faces a stagnating economy. Let us assume your Prime Minister (or President if that is who holds the executive power) seeks advice from two imaginary economists.

PM: You two economists have different views on what our economic policy should be. What is your advice?

FIRST ECONOMIST (Austrian school): Prime Minister, the reason we face a stagnant economy is your central bank perpetuated the credit cycle by suppressing interest rates when the economy turned down after the banking crisis and lending risk escalated. That has left us with a legacy of under-performing businesses, which should have been left to go bankrupt. Instead they are struggling under a burden of unrepayable debt. Capital is not being reallocated to the new enterprises of the future. The dynamism of free markets has been throttled.

The extra money and credit created by the banking system has not been applied to the real economy. Instead they are fuelling a financial boom in asset prices, which have become dangerously separated from production values.

Eventually, current monetary policy will lead to a fall in the purchasing power of the currency, and the central bank will be forced to raise interest rates to a level that will precipitate the next financial crisis, if the crisis has not already occurred by then. Overvalued assets become exposed to debt liquidation. It happens every time, and if you think the last crisis, which led to the Lehman collapse was bad, on current monetary policies the next one will be much worse, just as Lehman was much worse than the aftermath of the dot-com boom.

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The Declining Interest Rate Cap

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

Believe it or not, one of the topics in economics that confuses macroeconomists is the actual role of interest rates. For the most part they just assume that an interest rate is the cost of money, the price of money, or even the transfer of the fruits of production from producers to idle capitalists. This last assumption appears to have been Keynes’s motivation for his dislike of savers, or rentiers as he disparagingly labelled them. The thought that workers slave for a master who then pays interest to capitalists energises Marxism as well.

In a free market, consumption comes in two basic forms: that which is consumed today, and that which is postponed into the future. Deferred consumption is saving, and Keynes’s target was the saver, even “looking forward to the rentier’s euthanasia” as he put it in his General Theory.

Denying Say’s Law or the law of the markets allowed Keynes, in his own mind anyway, to replace the saver with the state as the principal source of funding for industrial investment. That he came to this conclusion can only be the result of moral principles unsupported by reasoned theory. But once you launch yourself down what amounts to the slipway of prejudice, there is no knowing where it will all end. In Keynes’s case, it produced a following which has become the mainspring of today’s macroeconomic mainstream. We play this down, commonly saying that the reason for discouraging saving is to encourage current consumption. This is an error, and everyone who utters this knows or should know it. All Keynes’s work, from his Tract on Monetary Reform onwards hints at his true desire, to eliminate idle savers as an economic factor.

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