I'm no expert in economics but it seems whenever the idea of capitalism without growth is mentioned, most people prefer to stick their heads in the sand. If, in my naive view, we have cyclic crises because of growth, shouldn't it be natural to focus on an alternative? Is this alternative too hard to implement?
While I hope we can design alternative systems and sustainable, circular economies, the desire for growth may be a hardwired part of the human condition.
Despite all good intentions, the hedonic treadmill is real.
You may like the work of Kate Raworth at Oxford though.
Right, the concern is not unfounded, but maybe a bit counterproductive without context. There are many resources we already exploit very inefficiently, and the sustainability of those is a real worry, but the general carrying capacity of Earth and the solar system is really really vastly huge, we just do very dumb things to ourselves economically speaking. (This is of course the coordination problem, and it's hard, as human behavior is what it is.)
Cycles arise in any complex/dynamic system. It's natural. Managing it should be natural too. Applying dampening on the amplitudes would help. That's basically the mandate of central banks.
Growth is the consequence of population growth and technological progress and the process of specialization (comparative advantages). All three are in pretty much full force, so it's not just growth because greed.
Simple non-growth-based capitalist endeavor that I've been daydreaming about (setting up a supermarket as an example):
The goal of Supermarket(SM) is to provide products to customers and a stable occupation
for those working in the system, not to maximize profit.
SM will only sell to subscribed members.
Whenever someone buys something, they pay only the cost of the product, and the purchase is recorded.
At the end of each month, SM has to balance its finances: costs have to be equalized with income.
We will charge our members an additional % over whatever they bought for this month, just as much as it's needed to balance the books. The more customers we have and the more volume we moved, the less % everyone has to pay.
This way, instead of customers paying a predetermined % margin for each product, they pay as little as it's needed to keep things going. They don't pay for anyone's profit.
Except for the cost equalization, this looks like co-op supermarkets. They seem to work pretty well where I live but the focus on low cost means sometimes they don't have a lot of variety.
I wonder if a government could make this work at the national level, in multiple industries.
> I wonder if a government could make this work at the national level, in multiple industries.
Exactly, a government would have the means to centralize this concept and make it extremely powerful. Instead of just a supermarket working on this principle, the whole distribution network could do it.
I'm looking forward to the torrent of downvotes without any meaningful debate, just cause I suggested that the government does something (bUt tHATs cOmUniSM!?!)
Whats the incentive for government to get food, water, energy, education and shelter right?
If we're missing any one of the five, we have insecurity and chaos usually ensues.
That environment appears to be the soup du jour that allows lobbyist and others to do their bidding and force/sneak in their agendas.
I think it was mentioned, but cycling thru calamity (the business cycle) with F,W,E,E and S until they hit their metrics is becoming a predictable sh!t show.
Here's a perspective shift. Profit is just a term for the owners' wages. Grocery store revenue paid to anyone, employee or owner, are all at risk of not "closing the loop". Thus, profit is not the problem, though concentrating it at the top does usually slow the flow.
In medicine you'd call that cancer, so, yeah... Maybe we need something more sustainable than growth for the sake of growth.
Also if we're globally maxed out, I think an economy is 'temporal zero sum', if that makes sense: you grow now by borrowing but pay back in the next recession?
The beauty of free markets (not sure if I'd call it capitalism) is that even if you're resource zero-sum, free markets can still experience growth, by seeking more efficient redistribution of those resources given individual preferences.
As I understand it, free markets determine preferences based on price. However, the price someone can buy something for includes both their desire to pay and their ability to pay. Therefore, I'm not sure that price is always a good metric for allocating resources.
Do resource zero-sum, free markets still reliably experience growth from the perspective of someone who doesn't view price as a good measurement of value?
If so that would potentially be useful because it could allow more progressive leaning and more libertarian leaning people to find some common ground.
If you pay for something it means that your value for the money is less than the value of the satisfaction you believe you will get out of it. Money does not magically create an equivalence class of value across all items of the same price.
It seems far fetched to assume that people's preferences will change just in the right way that there is always increasing welfare from the same basket of goods.
The problem that I would see is that since wealth tends to be passed on to future generations, without growth it would be difficult for those who currently are not wealthy to ever become wealthy.
This is maybe a similar point, but it also seems to me that the without growth we would need to come up with some alternative to 401ks in order to allow people to build wealth.
People ignore the idea "let's not have growth" because it's a bad idea. Here's a quick two-question quiz to determine whether you're in favor of economic growth:
- Do you believe wealth and income should be distributed equitably around the world?
- Do you want to live on more than USD 17.3k per annum?
If you answered "yes" to both of these questions, then congratulations! You're in favor of economic growth. The average global income per capita is USD 17.3k per annum. If that number goes up, we call that "growth". That is the definition of growth.
Of course you can get into population control, but if the alternative to growth is China-style population control -- necessarily more severe than just handing out birth control -- then bring on the economic crises, I say.
Right, so growth in its current state is a wealth vacuum distributing wealth from high impact places to low impact places. I don’t see how that works as an argument for MORE growth.
Then we should have more growth _and_ a better distribution of the gains from growth. But merely better distribution without growth leaves us in the USD17k scenario.
The original comment point is that there is that growth is needed (but not sufficient) if one wants both conditions he pointed out to happen - which is most people.
>Most places that’s more than enough to live comfortably.
“Comfortably” is certainly a matter of opinion. But that 17.3k is a purchasing-power parity average, targeted at HN’s largely rich-country leadership. The nominal average income per person in the world is 11.4k.
So we have taken the usual cost of living adjustments into account, and the question is, do you want to live on the equivalent of 17.3k per capita US relative to the cost of living in most of the US — somewhere like, say, Pittsburgh?
It’s difficult to try and frame this. The price of any goods with constrained supply (higher education, housing and land) tend to increase to meet people’s ability to pay.
It might make more sense to think in terms of a carbon budget if we are thinking about sustainability.
The major issue with this isn’t growth, it’s landlords and medical care having irrationally high prices based around a return on a good that should have no profit. Fuck growth.
Generally yes, but you've ignored another possibility: lower cost of living such that 17.3k per annum is plenty of money to live on. This is the positive promise of automation - technology advancements could, in theory, push marginal costs for most goods toward zero over time. If these cost savings are passed on to consumers, cost of living should drop accordingly as well. This has only somewhat happened to date because the big winners of productivity increases have been the wealthy/owners of capital.
The problem, of course, is when we talk about things that cannot be produced, like land.
Which goes back to scythe's point: is USD 17k (with US prices) enough to live on, even if we do not have to work? If yes, we do not need growth; if it would be better to have more, then we need growth.
>but you've ignored another possibility: lower cost of living such that 17.3k per annum is plenty of money to live on.
No, that's also growth. A lower "cost" of living requires some reconfiguration of "stuff" in the world so that it provides more utility, i.e., more "value", than it does currently, which we understand to be an increase because it is not currently providing that amount of utility -- i.e., providing for living. That would mean that the total amount of "value" has grown, even if we refer to it using smaller amounts of currency.
I think some people interpret "growth" to mean growth in physical things, like energy consumption or the amount of railroads, but growth also includes psychological variables like satisfaction and physiological variables like health. The world absolutely needs growth. You can't get around that by rewording the question.
Ok, I thought we were talking about economics and thus economic growth. If you want to get into intangible things like general well-being then it's a different discussion entirely.
If the "functioning countries" stay the same while the rest of the world catches up, the net result is -- drum roll, please -- growth! On a global scale! In fact, that would correspond to a global GDP growth of about 300%, or about 47 years at the current global GDP growth rate of 3%.
The more precisely you want to model the distribution, the more you can come up with all sorts of little technicalities. For example, if the rest of the world catches up to the developed countries without significant efficiency gains in many technologies, the environment is extremely screwed. We could go back and forth for days.
The question as posed was: does the world need to grow? The answer is a resounding yes.
You conflate them again! Do you even pay attention to he point I am making?
A developed economy should be stable, not collapse in on itself, if there is a period of no growth. It is disingenuous to try and prove your point by averaging out your income and economic issues with starving kids in Somalia!
Environment is already screwed. It's impossible to counterbalance consumption damage with increase in efficiency because you obviously can't have 300% efficiency.
Electric motor and generator are >90% efficient, most relevant technologies are ~50% and having diminishing returns.
Cycles arise in any complex/dynamic system. It's natural. Managing it should be natural too. Applying dampening on the amplitudes would help. That's basically the mandate of central banks.
Growth is the consequence of population growth and technological progress and the process of specialization (comparative advantages). All three are in pretty much full force, so it's not just growth because greed.
I purposefully haven't said periodicity or something else (maybe I should have added a bit more detail anyway.) The ebb and flow, the up and down the cycling is known, but when and its magnitude is not.
Sure it's chaotic and it probably has scale-free (self-similar or fractional-dimensional) properties at certain regimes, but on the large scale it's pretty well approximated by dynamic systems. (See the micro founded macro models used by central banks.)
Of course, we're getting better at modeling both micro and macro behavior of economies. (The caveat is that the economy also evolves so old models usually get less and less accurate, so job security for econometricians.)
The concept of growth is much misunderstood popularly with the various unsustainable growth memes. Growth isn't just more raw resources and finished goods but also development which makes things more efficient.
Importantly even if the goal is more environmental sustainability it isn't the enemy. Apply growth in productivity and less land is needed for production and more can be preserved. NYC has more value from Central Park than say the area as a gold mine now.
The automation job losses are themselves a sign of it - keeping the same number of employees and adding even more capacity would be wasteful.
To go without growth is to surrender entirely and doom oneself to decline. If everyone is working towards something and not experiencing growth by definition something is wrong - that level of effort should lead to improvement over time even if they are just a chain of masters, journeymen, and apprentices.
The cycles are a result of phantom growth from phantom values - even if the production is real returns may diminish more than expected.
I don't think the notion that 'growth causes recession' is reasonable in any way.
Yes, there are some negative aspects of 'negative growth' in things like deflation which can cause 'downward spirals' but there's no reason we shouldn't be able to grow consistently for the foreseeable future.
I think you're conflating borrowing & spending with profit & loss, which is a separate thing. Borrowing literally just means taking money from other people. On the consumer side this means taking out loans for mortgages, cars, and credit cards. On the business side this means taking out business loans or issuing bonds. Yes, it will impact your balance sheet, but you don't calculate borrowing or spending by looking at profit and loss - these are all separate accounting categories.
What I think the author was getting at is that generally speaking, when you borrow money the "good" thing to do with it is to use it toward economically productive means. You borrow money for a car so you can use the car to drive to work to make more money to spend on things you need. Businesses borrow money from a bank or equity firm so they can build a new factory to produce more things to sell to customers. The problem is when borrowing becomes divorced from economically productive spending. In the housing bubble this took the form of consumers borrowing huge amounts of money they could never afford to pay back not so they could be more productive and spend it on useful things, but rather so they could play at being housing speculators.
Today's big issue is that businesses are borrowing large amounts of money just to do share buybacks [1]. They do this because borrowing money is so cheap right now (interest rates have been absurdly low for the better part of a decade) and they don't actually have good capital investment things to spend their money on any more. So the result is boosted share prices via borrowing, without any corresponding economically productive spending to go along with it. Student loans are another form of this on the consumer side - millions of American students rack up tens of thousands of dollars in debt (they're borrowing money from student loan providers) and then their jobs at graduation suck so they can't afford to actually spend money on productive things - too much of their income goes to paying the interest.
Related concepts you might be interested in: Velocity of money [2], Debt to GDP [3], Debt to equity [4]
I'm not following how that has anything to do with what I said. Profit and loss are values calculated from other financials, not a starting point for them.
Also, what? Net assets = assets - liabilities. That's it. Profit has nothing to do with it unless you're trying to say that after you account for profits and don't spend them on anything else your assets will be increased. Maybe you're referring to something related to Return on Net Assets?
This piece and the book it refers to talk a bit about that idea: Essentially that the diminishing marginal utility of wealth and its growing concentration is creating a problem of inadequate aggregate demand:
By diminishing marginal utility of wealth, I presume you mean there is less incentive to spend money, the more of it you have. Because wealth is increasingly concentrated, less of it gets spent. Monetary velocity never recovered since the financial crisis. In fact, from 2011 onwards, monetary velocity has been at its lowest levels ever recorded.
“Too much borrowing” “too little spending” versus productive investment is the problem with Keynesian economics caused over supply / under pricing of money. Keynes said debt doesn’t matter because it’s someone else’s asset and it self-amortises: Yes, but it creates mal-investment and uneven inflation in favour of those with access to credit e.g. giant financial asset bubbles of 20/21st centuries.
Imagine a doctor stating "a healthy patient's heart rate is 70 bpm" and prescribing ever escalating medication and surgery to try and keep the heart rate at 70 bpm, regardless of age or whether the patient is sleeping or sprinting or recovering from previous surgery. Welcome to the world of central banking.
Central banking - especially in the US - tries to keep inflation and unemployment low. In accordance with Real Business Cycle theory.
The theory says that the central bank should help speed up the economy when it's too slow, and apply the brakes when it's getting too hot.
The problem is that when a recession (inevitably) hits, it'd be good if people had savings, social security, etc. If there were structured ways to unravel over-leveraged investments, and so on, without hurting the people.
The real problem is that monetary policy is only half of the coin, and the other half, fiscal policy, seems to never be enacted according to the theory. Just look at the current state of it, with record budget deficits at the height of a bull run.
Every theory, plan, ideology when meets with real life humans gets transformed. Socialism (state socialism, gulags, holodomor), buddhism (genocie in Myanmar), christianity (from megachurches and westboro baptist church to serious "internal" affairs like sexual abuse), islam (ISIL/ISIS), and the list is probably endless.
There are a lot of people working on solving the fiscal policy issue. And apparently just as many trying to stick to their guns and boneheaded over-simplistic arguments.
> Central banking - especially in the US - tries to keep inflation and unemployment low.
Fiat money (central banking) is the cause of endemic inflation, not the cure. There was no net inflation in the US money from 1800-1914, and pretty much continual inflation since.
The whole point of central banking is to inflate the currency to provide money for the government to spend without needing to raise taxes.
Who cares? Real economic growth is much higher in the continual inflation era than it was before. Inflation is a nothing problem, especially now that inflation is only about 2% a year.
What's the problem with inflation? It seems to me that it is a very effective wealth tax. Almost trivial to collect, and it greatly benefits those with debt including governments.
Since the interest rate is increased to account for inflation, it doesn't benefit debtors who can't just print more money to cover it (like the government does).
> The whole point of central banking is to inflate the currency to provide money for the government to spend without needing to raise taxes.
Bullshit.
The whole point of central banking is to provide price stability (which is predictable, stable, low ~2% inflation), that is to manage the money supply to follow the growth (or shrinking) of the economy.
This comment reads exactly like an anti-vac rant. Person with almost certainly no economics background rants about things they don't understand based on a bunch of YouTube videos and Twitter threads they've watched.
Milton Friedman writes about this in "Monetary History of the United States". He shows with graphs that the monetary stability was greater before the Fed was established (in 1914) than after. The Fed was simply unable to react as quickly as free banking did.
The Austrian school of economics has been advocating for an alternative form of monetary thinking since the 1920s, and despite predicting with astonishing accuracy the mechanics of almost every recession since then nobody takes them seriously because the teachings goes against establishment economists at the Federal Reserve, the IMF, and other central planners (probably related to the fact that they show with logic that recessions and the "business cycle" are to a large extent created by interference by central banks and not a natural consequence of the free market).
What needs to happen after the coming recession is the total abandonment of the notion that centrally planning the price and quantity of money to induce inflation is somehow a necessary policy to ensure that the economic machine functions, and with that the complete abolishment of central banking and a return to either a gold standard or, with recent developments in mind, the adoption of a crypto-backed money supply that cannot be manipulated by governments.
Inflationary monetary policy is the root cause of many of the issues we see today (widespread inequalities, political tension, erosion of purchasing power and, yes, ridiculous startup valuations) we see today, and it is about time that we abandon it.
> probably related to the fact that they show with logic that recessions and the "business cycle" are to a large extent created by interference by central banks and not a natural consequence of the free market.
Huh? Wasn't the economy very cyclical throughout the entire XIX century - before FED, IMF and fiat currency in general were established?
Economic malinvestment will always be a phenomenon that arises naturally in a free market - its a product of imperfect information. Thus, isolated booms and busts are also a natural occurence in an economy as companies that aren't profitable shutdown due to aforementioned judgement errors.
The fundemental question behind the development of Austrian monetary theory is not why there are booms and bust, but why these errors of judgement occur throughout the economy in often times very different sectors at the same time. Turns out this is more often than not because of significant, and crucicially, artificial distortions to the price system that causes resources to be put to use in places where they otherwise would not be, and creates illusions of profits to those who control said resources (individual employees, investors, executivies in companies etc.). Eventually the law of scarcity catches up, and the bust materialises and prices realign themselves (through deflation, which establishment economists are terrified of) to what they should be in a natural price system.
The only way to avoid this inevitable deflationary collapse of prices is to continue the illusion, of course, which is what central banks have been doing since 2008. This makes the eventual realignment much worse though since the price system continues to be distorted to an extent larger than it previously was.
The panics that occured prior to the instatement of the Federal Reserve were more often than not caused by either inflationary policies pursued by the the Treasury and general government interference, as was the case in the panic of 1907 in an effort to save overleveraged banks, or overextension of credit (and consequent overexpansion of the money supply) by fractional-reserve banks. In most cases however, these recessions resolved themselves rather quickly and did not lead to prolonged depressions and recovery periods like we saw in the 1930s during the Great Depression.
Read Friedman and Schwartz' Monetary History of the United States. The Great Depression was so severe because the money supply contracted so suddenly, which led to the largest deflation in US history. Mainstream economists worry about deflation because in the 30s it nearly doomed the entire system.
The single largest quarter of growth in US history was the first quarter of FDR's first term, when he stopped the money supply from contracting further with the bank holiday and stopped defending the gold standard.
It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. There are no set of facts that will ever cause Austrians to admit their theory is wrong.
>It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated.
I think it is amazing to me that economists have redefined the definition of inflation from an increase in the money supply to an increase in the consumer price index. Yes, we haven't seen significant rises in CPI yet, but you cannot deny there has been hyperinflation in other sectors of the economy like equities and real estate. As far as I can tell mainstream economists don't really believe in the Cantillon effect (that inflation happens in a gradual sector-by-sector fashion) so inflation in certain sectors of the economy is unthinkable as, according to them, money is neutral and inflation always happens everywhere at the same time and that for some reason CPI is the best measure for this. This is categorically and logically wrong and does not hold up to critical analysis.
>Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen.
Just because it hasn't happened yet does not mean it won't happen. All fiat currencies have always throughout history, without exception, and always for the same reasons, ended with hyperinflation and the total destruction of the currency. I don't see how the US Dollar possesses properties that renders it immune to monetary laws.
A general rise in the price level is what inflation means and what it's always meant. Even under the quantity theory of money there isn't a one-to-one correspondence between prices and the money supply, because the velocity of money has changed. The Fed and the BoE tried targeting the money supply in the early 80s, and they were unable to control the inflation rate because the velocity jumped around.
We haven't seen hyperinflation in equities or real estate. Both are below their historical highs. Anyway, it's not "inflation" it's an asset bubble -- prices are too high given underlying cash flows. And if investors are so incompetent at investing that an increase in the money supply makes them immediately blow it at the casino, that's a strong argument that we can't trust markets to invest. The Austrian argument leads inexorably to an anti-Austrian conclusion. (I'm not convinced, but I'm not the one who thinks there's necessarily an asset bubble.)
Nobody thinks CPI is automatically the best guess of inflation -- it's just one attempt. Everyone knows that prices don't all go and up and down together, and we have to use a proxy. Anyway, the Fed doesn't use CPI. They use PCE deflator, and they only consider goods where price changes are more persistent (so called "core inflation").
The vast majority of fiat currencies have not experienced hyperinflation so far. In contrast, all gold standard currencies have gone off the gold standard, so the historical evidence points strongly towards fiat, not against.
Austrian economics hasn't been totally ignored. However, the school of thought's aversion to econometrics makes their policy advice self-limiting compared to mainstream/mainline economic theory. This means Austrian methods can occasionally diagnose a potential cause to a given economic malaise, but the methods can't quantify impact nor fully assess hypotheses regarding causal factors.
The second issue with the Austrian school is in the quest for ideological purity, extreme workarounds substitute for what the mainline has already worked through in the decades or centuries prior (e.g. Rothbard vs. utility). I recommend reading over Bryan Caplan's piece on why he is not an Austrian despite working in the famous US Austrian-supporting school, George Mason University.[0]
As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities).
This is way too kind. Once upon a time there was a school of important, economists who were literally Austrian -- Menger, Bohm-Bawerk, Hayek -- who had certain commonalities. Mises and Rothbard turned it into an ideological movement that deliberately did not engage with anyone else's ideas. A healthy intellectual movement doesn't need to be convinced to pay attention to empirical evidence.
>A healthy intellectual movement doesn't need to be convinced to pay attention to empirical evidence.
You misunderstand the reasoning behind the "rejection" of empiricism by Mises and those that followed him.
Austrian theory as formulated by Mises is based on a priori truths about human nature and cannot be falsifiable by evidence. This may sound outlandish when you first hear it especially when one comes from an engineering or natural science background, but there is a very well developed epistemological reasoning for this position that is often overlooked by critics.
The economy is composed of humans who act towards their own personal goals, whether that is to provide for their family, or become a billionare tech founder. This is a highly complex system with an incredible amount of variables (in the case of individual humans, the ordinal scale of preferences is quite literally infinite!). As such, there are no constants that can be inferred with the same level of reliability that we may have in physics like the rate of gravity on planet Earth.
Thus, empirical economic models have a much, much greater margin of error than what we have in the natural sciences, and it is therefore untenable to formulate economic theory based on inherently unreliable foundations.
Instead, as the economy is composed of humans acting and not objects acting, the Austrians look inwards and through a Kantian-esque process of introspection formulate the a priori action axiom ("Human action is purposeful behaviour.") and build their theory using logic based on that axiom - thereby creating a system of knowledge that is unfalsifiable through evidence and is always true.
Which leads to the question: if "because I assume so" is evidence enough for making statements, how do you sort of the conflicting predictions of one theory based on "I assume so" and another based on as much evidence?
To give an example, let's assume that central bankers can make everyone better off by picking the right inflation rate. Therefore it is good to centrally plan the price and quantity of money. The grandparent's comment "let's assume"-based theory concluded that it is bad to centrally plan the price and quantity of money. Which advice should we follow?
I suggest we try an experiment. Appoint an austrian (say, Alan Greenspan) to run the US federal reserve. See if we get improved stability, or the largest recession since the Great Depression.
Ironically, mainstream economics has taken the "purposeful behavior" idea very seriously. Models almost entirely consist of agents acting purposefully. If agents are smart and prices are set by supply and demand, then money doesn't have real effects and a pure quantity theory of money holds. If agents are dumb, then you get mispricing but markets still clear and you don't get unemployment or factories closing. If prices are sticky, then it doesn't matter if agents are smart or dumb -- you get recessions that last unnaturally long unless either the government or the central bank steps in. So New Keynesianism is completely compatible with "human action is purposeful behavior".
But still, the rest of us prefer to test our theories by looking at evidence.
Instead, as the economy is composed of humans acting and not objects acting, the Austrians look inwards and through a Kantian-esque process of introspection formulate the a priori action axiom ("Human action is purposeful behaviour.") and build their theory using logic based on that axiom - thereby creating a system of knowledge that is unfalsifiable through evidence and is always true.
Weird, Marxist-Leninists say the same thing (which is why I'm not an ML).
If you're so inclined, can you comment on what you think Ron Paul was getting at when he used the phrase "Honest Money"? I'd like to hear what an Economist has to say about this.
He uses the term to describe using gold and silver as currency instead of notes issued by a central bank. The ideological point is that people are fallible (or in his view manipulate) and some seemingly independent metric is superior.
This ignores the empirical, historical evidence of the inflationary/deflationary boom/bust whipsaw of the gold standard eras (19th century in particular) which were hugely destructive and ruinous.
More distressingly it also ignores the fact that money is a signaling mechanism and when the amount in circulation is out of relation to economic activity the economy breaks down. Yes, humans have a hard time figuring out what the level of economic activity is, but I am quite sure that gold strikes are not correlated with the production costs of iPhones and t shirts.
>However, the school of thought's aversion to econometrics makes their policy advice self-limiting compared to mainstream/mainline economic theory.
This I agree with, I do think there is tremendous value in using statistics as a way of analysing trends and reinforcing theoretical arguments with empirical data. I'd disagree strongly on the point that Austrian theory is not ignored by mainstream economists though as it seems like many of the underlying assumptions that justifies the Federal Reserve are rather flimsy when examined critically from an a priori Austrian perspective.
>As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities).
Thanks for pointing this out, maybe I wasn't too clear in my post. I elaborate a bit more on this in a comment below, but didn't touch on the neccessity of having an institution able to bail out financial platforms during economic downturns.
I do think that this boils down to the question if we can ethically and legally justify fractional-reserve banking, as bailouts would not be necessary if banks were mandated to keep a 100% reserve on demand deposits. I'm personally a bit split on this issue and so are many other Austrians, with purists adhereing to the Rothbardian view that only full-reserve banking is ethically defensible while others prefer leaving it to the free market to decide. I believe that in the latter case private insurance companies would be more than suitable to provide services to bail out banks who overextend credit, and would also serve as a natural check on said overextension as an insurance company would not be willing to take the risk to insure an irresponsible bank with a tendency to not make careful judgements.
If anything, having a central institution that will bail out banks regardless of what happens is far more dangerous as it introduces a significant moral hazard whereby banks can take significant amount of risk (within applicable regulations, Basel III made it a bit more difficult after 2008) and know that they will be bailed out regardless of what happens. I can't say that this leads to a more stable economy than it would were we to have a full-reserve banking regime, or even a free market where banks choose their own reserve ratios.
> If anything, having a central institution that will bail out banks regardless of what happens is far more dangerous as it introduces a significant moral hazard whereby banks can take significant amount of risk (within applicable regulations, Basel III made it a bit more difficult after 2008) and know that they will be bailed out regardless of what happens. I can't say that this leads to a more stable economy than it would were we to have a full-reserve banking regime, or even a free market where banks choose their own reserve ratios.
Having worked in banking for the better part of the last decade, I agree with your points here. Basel III, CECL, CCAR have forced banks to be extremely conservative their lending, with a de facto scaling the conservativeness in the retail lending standard to their relative size. This being said, the banks that are designated as GSIB at least presently keep an awareness in mind of their sizes. (I worry that won't translate to bank executives over the next decade as those standards relax / roll back).
I can definitely see a situation where standards get relaxed or GSIBs opportunistically find loopholes and get us back to an overleveraged situation like 2008. While the repeal of Glass-Steagall opened up wonderful innovations in finance it also exposes retail clients to substantial risk -- and I don't think that has been substantially remediated.
Why is econometrics important? I went to UChicago during 2007 and econometrics was a major bane of all Econ majors. There was something so anti-pragmatic about reducing irrational economic actors into mere equations.
Meanwhile, did all of that sophisticated math improve the economy or predict the recession or help us out during recovery? It's nice to have hidden mathematical knowledge but is it actually providing benefits or is it just arcana?
Econometrics (aka stats for economists) is how we test models on real data. It seems to often be confused with the idea of using math in econ however ("reducing irrational economic actors into mere equations" seems to me to be economic theory, not something specific about econometrics).
This has two purposes:
- we would like to know which of our models are true, or at least good enough, and which ones are not.
- we would like to know the actual magnitude of things. For instance, if we increase tax rate by 1%, how large will the taxable income reaction be? Decrease by 0%? .25%? 1%? 10%? That's useful information for policy making.
Is this a joke? Econometrics is literally how you test models, quantify changes in the economy, etc... Versus just hand-waving and hoping your assumptions work.
And the reason economics doesn't always help the economy is because politicians almost never listen or shills are paid to advance policy that's detrimental to the economy.
> It's nice to have hidden mathematical knowledge but is it actually providing benefits or is it just arcana?
It depends on the context. Plenty of areas of econometrics have substantial mathurbation, as do all quantitative fields. But the toolkit is not without use.
(1) One common critique (which you leverage here) says that econometrics isn't useful because it doesn't predict business cycles. Macroeconomics divorced from microeconomic foundations[0] is a difficult domain to apply reasonable econometrics -- insufficient data to describe the system completely.
(2) Individuals often present as irrational but populations tend to behave rationally -- meaning that descriptive information or predictive information can be ascertained.[1] This is the central point of ML/predictive analytics applied to human systems (e.g. marketing), which is where the value-add of ML can come from.
(3) Remember the utility of econometrics is to measure economics -- that might be something like a value impact assessment, describing the output of a randomized control trial (for which the Nobel prize[2] was just awarded[3]), and similar. Economics is much bigger than only the macroeconomy.
My understanding is that would create a tragedy of the commons sort of situation where, even if it was in the overall greater good, any country that cannot manipulate their currency would be at a disadvantage to those who can. Particularly in extraordinary situations such as during a war.
Does the Austrian school have a solution or counter point to that argument?
Devaluing the currency to increase exports makes everybody in the country poorer (reduces their purchasing power for all imported goods). It also can't necessarily reduce the price of exports that depend on imports (e.g. importing iron, exporting steel) because the price of the imported components rises, causing an increase in the price of the finished good. Switzerland is an example of a country with a strong currency and citizens with very high purchasing power because of this.
The Austrian school has gotten nothing right, and if it ever became influential it would spell the end of capitalism. If Austrian were allowed to hold sway, Marx' idea that capitalism contains the seeds of its own destruction would prove true.
The Austrian school gets everything right. Like a broken clock is right twice a day, Austrian adherents endlessly predict recession and are eventually right, though anyone who invested based in their theses loses their shirt.
In the sad case that you’re not, what:’s the difference between “infinite divisibility” of a bitcoin and, say (for the sake of argument) joint ownership (perhaps through shareholding of a firm with a single monetary asset) of a single dollar cent?
Your share-holding of the firm can be diluted by an investor that brings $10 to the table. You don't maintain custody of the asset, unless you are using bearer instrument, in which case, your infinite divisibility, security and monetary properties are going to be pretty weak compared to Bitcoin.
You’re splitting hairs here so I might as well go sub-atomic: my default there is no automatic right for one shareholder to out-dilute others, and it would be illogical to use $10 to swamp the possession of a firm whose only asset is a single cent. Besides which, one could easily institute a shareholder agreement that expressly bans such acts.
Not just debt holders. Deflation encourages people to hoard cash, so economic growth slows, wages stay stagnant, investment doesn't happen, and there's far less opportunity for social mobility.
Inflation reduces the value of money over time which encourages investment and economic growth. It also punishes those who hoard cash and rewards anyone who engages in economic activity like say, working or starting a business.
There's a reason that governments support inflationary policies.
You can see this in cryptocurrency. My hypothesis for a long time has been that the 2017 Bitcoin price blow off was actually a hyper-deflationary collapse. Before that peak Bitcoin was starting to see adoption. The peak and its aftermath coincided with the abandonment of Bitcoin by adopters like Coinbase and Steam. Now it's pretty much only for speculation.
As it got adoption its deflationary nature really took off, igniting a speculative bubble that made it useless for actual commerce.
Bitcoin is unbelievably deflationary, much more so than gold. You have a hard limit combined with breakage due to lost keys and hoarding which causes more deflation which causes more hoarding.
This is incorrect. The people (god forbid "saving money") are getting a return on the currency appreciation, and are encouraged to save. The rate of return (risk adjusted) they are getting sets a base for what an investment would need to yield before a rational actor would exchange it for investment purposes. As the total "market cap" grows the % yield of capital gain declines, making investment more enticing and the amount of capital available for investing high. So savers both help the growth of the economy, and benefit from its growth (but at a slower rate than shrewd investors). The less shrewd get weeded out.
The supply of currency is fixed, so as its value grows the rate of return required to make an investment attractive increases. Eventually you only have HODLers. If Bitcoin were the only currency people would be forced to spend it on essentials, but that's it.
A less extreme version of this happened with gold, but gold is far less deflationary than Bitcoin. Bitcoin is absurdly deflationary. I don't think it was intended to be a Ponzi but there is no other outcome.
Of course too much inflation is also very bad. The ideal in most cases is a very slight rate of inflation.
There's a reason everyone abandoned hard currency. No country with hard currency has been able to compete. Flexible currency allows real world economic growth to be prioritized over monetary religion. Wealth is measured in goods, services, knowledge, health, etc. not bank balances.
Of course the Fed system does have huge problems. It sucks, but it sucks less than most alternatives. I'll say stick with it until an actually better alternative is found.
My favorite quote on central banks is from a colleague with a military background: the Fed is a weapon and abolishing it would be akin to unilateral disarmament. Countries with more flexible currencies like China would run right over us. He also pointed out that loose money (Reaganomics) is how we won the cold war. In the end it was not nukes or Star Wars but high deficits.
“All holders” is not a reflection of reality in how markets work. Everybody has their price. Utility of the means of exchange means that you have market participants passing through. It is just economic BS that you would ever get all holds. The price would either go North or South and would change some minds. Or life, and the time value of money would kick in. Gold’s problems had more to do with wars (WW1, WWII, Vietnam) than how good it was at being hard money. Fed is a weapon, and your wealth is it’s ammo.
So many intellectuals are thinking about the wrong ideas.
Return to the basics of trade and charity then focus on the flow of real goods and services as abstracted by the velocity of money from agent to agent.
Fundamentally, economic crashes are caused by dead money that represents concentrated, slow one-way trade patterns. Ideally, money flows across the people with perfect inclusion and closed-loops.
I strongly disagree. Economic transactions are rarely zero-sum.
If I spend $100, I expect to get something back for that. If I spend it on a charity, then I'm supporting something I value -- helping homeless veterans, supporting national parks, promoting gun safety education, whatever it may be -- then I'm benefitting.
As long as I've got the rest taken care of -- food, shelter, internet, and the power bill for my gigantic neon sign of Freddie Mercury -- then practically speaking, that $100 was doing nothing in my pocket, and now, it's actively doing work on my behalf towards doing good in the world.
>economic crashes are caused by dead money that represents concentrated, slow one-way trade patterns. Ideally, money flows across the people with perfect inclusion and closed-loops.
I don't think this is sustainable in a complex world. Maybe a long time ago on small scales this is what economic activity looked like, but today we have huge institutions that lend and borrow across the globe in obligations that span tens of years, and that is reasonable because the kind of things we're building are so complex that those large concentrations of capital and those obligations over time are necessary.
This introduces more risk because it creates asymmetries but it also enables projects of sorts that aren't possible in some 'closed-loop' environment.
No, crashes happen because of a common misunderstanding of some important market variables (or war, or cataclysms like bad weather).
The last crash happened because of systematic soft-fraud all the way through the housing chain from individual borrowers, to lenders, VPs, ratings agencies, bankers, fund managers not doing their jobs, excessive risk etc.. No single issue would have caused a problem but collectively it meant everything was vastly mis-priced.
The next break will happen because of the China slowdown when the world discovers more materially how much China numbers have been fudged for the last 30 years. We know it, but kind of ignore it. China won't crash but it'll slow down more quickly than anticipated which could cause some bubbles to pop where there was that dependency.
Markets can also over-correct.
If most market participants have really good information, ahead of time, and act rationally - there's no need for crashes.
The Canadian economy doesn't go into hard recession - almost all of Canadian 'swings' are due to American pull. Canada has always been focused on 'stability' more than anything else (i.e. freedom, growth, exceptionalism).
An episode of the excellent econtalk podcast [1] discusses a similar theme. There is massive levels of dematerialization happening right now since so much commerce and activity has moved to the internet and general purpose computing devices.
I'm not very convinced. Yes the smartphone has eliminated the need for some of those devices, but there is now a rich market for accessories:
Wireless chargers, cables, battery backups, expensive phone cases, cheap phone cases, selfie sticks, phone lighting accessories, lenses. Plus smartphones create an entire economy of their own in terms of apps.
In Diamond Age by Neal Stephenson, your position in society is reflected in part by the uniqueness of the goods you own.
Poor people have lots of flashy, brand-name merchandise. Wealthy people, on the other hand, own things that are hand-crafted out of natural materials, often bespoke to them. News for the masses is flashy, digital, and tailored to the individual; news for the elites, the top of the top, comes printed on real paper, just like they did in the old days.
It's not that the elites are Luddites, eschewing technology. Rather, it's a very subtle part of their lives, a hint of fennel as opposed to a tablespoon of cayenne.
I suspect this is not unlike where we are going.
Smartphones, tablets, and laptops have swallowed almost every other electronic device, and you don't really even need to upgrade that often. I pick up a new iPhone every four years or so, and mostly just for the camera upgrades (and a fresh battery).
I suspect the trend for desiring high-quality, locally-produced craft goods will accelerate. Raw materials may come from everywhere, but fast fashion is being replaced with sustainable clothing, and I don't see Generation Z being invested in the high-bling party lifestyle that my generation desired.
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[ 2.6 ms ] story [ 97.0 ms ] threadOr ask the hundreds of millions or more who are no longer poor thanks to capitalism.
Edit: typo
There has been quite a history of interventionist policies.
Despite all good intentions, the hedonic treadmill is real.
You may like the work of Kate Raworth at Oxford though.
The big applied questions is how to manage the cyclicality - that arises in any dynamic system anyhow.
When we looked at the most empty spot we could find with the best camera ever built, we saw more universe than we could even have imagined.
Earth, ok, that's somewhat finite. Yet we're literally barely scratching its surface.
Growth is the consequence of population growth and technological progress and the process of specialization (comparative advantages). All three are in pretty much full force, so it's not just growth because greed.
The goal of Supermarket(SM) is to provide products to customers and a stable occupation for those working in the system, not to maximize profit. SM will only sell to subscribed members.
Whenever someone buys something, they pay only the cost of the product, and the purchase is recorded. At the end of each month, SM has to balance its finances: costs have to be equalized with income. We will charge our members an additional % over whatever they bought for this month, just as much as it's needed to balance the books. The more customers we have and the more volume we moved, the less % everyone has to pay.
This way, instead of customers paying a predetermined % margin for each product, they pay as little as it's needed to keep things going. They don't pay for anyone's profit.
https://www.moneycrashers.com/food-coop-costs-benefits-drawb...
- Coop (that's the name) has https://en.wikipedia.org/wiki/Coop_(Switzerland)
- Migros https://en.wikipedia.org/wiki/Migros
I wonder if a government could make this work at the national level, in multiple industries.
Exactly, a government would have the means to centralize this concept and make it extremely powerful. Instead of just a supermarket working on this principle, the whole distribution network could do it.
I'm looking forward to the torrent of downvotes without any meaningful debate, just cause I suggested that the government does something (bUt tHATs cOmUniSM!?!)
If we're missing any one of the five, we have insecurity and chaos usually ensues.
That environment appears to be the soup du jour that allows lobbyist and others to do their bidding and force/sneak in their agendas.
I think it was mentioned, but cycling thru calamity (the business cycle) with F,W,E,E and S until they hit their metrics is becoming a predictable sh!t show.
The real equalization problem involves everyone.
Also if we're globally maxed out, I think an economy is 'temporal zero sum', if that makes sense: you grow now by borrowing but pay back in the next recession?
Totally not an economist though.
Do resource zero-sum, free markets still reliably experience growth from the perspective of someone who doesn't view price as a good measurement of value?
If so that would potentially be useful because it could allow more progressive leaning and more libertarian leaning people to find some common ground.
Whats the difference between the wealthy and the rich? ---Freedom
Whats the difference between the rich and the poor? ---Nothing
Its hard to know if they're talking about AI or the economy when they start using words like manipulation, distortion, smoke-n-mirrors and illusion.
This is maybe a similar point, but it also seems to me that the without growth we would need to come up with some alternative to 401ks in order to allow people to build wealth.
- Do you believe wealth and income should be distributed equitably around the world?
- Do you want to live on more than USD 17.3k per annum?
If you answered "yes" to both of these questions, then congratulations! You're in favor of economic growth. The average global income per capita is USD 17.3k per annum. If that number goes up, we call that "growth". That is the definition of growth.
Of course you can get into population control, but if the alternative to growth is China-style population control -- necessarily more severe than just handing out birth control -- then bring on the economic crises, I say.
By itself this is meaningless. What does it buy where you are? Most places that’s more than enough to live comfortably.
Anyway, money is only useful to decide who starves.
Growth doesn’t matter if it doesn’t reach the people.
The original comment point is that there is that growth is needed (but not sufficient) if one wants both conditions he pointed out to happen - which is most people.
“Comfortably” is certainly a matter of opinion. But that 17.3k is a purchasing-power parity average, targeted at HN’s largely rich-country leadership. The nominal average income per person in the world is 11.4k.
http://m.statisticstimes.com/economy/countries-by-gdp-capita...
So we have taken the usual cost of living adjustments into account, and the question is, do you want to live on the equivalent of 17.3k per capita US relative to the cost of living in most of the US — somewhere like, say, Pittsburgh?
It might make more sense to think in terms of a carbon budget if we are thinking about sustainability.
The problem, of course, is when we talk about things that cannot be produced, like land.
No, that's also growth. A lower "cost" of living requires some reconfiguration of "stuff" in the world so that it provides more utility, i.e., more "value", than it does currently, which we understand to be an increase because it is not currently providing that amount of utility -- i.e., providing for living. That would mean that the total amount of "value" has grown, even if we refer to it using smaller amounts of currency.
I think some people interpret "growth" to mean growth in physical things, like energy consumption or the amount of railroads, but growth also includes psychological variables like satisfaction and physiological variables like health. The world absolutely needs growth. You can't get around that by rewording the question.
This argument refers to developed nations, not Somalia. You could achieve 1,000% growth by stopping war crimes.
Once you restrict you analysis to functioning countries, for example OEDC, you are probably looking at $40k+
https://en.wikipedia.org/wiki/List_of_OECD_countries_by_GDP_...
The more precisely you want to model the distribution, the more you can come up with all sorts of little technicalities. For example, if the rest of the world catches up to the developed countries without significant efficiency gains in many technologies, the environment is extremely screwed. We could go back and forth for days.
The question as posed was: does the world need to grow? The answer is a resounding yes.
A developed economy should be stable, not collapse in on itself, if there is a period of no growth. It is disingenuous to try and prove your point by averaging out your income and economic issues with starving kids in Somalia!
Environment is already screwed. It's impossible to counterbalance consumption damage with increase in efficiency because you obviously can't have 300% efficiency.
Electric motor and generator are >90% efficient, most relevant technologies are ~50% and having diminishing returns.
Growth is the consequence of population growth and technological progress and the process of specialization (comparative advantages). All three are in pretty much full force, so it's not just growth because greed.
(sorry for double posting :| )
A cycle is predictable, a chaotic system is not.
Sure it's chaotic and it probably has scale-free (self-similar or fractional-dimensional) properties at certain regimes, but on the large scale it's pretty well approximated by dynamic systems. (See the micro founded macro models used by central banks.)
Of course, we're getting better at modeling both micro and macro behavior of economies. (The caveat is that the economy also evolves so old models usually get less and less accurate, so job security for econometricians.)
Importantly even if the goal is more environmental sustainability it isn't the enemy. Apply growth in productivity and less land is needed for production and more can be preserved. NYC has more value from Central Park than say the area as a gold mine now.
The automation job losses are themselves a sign of it - keeping the same number of employees and adding even more capacity would be wasteful.
To go without growth is to surrender entirely and doom oneself to decline. If everyone is working towards something and not experiencing growth by definition something is wrong - that level of effort should lead to improvement over time even if they are just a chain of masters, journeymen, and apprentices.
The cycles are a result of phantom growth from phantom values - even if the production is real returns may diminish more than expected.
Yes, there are some negative aspects of 'negative growth' in things like deflation which can cause 'downward spirals' but there's no reason we shouldn't be able to grow consistently for the foreseeable future.
Borrowing/growing debt is a negative balance after spending & earning are added up.
What I think the author was getting at is that generally speaking, when you borrow money the "good" thing to do with it is to use it toward economically productive means. You borrow money for a car so you can use the car to drive to work to make more money to spend on things you need. Businesses borrow money from a bank or equity firm so they can build a new factory to produce more things to sell to customers. The problem is when borrowing becomes divorced from economically productive spending. In the housing bubble this took the form of consumers borrowing huge amounts of money they could never afford to pay back not so they could be more productive and spend it on useful things, but rather so they could play at being housing speculators.
Today's big issue is that businesses are borrowing large amounts of money just to do share buybacks [1]. They do this because borrowing money is so cheap right now (interest rates have been absurdly low for the better part of a decade) and they don't actually have good capital investment things to spend their money on any more. So the result is boosted share prices via borrowing, without any corresponding economically productive spending to go along with it. Student loans are another form of this on the consumer side - millions of American students rack up tens of thousands of dollars in debt (they're borrowing money from student loan providers) and then their jobs at graduation suck so they can't afford to actually spend money on productive things - too much of their income goes to paying the interest.
Related concepts you might be interested in: Velocity of money [2], Debt to GDP [3], Debt to equity [4]
[1] https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...
[2] https://fred.stlouisfed.org/series/M2V#targetText=The%20velo....
[3] https://en.wikipedia.org/wiki/Debt-to-GDP_ratio
[4] https://www.investopedia.com/terms/d/debtequityratio.asp#tar...(,evaluate%20a%20company's%20financial%20leverage.
Also, what? Net assets = assets - liabilities. That's it. Profit has nothing to do with it unless you're trying to say that after you account for profits and don't spend them on anything else your assets will be increased. Maybe you're referring to something related to Return on Net Assets?
It could indicate that households wealth (capital) is too low.
http://bostonreview.net/class-inequality/jonathan-kirshner-w...
https://fred.stlouisfed.org/series/M2V
The theory says that the central bank should help speed up the economy when it's too slow, and apply the brakes when it's getting too hot.
The problem is that when a recession (inevitably) hits, it'd be good if people had savings, social security, etc. If there were structured ways to unravel over-leveraged investments, and so on, without hurting the people.
There are a lot of people working on solving the fiscal policy issue. And apparently just as many trying to stick to their guns and boneheaded over-simplistic arguments.
Fiat money (central banking) is the cause of endemic inflation, not the cure. There was no net inflation in the US money from 1800-1914, and pretty much continual inflation since.
The whole point of central banking is to inflate the currency to provide money for the government to spend without needing to raise taxes.
Is it? I'm not so sure.
Since the interest rate is increased to account for inflation, it doesn't benefit debtors who can't just print more money to cover it (like the government does).
Bullshit.
The whole point of central banking is to provide price stability (which is predictable, stable, low ~2% inflation), that is to manage the money supply to follow the growth (or shrinking) of the economy.
https://www.bridgewater.com/big-debt-crises/Principles-For-N...
Milton Friedman writes about this in "Monetary History of the United States". He shows with graphs that the monetary stability was greater before the Fed was established (in 1914) than after. The Fed was simply unable to react as quickly as free banking did.
What needs to happen after the coming recession is the total abandonment of the notion that centrally planning the price and quantity of money to induce inflation is somehow a necessary policy to ensure that the economic machine functions, and with that the complete abolishment of central banking and a return to either a gold standard or, with recent developments in mind, the adoption of a crypto-backed money supply that cannot be manipulated by governments.
Inflationary monetary policy is the root cause of many of the issues we see today (widespread inequalities, political tension, erosion of purchasing power and, yes, ridiculous startup valuations) we see today, and it is about time that we abandon it.
Huh? Wasn't the economy very cyclical throughout the entire XIX century - before FED, IMF and fiat currency in general were established?
The fundemental question behind the development of Austrian monetary theory is not why there are booms and bust, but why these errors of judgement occur throughout the economy in often times very different sectors at the same time. Turns out this is more often than not because of significant, and crucicially, artificial distortions to the price system that causes resources to be put to use in places where they otherwise would not be, and creates illusions of profits to those who control said resources (individual employees, investors, executivies in companies etc.). Eventually the law of scarcity catches up, and the bust materialises and prices realign themselves (through deflation, which establishment economists are terrified of) to what they should be in a natural price system.
The only way to avoid this inevitable deflationary collapse of prices is to continue the illusion, of course, which is what central banks have been doing since 2008. This makes the eventual realignment much worse though since the price system continues to be distorted to an extent larger than it previously was.
The panics that occured prior to the instatement of the Federal Reserve were more often than not caused by either inflationary policies pursued by the the Treasury and general government interference, as was the case in the panic of 1907 in an effort to save overleveraged banks, or overextension of credit (and consequent overexpansion of the money supply) by fractional-reserve banks. In most cases however, these recessions resolved themselves rather quickly and did not lead to prolonged depressions and recovery periods like we saw in the 1930s during the Great Depression.
The single largest quarter of growth in US history was the first quarter of FDR's first term, when he stopped the money supply from contracting further with the bank holiday and stopped defending the gold standard.
It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. There are no set of facts that will ever cause Austrians to admit their theory is wrong.
I think it is amazing to me that economists have redefined the definition of inflation from an increase in the money supply to an increase in the consumer price index. Yes, we haven't seen significant rises in CPI yet, but you cannot deny there has been hyperinflation in other sectors of the economy like equities and real estate. As far as I can tell mainstream economists don't really believe in the Cantillon effect (that inflation happens in a gradual sector-by-sector fashion) so inflation in certain sectors of the economy is unthinkable as, according to them, money is neutral and inflation always happens everywhere at the same time and that for some reason CPI is the best measure for this. This is categorically and logically wrong and does not hold up to critical analysis.
>Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen.
Just because it hasn't happened yet does not mean it won't happen. All fiat currencies have always throughout history, without exception, and always for the same reasons, ended with hyperinflation and the total destruction of the currency. I don't see how the US Dollar possesses properties that renders it immune to monetary laws.
We haven't seen hyperinflation in equities or real estate. Both are below their historical highs. Anyway, it's not "inflation" it's an asset bubble -- prices are too high given underlying cash flows. And if investors are so incompetent at investing that an increase in the money supply makes them immediately blow it at the casino, that's a strong argument that we can't trust markets to invest. The Austrian argument leads inexorably to an anti-Austrian conclusion. (I'm not convinced, but I'm not the one who thinks there's necessarily an asset bubble.)
Nobody thinks CPI is automatically the best guess of inflation -- it's just one attempt. Everyone knows that prices don't all go and up and down together, and we have to use a proxy. Anyway, the Fed doesn't use CPI. They use PCE deflator, and they only consider goods where price changes are more persistent (so called "core inflation").
The vast majority of fiat currencies have not experienced hyperinflation so far. In contrast, all gold standard currencies have gone off the gold standard, so the historical evidence points strongly towards fiat, not against.
Austrian economics hasn't been totally ignored. However, the school of thought's aversion to econometrics makes their policy advice self-limiting compared to mainstream/mainline economic theory. This means Austrian methods can occasionally diagnose a potential cause to a given economic malaise, but the methods can't quantify impact nor fully assess hypotheses regarding causal factors.
The second issue with the Austrian school is in the quest for ideological purity, extreme workarounds substitute for what the mainline has already worked through in the decades or centuries prior (e.g. Rothbard vs. utility). I recommend reading over Bryan Caplan's piece on why he is not an Austrian despite working in the famous US Austrian-supporting school, George Mason University.[0]
As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities).
[0] https://econfaculty.gmu.edu/bcaplan/whyaust.htm
[1] https://mises.org/wire/economic-busts-can-happen-free-market...
You misunderstand the reasoning behind the "rejection" of empiricism by Mises and those that followed him.
Austrian theory as formulated by Mises is based on a priori truths about human nature and cannot be falsifiable by evidence. This may sound outlandish when you first hear it especially when one comes from an engineering or natural science background, but there is a very well developed epistemological reasoning for this position that is often overlooked by critics.
The economy is composed of humans who act towards their own personal goals, whether that is to provide for their family, or become a billionare tech founder. This is a highly complex system with an incredible amount of variables (in the case of individual humans, the ordinal scale of preferences is quite literally infinite!). As such, there are no constants that can be inferred with the same level of reliability that we may have in physics like the rate of gravity on planet Earth.
Thus, empirical economic models have a much, much greater margin of error than what we have in the natural sciences, and it is therefore untenable to formulate economic theory based on inherently unreliable foundations.
Instead, as the economy is composed of humans acting and not objects acting, the Austrians look inwards and through a Kantian-esque process of introspection formulate the a priori action axiom ("Human action is purposeful behaviour.") and build their theory using logic based on that axiom - thereby creating a system of knowledge that is unfalsifiable through evidence and is always true.
To give an example, let's assume that central bankers can make everyone better off by picking the right inflation rate. Therefore it is good to centrally plan the price and quantity of money. The grandparent's comment "let's assume"-based theory concluded that it is bad to centrally plan the price and quantity of money. Which advice should we follow?
But still, the rest of us prefer to test our theories by looking at evidence.
Weird, Marxist-Leninists say the same thing (which is why I'm not an ML).
https://www.lewrockwell.com/1970/01/ron-paul/bring-back-hone...
https://youtu.be/IF5pwDCpz4s?t=450
This ignores the empirical, historical evidence of the inflationary/deflationary boom/bust whipsaw of the gold standard eras (19th century in particular) which were hugely destructive and ruinous.
More distressingly it also ignores the fact that money is a signaling mechanism and when the amount in circulation is out of relation to economic activity the economy breaks down. Yes, humans have a hard time figuring out what the level of economic activity is, but I am quite sure that gold strikes are not correlated with the production costs of iPhones and t shirts.
This I agree with, I do think there is tremendous value in using statistics as a way of analysing trends and reinforcing theoretical arguments with empirical data. I'd disagree strongly on the point that Austrian theory is not ignored by mainstream economists though as it seems like many of the underlying assumptions that justifies the Federal Reserve are rather flimsy when examined critically from an a priori Austrian perspective.
>As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities).
Thanks for pointing this out, maybe I wasn't too clear in my post. I elaborate a bit more on this in a comment below, but didn't touch on the neccessity of having an institution able to bail out financial platforms during economic downturns.
I do think that this boils down to the question if we can ethically and legally justify fractional-reserve banking, as bailouts would not be necessary if banks were mandated to keep a 100% reserve on demand deposits. I'm personally a bit split on this issue and so are many other Austrians, with purists adhereing to the Rothbardian view that only full-reserve banking is ethically defensible while others prefer leaving it to the free market to decide. I believe that in the latter case private insurance companies would be more than suitable to provide services to bail out banks who overextend credit, and would also serve as a natural check on said overextension as an insurance company would not be willing to take the risk to insure an irresponsible bank with a tendency to not make careful judgements.
If anything, having a central institution that will bail out banks regardless of what happens is far more dangerous as it introduces a significant moral hazard whereby banks can take significant amount of risk (within applicable regulations, Basel III made it a bit more difficult after 2008) and know that they will be bailed out regardless of what happens. I can't say that this leads to a more stable economy than it would were we to have a full-reserve banking regime, or even a free market where banks choose their own reserve ratios.
Having worked in banking for the better part of the last decade, I agree with your points here. Basel III, CECL, CCAR have forced banks to be extremely conservative their lending, with a de facto scaling the conservativeness in the retail lending standard to their relative size. This being said, the banks that are designated as GSIB at least presently keep an awareness in mind of their sizes. (I worry that won't translate to bank executives over the next decade as those standards relax / roll back).
I can definitely see a situation where standards get relaxed or GSIBs opportunistically find loopholes and get us back to an overleveraged situation like 2008. While the repeal of Glass-Steagall opened up wonderful innovations in finance it also exposes retail clients to substantial risk -- and I don't think that has been substantially remediated.
Meanwhile, did all of that sophisticated math improve the economy or predict the recession or help us out during recovery? It's nice to have hidden mathematical knowledge but is it actually providing benefits or is it just arcana?
This has two purposes:
- we would like to know which of our models are true, or at least good enough, and which ones are not.
- we would like to know the actual magnitude of things. For instance, if we increase tax rate by 1%, how large will the taxable income reaction be? Decrease by 0%? .25%? 1%? 10%? That's useful information for policy making.
And the reason economics doesn't always help the economy is because politicians almost never listen or shills are paid to advance policy that's detrimental to the economy.
It depends on the context. Plenty of areas of econometrics have substantial mathurbation, as do all quantitative fields. But the toolkit is not without use.
(1) One common critique (which you leverage here) says that econometrics isn't useful because it doesn't predict business cycles. Macroeconomics divorced from microeconomic foundations[0] is a difficult domain to apply reasonable econometrics -- insufficient data to describe the system completely.
(2) Individuals often present as irrational but populations tend to behave rationally -- meaning that descriptive information or predictive information can be ascertained.[1] This is the central point of ML/predictive analytics applied to human systems (e.g. marketing), which is where the value-add of ML can come from.
(3) Remember the utility of econometrics is to measure economics -- that might be something like a value impact assessment, describing the output of a randomized control trial (for which the Nobel prize[2] was just awarded[3]), and similar. Economics is much bigger than only the macroeconomy.
Notes:
[0] The Lucas critique: https://en.wikipedia.org/wiki/Lucas_critique, Theory before business-cycle measurement: http://faculty.wcas.northwestern.edu/~lchrist/papers/qr1042....
[1] To describe or predict: https://www.stat.berkeley.edu/~aldous/157/Papers/shmueli.pdf
[2] I am aware the prize is not a real Nobel, the name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
[3] List of Economics Nobel Prize winners: https://en.wikipedia.org/wiki/List_of_Nobel_Memorial_Prize_l...
Does the Austrian school have a solution or counter point to that argument?
Ah, so how do we handle that total cap of 21 million bitcoins?
In the sad case that you’re not, what:’s the difference between “infinite divisibility” of a bitcoin and, say (for the sake of argument) joint ownership (perhaps through shareholding of a firm with a single monetary asset) of a single dollar cent?
Inflation reduces the value of money over time which encourages investment and economic growth. It also punishes those who hoard cash and rewards anyone who engages in economic activity like say, working or starting a business.
There's a reason that governments support inflationary policies.
As it got adoption its deflationary nature really took off, igniting a speculative bubble that made it useless for actual commerce.
Bitcoin is unbelievably deflationary, much more so than gold. You have a hard limit combined with breakage due to lost keys and hoarding which causes more deflation which causes more hoarding.
A less extreme version of this happened with gold, but gold is far less deflationary than Bitcoin. Bitcoin is absurdly deflationary. I don't think it was intended to be a Ponzi but there is no other outcome.
Of course too much inflation is also very bad. The ideal in most cases is a very slight rate of inflation.
There's a reason everyone abandoned hard currency. No country with hard currency has been able to compete. Flexible currency allows real world economic growth to be prioritized over monetary religion. Wealth is measured in goods, services, knowledge, health, etc. not bank balances.
Of course the Fed system does have huge problems. It sucks, but it sucks less than most alternatives. I'll say stick with it until an actually better alternative is found.
My favorite quote on central banks is from a colleague with a military background: the Fed is a weapon and abolishing it would be akin to unilateral disarmament. Countries with more flexible currencies like China would run right over us. He also pointed out that loose money (Reaganomics) is how we won the cold war. In the end it was not nukes or Star Wars but high deficits.
Return to the basics of trade and charity then focus on the flow of real goods and services as abstracted by the velocity of money from agent to agent.
Fundamentally, economic crashes are caused by dead money that represents concentrated, slow one-way trade patterns. Ideally, money flows across the people with perfect inclusion and closed-loops.
If I spend $100, I expect to get something back for that. If I spend it on a charity, then I'm supporting something I value -- helping homeless veterans, supporting national parks, promoting gun safety education, whatever it may be -- then I'm benefitting.
As long as I've got the rest taken care of -- food, shelter, internet, and the power bill for my gigantic neon sign of Freddie Mercury -- then practically speaking, that $100 was doing nothing in my pocket, and now, it's actively doing work on my behalf towards doing good in the world.
I don't think this is sustainable in a complex world. Maybe a long time ago on small scales this is what economic activity looked like, but today we have huge institutions that lend and borrow across the globe in obligations that span tens of years, and that is reasonable because the kind of things we're building are so complex that those large concentrations of capital and those obligations over time are necessary.
This introduces more risk because it creates asymmetries but it also enables projects of sorts that aren't possible in some 'closed-loop' environment.
The last crash happened because of systematic soft-fraud all the way through the housing chain from individual borrowers, to lenders, VPs, ratings agencies, bankers, fund managers not doing their jobs, excessive risk etc.. No single issue would have caused a problem but collectively it meant everything was vastly mis-priced.
The next break will happen because of the China slowdown when the world discovers more materially how much China numbers have been fudged for the last 30 years. We know it, but kind of ignore it. China won't crash but it'll slow down more quickly than anticipated which could cause some bubbles to pop where there was that dependency.
Markets can also over-correct.
If most market participants have really good information, ahead of time, and act rationally - there's no need for crashes.
The Canadian economy doesn't go into hard recession - almost all of Canadian 'swings' are due to American pull. Canada has always been focused on 'stability' more than anything else (i.e. freedom, growth, exceptionalism).
1) No more need to buy a dedicated device for photography and video recording
2) No more need to buy a Speech Recognition specialized software
3) No more need to buy a specialized remote control
4) No more need to buy a flashlight
5) No more need to buy a landline wired phone
6) No more need to buy a sound recorder
7) No more need to buy a physical storage (CD, DVD, etc)
8) No more need to buy a ... you can continue
All this affects a lot of companies. Just think how many of them will either run out of business or will stay in a niche consumer mode.
There are only two smartphone operating systems controlled by basically two companies.
There are only few hardware for smartphones companies, like silicon fabs, and several fabless design companies.
Anyway, most of the needs of a typical consumer are satisfied with only one device: The Smartphone
[1] https://www.econtalk.org/andrew-mcafee-on-more-from-less/
Wireless chargers, cables, battery backups, expensive phone cases, cheap phone cases, selfie sticks, phone lighting accessories, lenses. Plus smartphones create an entire economy of their own in terms of apps.
Poor people have lots of flashy, brand-name merchandise. Wealthy people, on the other hand, own things that are hand-crafted out of natural materials, often bespoke to them. News for the masses is flashy, digital, and tailored to the individual; news for the elites, the top of the top, comes printed on real paper, just like they did in the old days.
It's not that the elites are Luddites, eschewing technology. Rather, it's a very subtle part of their lives, a hint of fennel as opposed to a tablespoon of cayenne.
I suspect this is not unlike where we are going.
Smartphones, tablets, and laptops have swallowed almost every other electronic device, and you don't really even need to upgrade that often. I pick up a new iPhone every four years or so, and mostly just for the camera upgrades (and a fresh battery).
I suspect the trend for desiring high-quality, locally-produced craft goods will accelerate. Raw materials may come from everywhere, but fast fashion is being replaced with sustainable clothing, and I don't see Generation Z being invested in the high-bling party lifestyle that my generation desired.
Interesting times, indeed.