Remembering Carl Menger, Founder of the Austrian School of Economics

In commemoration of Carl Menger's 176th birthday (yesterday), here's a lengthy excerpt of BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel and Austrian Economist Richard Ebeling's eulogy at the FFF.org:

Today is Austrian economist, Carl Menger’s, birthday. Born on February 23, 1840, he died on February 26, 1921, at the age of 81. Menger is most well known as one of the first formulators of the theory of marginal utility, separately though in published form almost simultaneously, with William Stanley Jevons and Leon Walras in the early 1870s. But this work also marked the beginning of a uniquely distinct “Austrian School of Economics” based on the theory of subjective value, of which he became viewed as the “founding father.”

Menger is also famous for his theory of “spontaneous order” explaining the emergence and development of social and market institutions, especially money, which may be considered an extension of the earlier contributions of the eighteenth century Scottish Moral Philosophers on the same theme. In addition, he was an active participant in the Austrian government’s commission that put Austria-Hungary on the gold standard in the early 1890s, and was a critic of both socialism and extensive government intervention in economic affairs.

While Carl Menger may have been the founder of the Austrian School, it was through the writings of his two inspired followers, Eugen von Böhm-Bawerk and Friedrich von Wieser, that the name and fame of “Austrian Economics” became widely known worldwide starting in the 1880s and 1890s.

Menger’s Influence on the Austrian Intellectual Milieu

Shortly after Menger’s death in 1921, Wieser wrote a tribute to his master, and explained the intellectual milieu in which Carl Menger’s Grundsätze der Volkswirtschaftsliche [Principles of Economics] appeared on the scene in 1871.

Wieser told that back in those days, students like himself and Böhm-Bawerk did their study of economics through the law faculty at the university, and he thought this gave them a solid and sound grounding to approach and appreciate the institutions of property, contracts, and various market institutions. But it did not provide an understanding of the workings of the market order, rather just an appreciation of its legal basis and prerequisites.

The German economics textbooks assigned were thorough in their own way, but lacked a sufficiently satisfying grounding in the logic of economic value, the emergence of prices, or the working of market competition. Plus, they were tainted by the anti-theoretical prejudices of the dominant German Historical School.

When Wieser and Böhm-Bawerk turned to the “classical economists” for such a theoretical foundation, in the writings of, say, Adam Smith and David Ricardo, they found an amazing analysis of the interactive working and coordination of market competition. But, Wieser said, they lacked a sufficiently “individualistic” approach to dig deep enough to show how out of the evaluations and actions of the individual participants of the market order there logically and empirically emerged the market process and its pricing and coordinating outcomes.

Wieser then said:

In the midst of this distress, we found at hand Menger’s ‘Principles,’ and suddenly all of our doubts were gone. Here was given to us a fixed Archimedean point, from which we found even more; we were given a full Archimedean plane, on which we were able to have a firm foundation and sufficient information to be reassured that we could proceed with confident steps.

Menger once told me how he had come to find this solid foundation. Menger was led to his theory of [subjective] value by the way prices were made in the money market and commodity markets, on which had had to report as a young man in the [Austrian] Civil Service. He saw that the markets were led in determining these prices by facts of demand of which the prevalent theory of prices took no notice. This observation brought him to an examination of human needs and their laws.

Menger’s Commonalities with Other Marginalist Thinkers

What Menger shared in common with the other formulators of marginal utility were the following insights:

First, value is not intrinsic to a good; it does not result simply from a quantity of labor that may have gone into a good’s production, as the classical economists had argued from the time of Adam Smith. Value is based on a human evaluation of the degree of usefulness and importance of a good under conditions of its scarcity.

Second, goods are not evaluated in terms of “classes” or categories of goods, for instance, all “water” versus all “diamonds.” Goods are evaluated in terms of discrete or “marginal” amounts of each particular good used or consumed.

Third, the marginal usefulness or importance each unit of a particular good acquired in succession is less (or diminishes) with each additional unit used or consumed.

Strangely enough, when Menger presented his theory of the diminishing marginal usefulness of units of a good acquired and employed in his Principles, he gave no name to the concept. The term grenznutzen, or “marginal use,” was coined by Friedrich von Wieser and became translated into English and generally accepted as “marginal utility.”

Menger’s Unique and Distinct Approach to Economics

What stands out about Menger’s formulation and development of the “marginal” concept is the unique way he approached the entire subject matter of economic analysis. He grounded the analysis immediately in a clear and insistent methodological individualism. He emphasized that the method of his analysis was to reduce the complex phenomena of the social and market order to their most elementary components – individual choosing and acting men – to explain the logic of their choices and conduct in satisfying their wants, and on that foundation to then analyze the manner in which the interactions of these individual choosers and actors generate the formation and patterns of that wider and more complex social and market order.

All things, Menger continued, are subject to the laws of cause and effect, and thus to satisfy their wants individuals must discover the “laws” of causality in the world in which they live and act, including the discoverable causal connections between useful objects and things that may be utilized to serve and satisfy men’s ends.

From this Menger presented what has been a hallmark of Austrian theory ever since, that is, the idea of stages of production through planned and implemented periods of production. Some means may be found to be directly and relatively immediately useful in fulfilling desired ends, but in many if not most cases, useful things are only found to be indirectly serviceable for those ends.

Thus, for a finished loaf of bread to be available for making a sandwich, there must be an oven and other ingredients (yeast, dough, etc.) out of which the bread may be made and baked. But to have the oven and these other ingredients, iron and other raw materials must have been mined and them manufactured into a useable oven, and the dough required the farming and the harvesting of wheat, etc.

This, then, led Menger to emphasize that the existence and undertaking of such causal processes were inescapably linked to the presence and importance of time in all things that men do. Or as Menger expressed it, “The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming, and these are only conceivable as processes in time.”

Furthermore, once we appreciate and acknowledge the omnipresence of causality and time, we must also admit the reality of uncertainty. Since time includes not only a “past” and a “present” but also a “future,” we must deal with the fact that our ideas about our wants, the efficacy of the means at our disposal and the causalities set in motion “now” for an outcome “later,” may turn out to be wrong.

There exists in all of our actions the possibility that the future may be different than we have anticipated as the experienced events unfold leading to that point on the horizon towards which are actions are directed. Thus, from the beginning the Austrians highlighted the imperfection of human knowledge that makes disappoint and as well as success an ever-present and possible aspect of all that we do.

This way of thinking about and emphasizing the reality of the human decision-making circumstance also resulted in an implicit focus on what today the Austrians refer to as methodological subjectivism. That is, the insight that if we are to understand the logic and meaning in men’s actions we must appreciate how the actors, themselves, evaluate, interpret, and assign meanings to their own actions, the objects of the world that enter their orbit of relevance, and the actions and intentions of others with whom they may directly or indirectly interact.

Menger highlighted that in all planned acts an actor assigns meaning to some objects as useful consumer goods, and to others as indirectly useful producer goods of one type or another that are coordinated by the planner in complementary patterns of use through time-filled periods of production. These designations and causally connected production relationships do not exist or have meaning and relevance outside of a human mind giving meaning and arrangement to the things of the world in a particular way.

The Human Actor is More than a Mathematical Function

The famous Chicago School economist, Frank H. Knight, once remarked, “The entire theory [of marginal utility] is much more convincing in the loose, common-sense formulation of Menger than it is in the more refined mathematical version of Jevons and Walras.”

From the start, Menger did not view man as a mathematical variable reduced to mere quantitative dimensions. He presents and studies individuals in the realities of human circumstances and decisions. Thus, in his own exposition of the relationship between men’s wants and any useable means, he asks when would it matter to a person if some quantity of useful means were acquired or lost, in the context of the actor’s intentions, plans and meanings.

Read the rest here

At the Mises Blog, the great Carl Menger as excerpted from Jörg Guido Hülsmann's Mises: Last Knight of Liberalism

Also at the Mises Blog, the great Ludwig von Mises noted of Carl Menger as the Oracle of the Fall of Europe

Frank Shostak: How Easy Money Drives the Stock Market

Austrian economist Frank Shostak explains at the Mises Institute how easy money (not G-R-O-W-T-H) sends stocks to the moon (bold mine)

In a market economy a major service that money provides is that of the medium of exchange. Producers exchange their goods for money and then exchange money for other goods. 

As production of goods and services increase this results in a greater demand for the services of the medium of exchange (the service that money provides). 

Conversely, as economic activity slows down, the demand for the services of money follows suit. 

Prices and the Demand for Money 

The demand for the services of the medium of exchange is also affected by changes in prices. An increase in the prices of goods and services leads to an increase in the demand for the medium of exchange. 

People now demand more money to facilitate more expensive goods and services. A fall in the prices of goods and services results in a decline in the demand for the medium of exchange. 

Now, take the example where an increase in the supply of money for a given state of economic activity (i.e., production) has taken place. Since there wasn’t any change in the demand for the services of the medium of exchange, this means that people now have a surplus of money or an increase in monetary liquidity. 

No individual wants to hold more money than is required, and an individual can get rid of surplus cash by exchanging the money for goods. 

All the individuals as a group, however, cannot get rid of the surplus of money just like that. They can only shift money from one individual to another individual. 

The mechanism that generates the elimination of the surplus of cash is the increase in the prices of goods. Once individuals start to employ the surplus cash in acquiring goods, it pushes prices higher. 

As a result the demand for the services of money increases. All this in turn works toward the elimination of the monetary surplus. 

Note that what has triggered increases in the prices of goods in various markets is the increase in the monetary surplus or monetary liquidity in response to the increase in the money supply. 

Price Deflation and the Money Supply 

While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit. 

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down. 

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit. 

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices. 

For instance, an increase in liquidity can emerge for a given stock of money and a decline in economic activity. 

A fall in economic activity means that fewer goods are now produced. This means that fewer goods are going to be exchanged, implying a decline in the demand for the services of money. 

Once, however, a surplus of money emerges, it produces exactly the same outcome with respect to the prices of goods and services as the increase in the money supply does. That is, it pushes prices higher. 

An increase in prices in turn works toward the elimination of the surplus of money — the elimination of monetary liquidity. 

Conversely an increase in economic activity while the stock of money stays unchanged produces a monetary deficit. 

This in turn sets in motion the selling of goods thereby depressing their prices. The fall in prices in turn works toward the elimination of the monetary deficit. 

These dynamics can affect a wide variety of markets unequally, but one market in which we can see the relationship between prices and money supply is the stock market.

A Time Lag Between Peak Liquidity and Peak Stocks?

There is a time lag between changes in liquidity, i.e., a monetary surplus, and changes in asset prices such as the prices of stocks.

(The reason for the lag is because when money is injected it doesn’t affect all individuals and hence all markets instantly. There are earlier and later recipients of money.)

For instance, there could be a long time lag between the peak in liquidity and the peak in the stock market.

The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.

Read the rest here

Ludwig von Mises: The Peculiar and Unique Position of Economics

In celebration of this year's Holy week, residents of the Philippines will be having a long weekend.

So before I sign out for the week, here is a recommended read on the importance of economics and its effects to society and politics as articulated by the great Austrian economist Ludwig von Mises excerpted from Human Action (1949), chapter 37, "The Nondescript Character of Economics."

From the Mises Institute: (bold mine)

The Singularity of Economics

What assigns economics its peculiar and unique position in the orbit both of pure knowledge and of the practical utilization of knowledge is the fact that its particular theorems are not open to any verification or falsification on the ground of experience. Of course, a measure suggested by sound economic reasoning results in producing the effects aimed at, and a measure suggested by faulty economic reasoning fails to produce the ends sought. But such experience is always still historical experience, i.e., the experience of complex phenomena. It can never, as has been pointed out, prove or disprove any particular theorem. The application of spurious economic theorems results in undesired consequences. But these effects never have that undisputable power of conviction which the experimental facts in the field of the natural sciences provide. The ultimate yardstick of an economic theorem's correctness or incorrectness is solely reason unaided by experience.

The ominous import of this state of affairs is that it prevents the naïve mind from recognizing the reality of the things economics deals with. "Real" is, in the eyes of man, all that he cannot alter and to whose existence he must adjust his actions if he wants to attain his ends. The cognizance of reality is a sad experience. It teaches the limits on the satisfaction of one's wishes. Only reluctantly does man resign himself to the insight that there are things, viz., the whole complex of all causal relations between events, which wishful thinking cannot alter. Yet sense experience speaks an easily perceptible language. There is no use arguing about experiments. The reality of experimentally established facts cannot be contested.

But in the field of praxeological knowledge neither success nor failure speaks a distinct language audible to everybody. The experience derived exclusively from complex phenomena does not bar escape into interpretations based on wishful thinking. The naïve man's propensity to ascribe omnipotence to his thoughts, however confused and contradictory, is never manifestly and unambiguously falsified by experience. The economist can never refute the economic cranks and quacks in the way in which the doctor refutes the medicine man and the charlatan. History speaks only to those people who know how to interpret it on the ground of correct theories.

Economics and Public Opinion

The significance of this fundamental epistemological difference becomes clear if we realize that the practical utilization of the teachings of economics presupposes their endorsement by public opinion. In the market economy the realization of technological innovations does not require anything more than the cognizance of their reasonableness by one or a few enlightened spirits. No dullness and clumsiness on the part of the masses can stop the pioneers of improvement. There is no need for them to win the approval of inert people beforehand. They are free to embark upon their projects even if everyone else laughs at them. Later, when the new, better, and cheaper products appear on the market, these scoffers will scramble for them. However dull a man may be, he knows how to tell the difference between a cheaper shoe and a more expensive one, and to appreciate the usefulness of new products.

But it is different in the field of social organization and economic policies. Here the best theories are useless if not supported by public opinion. They cannot work if not accepted by a majority of the people. Whatever the system of government may be, there cannot be any question of ruling a nation lastingly on the ground of doctrines at variance with public opinion. In the end the philosophy of the majority prevails. In the long run there cannot be any such thing as an unpopular system of government. The difference between democracy and despotism does not affect the final outcome. It refers only to the method by which the adjustment of the system of government to the ideology held by public opinion is brought about. Unpopular autocrats can only be dethroned by revolutionary upheavals, while unpopular democratic rulers are peacefully ousted in the next election.

The supremacy of public opinion determines not only the singular role that economics occupies in the complex of thought and knowledge. It determines the whole process of human history. 

The customary discussions concerning the role the individual plays in history miss the point. Everything that is thought, done and accomplished is a performance of individuals. New ideas and innovations are always an achievement of uncommon men. But these great men cannot succeed in adjusting social conditions to their plans if they do not convince public opinion.

The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.

Voluntary Exchange vs. Government Mandates: Why State ownership is not real ownership

At the Mises Institute, Austrian economist Patrick Barron eloquently explains the difference between individual (voluntary) transactions and government interventions or mandates: (italics original; bold mine)

The basic unit of all economic activity is the uncoerced, free exchange of one economic good for another. Moreover, the decision to engage in exchange is based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange, each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government.

The exchange will take place when each party values the good to be received more than the good that he gives up. The expected — but by no means guaranteed — result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process. 

Third Parties Cannot Create Value by Forcing Exchange 

Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party's subjective preference is ordinal only. 

This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange, and because the volume and dollar amounts of future exchanges are independent of past exchanges. 

One Example: The Case of Ethanol 

Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today: subsidized, protected, and mandated use of ethanol.

The use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required.

Because those engaging in the forced exchange did not desire the ethanol in the first place, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. Yet the government includes all mandated exchanges as a source of “value” in its own calculations.

This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have "never had it so good." 

Another Example: The Soviet Economy 

Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. 

State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union's commonly held resources was tallied by our CIA as meeting legitimate demand.

Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people's legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. 

Peaceful Exchange Allowed, Violent Exchange Redressed

With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke's book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and uncoerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. 

Even the individual's preferences are fickle or may change across time. So aggregating numbers can provide a misleading picture of actual conditions.

 

This represents a teleological reason to doubt those government ‘aggregate’ numbers.

Infographics: Austrian Economics versus Keynesian Economics

Courtesy of theAustrianInsider.com (HT Mises Blog)

For a crispier or clearer image pls go to the original site here

Move Aside GDP, US BEA Introduces Austrian Economic Measure called “Gross Output”

The Keynesian demand side GDP statistical construct will now be counterbalanced with the introduction by the US Bureau of Analysis BEA of the supply side economic statistical measure called “Gross Output”. The Gross Output was long proposed by Austrian economist Mark Skousen. [Mark Skousen’s 2010 paper here]

Writes Mark Skousen at the Wall Street Journal [bold mine]

Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter. It's called gross output, and it's the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a "unique perspective" and a "powerful new set of tools of analysis." Gross output is an attempt to measure what the BEA calls the "make" economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product, and far more volatile.

In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the "use" economy, the value of all "final" or finished goods and services used by consumers, business and government. It reached $17 trillion last year.

The follies of demand side GDP:

But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship

Thus journalists and many economic analysts report that "consumer spending drives the economy." And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market. There is an underlying anti-saving mentality in this analysis, as evidenced by statements frequently made during debates on tax cuts or tax rebates that if consumers save their tax refund instead of spending it, it will do no good for the economy…

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy.

Read the rest here

I do not expect vested interest groups and the political class to immediately adapt this, which instead they are likely to dismiss or ignore. However such alternative economic metric, which is likely to be more representative of the real conditions of the economy, will likely pave way for more divisions in the sphere of politics as boom-bust cycles and other distortions from myriad government interventions will become more evident.

This reminds me of the Hayek versus Keynes rap theme: Fear the Boom and the Bust

Walter Block on Why the Minimum Wage Law is a Stab on the Back of the Poor

Austrian economist Walter Block’s take on the baneful invisible effects of the minimum wage law (sourced from lewrockwell.com, with permission of Professor Block) [bold mine, italics Professor Block]

The minimum wage on its face is an unemployment law, not an employment law. It does not compel anyone to hire anyone else. It only stipulates who CANNOT legally be employed: no one may be hired for less than the amount stipulated by law. If the minimum wage law is set at $10 per hour, the law does not require any employer to hire any employee at that wage level. It only FORBIDS employment contracts set at $9.99 or below. This is not a matter of empirical evidence, not that there can be any such thing in proper, e.g., Austrian economics; this conclusion is a matter of pure logic. We repeat: the minimum wage on its face is an unemployment law, not an employment law.

What about empirical studies (economic history, for praxeological economists)? Here, economists disagree. Some say there will be no unemployment effects whatsoever. That is, a person with a productivity level of $6 per hour will still be hired and paid $10 per hour, even though any such firm that does so will lose $4 per hour. Such “economists” are in a distinct minority. Other dismal scientists opine there will be very slight unemployment effect; some few unskilled workers will lose their jobs or not attain them in the first place; but a large number will retain their jobs and be paid more. Then there is a third or majority view: most economists conclude that this law will boost unemployment for those with low productivity, and will only raise wages for them temporarily, until employers can substitute away from the factor of production (unskilled labor) now priced out of the market.

What is the Austrian take on all of this? The praxeological view is that the minimum wage law will raise unemployment higher than it would otherwise be, in the absence of this law, other things equal, provided only that it is set above the level of productivity of at least one worker. This is an apodictic claim, not subject to refutation, falsification or testing. This claim is necessarily true, and yields knowledge about real world effects. Austrian economics is causal – realist, unlike the economics of the mainstream logical positivists, who recognize no economic law, only hypotheses to be tested, and if not falsified, then provisionally accepted.

Some economists who have recently signed this open letter in support of the minimum wage law have published introductory and intermediate economics textbooks. In those publications, they take the usual position that minimum wage legislation unemploys laborers with low skills. Thus, their textbooks blatantly contradict the open letter they signed.  I take great joy in listening to and reading their responses to this charge that they are contradicting themselves. Talk about talking without saying anything.

What of the ethics of the matter? Here, again, there can be no controversy. The minimum wage law violates people’s rights to engage in consenting adult behavior. An employer and an employee agree to a wage contract of, say, $5 per hour. Both are considered criminals under this pernicious legislation. But it is a victimless “crime” to pay someone $5 per hour for his labor services, and/or to receive such an amount of money for working. Both parties agreed to this contract! Our society is now in the process of legalizing other victimless crimes, such as those concerning prostitution, drugs, gambling, etc. Many people favor “choice” when it comes to adult behavior without victims. The minimum wage law is a step backwards from these moves in a moral direction.  And, yet, paradoxically, it is to a great degree precisely those people who advocate the legalization of these victimless crimes who are the staunchest supporters of the minimum wage law.

Posit that the “moderate” economists were right. A few people will lose their jobs, but the overwhelming majority would either find or keep their employment slots, at higher compensation rates. Suppose I were to go to the inner city (which contains a disproportionate number of the unskilled), and did the following. I went to one in every 20 people I met, and, at the point of a gun, I relieved them of, oh, $10,000 (40 hours per week time 50 weeks multiplied by $5 per hour). Whereupon I turned to the other 19 out of 20 people and dispersed these stolen funds amongst them. If I did so, I would be promoting the precise effects that the moderate members of the economics profession who are supporters of minimum wage claim will occur. Namely, this law, they contend, they concede, will hurt very few but benefit the many. But how would my excursion into the inner city, and my wealth transfer, be considered by law? Of course, I would be considered a criminal, and very properly so.

For reasons we need not discuss right now, the productivity of whites is higher than that of blacks. It is for this reason that the unemployment of the latter is higher than that of the former, actually, as an empirical finding, about twice as high. For reasons we need not discuss right now, the productivity of middle aged workers is higher than that of young employees, who are just starting out. . It is for this reason that the unemployment of the latter is higher than that of the former, actually, as an empirical finding, about twice as high. It is for this reason that the unemployment rate of black teens is roughly quadruple that of whites of mature years. All this stems from the minimum wage law serving as a barrier to entry, a hurdle, and not a floor raising wages. Supporters of the minimum wage, who just LOVE statistics, tend to shy away from this revealing data.

Who are the beneficiaries of the minimum wage law?  Quo bono?  This will come as a shock to some people, but the people who gain the most from this legislation are skilled workers, typically organized into labor unions. When they demand a boost in their own wages, the immediate response of the employer is to want to substitute away from this suddenly more expensive factor of production, skilled labor, and into a substitute for it; that is unskilled labor. There is more than one way to skin the cat. The same number of widgets might be able to be produced with 100 skilled and 100 unskilled workers, as with, for example, 50 of the former and 200 of the latter.  If there is any such thing as fixed proportions in manufacturing and production, it must be a great rarity. How best to fight such an eventuality from the point of the labor union? One way to do so is to castigate as scabs” (why this is not an example of “hate speech” similar to the use of the “N” or “K” word is beyond me; well, not really) the unskilled laborers hired in response to the union’s demand for higher wages. But there are problems here. For one thing, these newly hired employees would be disproportionately minority group members. It really looks bad for liberals, “progressives,” to be fighting this particular demographic. For another, these people can fight back. If you slash their tires, and hit them over the head with a baseball bat, they can reciprocate. No; this will not do. Organized labor has come up with an ingenious counterattack. Are you ready for this? Please take a seat, for you are now in danger of keeling right over. Yes: the minimum wage law; that is the solution to this quandary for organized labor. There is perhaps no better way to eliminate competition than to price it out of the market. (Hint, to burger providers; if you want to adopt crony capitalism, try to get a law passed compelling the prices of competitive products such as pizza, hot dogs, to be raised ten-fold. You can claim it is for health reasons.)

Who else benefits from the minimum wage law? This is like asking, who gains from high unemployment rates of young people, and unskilled workers? When looked at in this manner, several candidates immediately come to mind, given that unemployment breeds boredom and criminality: social workers, psychologists, psychologists, prison guards, policemen, etc. I don’t say that all of these people favor the minimum wage law because it will feather their nests. I only say their financial situation improves from its passage, and therefore empirical research into this possibility might be fruitful.

Why do we have this law on the books if it is so evil, so pernicious? One reason, already discussed, is that there are beneficiaries: organized labor, and our friends on the left who support them. Another is of course monumental economic illiteracy. Obdurate economic illiteracy. I teach freshman economics at Loyola University, and I usually take a survey of my students on opening day. Typically, a large majority favors the minimum wage law, and they do so not out of malevolence. Rather, they really think that this law will raise wages and help the poor. My students think this law is like a floor rising, and thus raising everyone with it. They do not realize that a better metaphor is a hurdle, or high jump bar: the higher the level stipulated by the minimum wage law, the harder is it to “jump” into employment. This law eliminates the lowest rungs of the employment ladder, where especially young people can gain valuable on-the-job training, which will help raise their productivity. If this legislation were of such great help to the poor, I ask my students, why are we so niggardly about it? Why limit the raise to $10, or $12 or even $15, as some radicals favor? Why not really help the poor, and raise the minimum wage level to $100 per hour, or $1000 per hour, or maybe $10,000 per hour. At this point they can see that virtually the entire population would be unemployed, because it is a rare person who has such high productivity. But, then, hopefully, then can begin to see that a minimum wage of a mere $7 per hour is an insuperable barrier to employment for someone whose productivity is $4 per hour.

When the minimum wage was raised from $.40 to $.70 cents per hour (the largest percentage increase so far) we went from manually operated elevators to automatic ones, helping high skilled engineers at the expense of the unskilled manual operators. This transition took a few years, but that was the cause. Initially, before anyone could be fired, wages did indeed rise. If the present minimum wage goes from $7.25 to, horrors!, $15.00, people who ask if you want “fries with” that will be supplanted by self serves and automatic machinery which will then be competitive with labor, but cannot now compete with low skilled people. Those jobs will go the same place, namely, booted out of existence, as the ones that used to exist at gas filling stations.

What should be done? We should not raise the present national minimum wage from its present $7.25. Nor should we maintain it at that level. Nor should we decrease it (some politicians advocate a lower minimum wage, for example, $4 per hour, just for the summer and only for high school kids to help them get jobs; but to counsel such a course of action is to admit that the law is a hurdle which must be jumped over, not a floor supporting rises). We should instead eliminate it entirely, and sow salt where once it stood. More than that. We should criminalize passage of this law. That is, we should throw in jail, or deal with these miscreants as we would other criminals, all those responsible for the passage of this law and for its implementation, such as the legislators who passed such a law, the police who enforced it and the judges who gave it their seal of approval. After all, is this not the way we would treat a person who unemployed other people at the point of a gun? Suppose there were a law that explicitly did consign people to involuntary unemployment, not implicitly and indirectly as does the minimum wage law, but direcetly. That is, an enactment such as this: It shall be illegal to employ black people. It shall be illegal to employ white people. It shall be illegal to employ young people. It shall be illegal to employ old people. It shall be illegal to employ Jews. It shall be illegal to employ Christians. It shall be illegal to employ gays.  It shall be illegal to employ heterosexuals. It shall be illegal to employ men. It shall be illegal to employ women. How would we treat all those responsible for the passage of such laws and for their implementation such as the legislators who passed such a law, the police who enforced it, the judges who gave it their seal of approval? Precisely, we would throw the book at them. We would penalize them to the fullest extent of the law.  Why should we do any less for those responsible for the minimum wage law?

I may add that the recent trends in globalization particularly outsourcing [as this 2010 yahoo article points out “The United States has one of the highest rates for minimum wage. In fact, there are some countries that do not set minimum wage rates. As of 2008, minimum wage in China was $ .60 (US Dollars), while in India it was $2.15 (US Dollars), and it was $2.46 (US Dollars) in Mexico.* Besides higher minimum wage in the United States, companies must contribute to Social Security, Medicare, FICA and unemployment insurance. These payments do not have to be made for foreign employees, and therefore the American companies save on payroll and costs for payroll.”]…as well as China’s export boom via “cheap labor” may partly have been one of the unseen consequences of the US minimum wage law.

Mark Thornton on How to Read Mises

Interested to learn more about the contributions of the leader of the Austrian school of economics, the late great Ludwig von Mises? 

Austrian economist Mark Thornton at the Mises Blog recommends a step by step 'building process' approach—from easy to technical—to go about the works of von Mises 

October 10th is the 40th anniversary of the death of Ludwig von Mises. He was one of the most notable economists and social philosophers of the twentieth century who created an integrated, deductive science of economics. He based system on the fundamental axiom that human beings act purposely to achieve their desired goals. Mises left a legacy of books and articles that continue to teach and inspire people in a method and science that makes an undeniable case for a society based on freedom and peace.

Many have tried and failed to grasp the enormity of Mises’s contributions. I have been asked many times about “how to read Mises.” For a long time my only answer was “don’t start with Human Action, Mises’s magnum opus. Then, a few years ago, I set out to produce The Quotable Mises where I collected quotes from all his books. This book gives readers quick access to Mises’s contributions and viewpoints. It also serves as a handy tool for researchers and journalists.

It also gave me some insight into the question of how to read Mises. My suggestion now is to begin reading his shorter, popular articles, as well as audio and video lectures on Mises.org. Then proceed to his shorter books like Bureaucracy and Planned Chaos before moving to longer treatments such as Liberalism, A Critique of Interventionism, Omnipotent Government, and Nation, State, and Economy. Next take on the big four Theory of Money and Credit, Socialism, Epistemological Problems, and Theory and History. Finally, you are ready for the centerpiece of Mises’s system of economics, Human Action.

I believe that this approach to reading Mises works because Mises system was comprehensive and cohesive, but his writings represent a building process in which economics is constructed and where concepts are repeated in finer and more elaborate detail. What you might not understand at one level becomes increasingly clear, coherent, and relevant for understanding his overall system.

Here is the list of von Mises' short articles (Some of them are excerpts from his books)

Here is the list of von Mises' books

Remembering Ludwig von Mises on his 132nd Birthday

September 29, 2013 will mark the 132nd birthday of my mentor (via his works) and inspiration Ludwig von Mises. 

It has been through the works of Mr. von Mises and the Austrian school of economics who opened my eyes to reality or the truth amidst a world seemingly lobotomized of reason and a world seemingly governed by deception, manipulation, indoctrination, repression, oppression and untruths.

It is interesting to know that Nazi Germany even hunted down Mr. von Mises as his trenchant tirades against inflation and interventionism meant that "both fascists and communists hated him" according to Austrian economist Dr. Richard Ebeling.

Mr. von Mises, narrowly escaped the Gestapo dragnet in Vienna during the German occupation by fleeing to Switzerland. Nonetheless volumes of Mr. Mises work had been captured but luckily enough had not been destroyed and had been recovered in a Moscow archive 1996—decades after the Soviets “liberated” Bohemia.  

The Huffington Post writes of the recovery of the treasure troves of Dr. von Mises work here.

Read Ludwig von Mises’ biography here.

Here is a compilation of Mr. von Mises works at the Mises Institute.

My tribute to Mr. Mises ends with this excerpt from his magnum opus, Human Action (p.239)

Theism and Deism of the Age of Enlightenment viewed the regularity of natural phenomena as an emanation of the decrees of Providence. When the philosophers of the Enlightenment discovered that there prevails a regularity of phenomena also in human action and in social evolution, they were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe. This was the true meaning of the doctrine of the predetermined harmony as expounded by some economists. The social philosophy of paternal despotism laid stress upon the divine mission of kings and autocrats predestined to rule the peoples. The liberal retorted that the operation of an unhampered market, on which the consumer—i.e., every citizen—is sovereign, brings about more satisfactory results than the decrees of anointed rulers. Observe the functioning of the market system, they said, and you will discover in it too the finger of God

Quote of the Day: The crisis of government paternalism

This “crisis” of government paternalism was accelerated by monetary and related interventionist policies in the United States and Europe that produced another “boom-bust” cycle in the first decade of the 21^st century. It has had all of the hallmarks of the type of business cycle that the Austrians—and especially, Hayek—had explained decades earlier. Financial markets were awash with loanable funds made possible due to aggressive monetary expansion by central banks; interest rates were artificially pushed far below any market-based level; business investment borrowing, home borrowing, and consumer credit borrowing were far in excess of actual savings rates able to sustain them.

The capital, resources, and labor of society were misallocated and misdirected into various directions throughout these economies, all of which was going to necessitate a significant “adjustment” period when the “bubbles” of the boom finally burst. But rather than allowing the required adjustments and reallocations of capital and labor, and accepting that government welfare and related spending had to be permanently reduced or eliminated, governments have resisted these needed changes.

In many countries, the presumed “austerity” policies have really involved little or no reduction in the levels of government spending and redistribution, but noticeable increases in taxes. “Austerity” means squeezing the private sector to maintain a blotted government sector. The implicit psychology of many in Europe and the United States is that if the current crisis can “somehow” be gotten over, then the trend line of intrusive and growing government spending of past decades can be returned to in the future.

This is from Austrian economic professor and former President of Foundation for Economic Freedom Richard M Ebeling in an interview with the Austrian Economics Center (AEC).  This crisis of paternalism has spread to Asia.

BIS Official: Loose Central Bank Policies Looking Increasingly Dangerous

The chief of the central bank of global central banks, the Bank of International Settlements, has warned of unintended consequences of prolonged easy money policies

From the Wall Street Journal Real Times Economics Blog: (bold mine)

The latest to take up the refrain is Jaime Caruana, general manager of the Bank for International Settlements, who warned in an unusually frank speech in London that, while the ultra-low interest rates and ultra-easy monetary policy adopted by advanced economy central banks might have been the right response to the crisis when it broke, they are looking increasingly dangerous the longer they last.

“A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver,” Mr. Caruana said. “This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness.”

Low rates may have helped keep banks alive and keep a roof over the heads of overextended borrowers—but they are threatening the ability of insurance and pension funds to meet their commitments, and tempting them into all kinds of wrong investment decisions in the meantime. Although he didn’t spell it out, he painted a picture of a massive and stealthy transfer of wealth from savers to borrowers.

Perhaps Mr. Caruana may have noticed of the growing disparity between asset markets and the real economy and how such policies have been failing to generate the much anticipated results.

Importantly, Mr. Caruana notes of the ethical inequities from  the “massive and stealthy transfer of wealth” which in reality is taken from society (those not politically connected) and transferred to the political class and politically privileged banksters and other cronies.

The article suggest the BIS’s view should be heeded because “the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.”

This represents that cognitive bias called anchoring. In reality, past performance does not assure of future outcomes. Correct prediction by the BIS in the recent past doesn’t necessarily hold that they will be as accurate in the future.

What makes the BIS council worthwhile is the economic and the epistemological reasoning behind the analysis of current du jour easy money policies.

For instance, Mr. Caruana implicitly points to the moral hazard as consequence from such policies, noting that instead of real reforms, politicians have used central bankers as instruments to maintain the status quo.

From the same article:

Like many central bankers, Mr. Caruana put a good deal of the blame for the current mess on governments for failing to address the root causes of unemployment and low growth. “After five years of buying time, one has to ask whether that time has been – or will be – used wisely,” he said.

Likewise he warns of the anchoring bias applied to looking at inflation risks…

But he reserved a decent measure of criticism for central banks too, warning that they can’t just shut their eyes to the risks they are creating just because a certain measure of domestic consumer inflation is within its official target range.

…and of bubble cycles:

“If you don’t get financial stability, you will not be able to get price stability,” he said in follow-up comments to his speech, making clear that he understood financial stability as something to be defined globally, not just in a single country or region. That’s a problem because no central bank in the world is mandated to give a hoot about what effects its policy causes outside its jurisdiction. With an eye on the huge cross-border capital flows triggered by radical central bank action, he warned his audience how easy it is, in a globalized world, for distortions created in one country to spill over into other countries before returning “like a boomerang” to haunt the originating country.

So very apropos. 

Seems like Mr. Carauana, a telcom engineer by education, has revealed tinges of influence from Austrian economics. 

The BIS has been no stranger to the Austrian school. Canadian economist, William R. White, former manager in the monetary and economic department has been reputed as one of the Austrian school influenced economist in the BIS. In fact, it was Mr. White's paper in 2006, during his tenure, that accurately predicted the crisis of 2007-2008, from which the reputation of the above article rests on.

In Remembrance of Friedrich von Hayek’s 114th Birthday

This is really a belated commemoration: the great Austrian economist Friedrich von Hayek’s 114th birthday was yesterday May 8th!

Graphics from Tumblr on Friedrich von Hayek

Quote from the Road to Serfdom

Income Inequality: The Austrian Perspective

Roger Koppl at the Thinkmarkets blog explains the controversial issue of income inequality from the Austrian school perspective;

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

Mr. Koppl identifies four ways governments create such inequality: Privatizing profits and socializing losses, Regulation, Collapse of the rule of law and Public Schools

Pls read the rest here

Dad Howard Buffet’s Wish for Son Warren Buffett Delivered

I earlier posted that the prominent libertarian Howard Buffett, father of one of the world’s richest man, Warren Buffett, wrote the great dean of Austrian economics Murray Rothbard to ask where he could buy the latter's book "The Panic of 1819".  That book was intended for his son, Warren.

 

Unfortunately for dad Howard, son Warren not only turned from a value investor into a political entrepreneur (crony) but embraced a political  philosophy that justified his actions, which runs diametrically in contrast with his dad.

Nonetheless, Austrian school professor and economist Mark Thornton fulfills dad Howard’s wish, 51 year after. 

Writes Daniel Sanchez at the Mises Blog 

Warren Buffett’s father Howard (an anti-New Deal and anti-interventionist Congressman) wrote to Murray Rothbard in 1962 about sending some of Murray’s books to his son. Judging from Warren’s recent comments, it seems the books were lost in the mail. So Mark Thornton has sent this care package to the billionaire investor.