Archive for the ‘economics’ Category
These are my thoughts on reading An Austrian Defense of the Euro by the esteemed Jesús Huerta de Soto, professor of economics at Universidad Rey Juan Carlos.
Proponents of sound money should readily agree that to the extent that the euro is presently a “hard” currency, it can be considered superior to a collection of “soft” national currencies. However, there is at least one tangible benefit for some when national governments control their own currencies: users of money, fearing inflation, can frequently escape from a depreciating currency by switching into one of its more stable foreign counterparts. A floating exchange rate régime complements this system by efficiently reflecting the depreciation of the softer currency in the price and thereby illustrating the relative loss of purchasing power.
The euro abolished these dynamics, preventing escape through exiting the monetary system of just a single nation and requiring instead financial migration from a large supranational bloc.
But is it not true that a fixed exchange rate régime imposes discipline on governments, whereas a floating exchange rate régime allows for profligacy and a race to the bottom? Yes, this is true, so long as the fixed exchange rate in question has been imposed on the producers of money, and not imposed on the users of money. For example, suppose that Central Bank A pledges that one unit of their currency, alpha, shall be worth exactly one unit of Central Bank B’s currency, beta, and succeeds in buying and selling alphas and betas in the marketplace to enforce this rate. The fixed exchange rate should indeed help to impose some discipline on the government which owns Central Bank A. Central Bank A will be incentivised not to inflate the supply of alphas any more than B inflates the supply of betas; if they inflate too much, they will pay the price for it by the requirement to supply extra betas into the marketplace (a currency unit which they cannot create without cost) in order to maintain the fixed rate. This is the mechanism by which fixed exchange rates can help to produce monetary and hence fiscal discipline.
Does the euro impose a fixed exchange rate? Yes, it does. However, it imposes the fixed rate on the people, not on the central bank . The ECB is not required to guarantee the exchange rate of the euro against any other currency. Furthermore, and in particular, the citizens of Spain are not guaranteed that their currency will be maintained at a particular rate against the currency of Italy.
What has happened in reality is that the exchange rate between Spain and Italy has been obliterated. To demonstrate the point: suppose there are two bakers in your town, producing equally desirable bread. Suppose one of them makes a solemn promise that his bread will never cost more than his rival’s. This is fine, so long as he and his rival are genuinely competing to make a profit out of the business of providing you with their bread. But suppose your baker and his rival undergo a corporate merger, and a single entity now owns and completely controls both bakeries. And suppose your baker continues to promise that his bread will not cost more than the other guy’s. What would you make of his promise now? You would laugh at it. He is in a combination. The same entity dictates prices in both bakeries, and therefore the guarantee is worthless. You now have to pay the price dictated to you by the parent company, no matter which baker you go to. In like manner, the promise that one euro in Spain can be exchanged for one euro in Italy is something which carries no guarantee of value to users of the euro.
Many national governments, having been relegated to mere users rather than sovereign producers of money, have experienced great discomfort due to their inability to print their way out of recent difficulties. But the price for fiscal disclipline, in the present, on a national level, is fiscal indiscipline, in the future, on a supranational level.
The euro is a money monopoly, and a monopoly not over one nation (as most currencies are), but over many nations. The institution of the euro represents a grand weakening in the global competition to provide a reliable medium of exchange. This competition was not too strong to begin with, since almost every country holds a money monopoly over its territory, but the momentous consequence of the single currency is that eurozone countries no longer compete against each other to provide an attractive, stable money. Absent any threat of capital flight within the eurozone from nations with poor monetary policies to nations with sensible monetary policies, the ECB has the freedom to produce a form of money less satisfactory to the consumer than that which Europeans on average would otherwise have experienced. We can trust that sooner or later, if they have not done so already, they will choose to exercise this power. As a consequence of this, the EU will be relatively free to follow fiscal policies less restrained than those which Europeans on average would have witnessed. The errors of the nation are replaced by the errors of the bloc.
The route to sound money, whether that may be gold or silver or something else, with 100% or fractional reserves, must require increased levels of competition among producers of money, not decreased levels of competition. Few of us would argue that decreased competition would improve the quality of any other good.
Much of the developed world is suffering a jobs crisis, and the experience for Ireland is worse than most. The Irish legal framework for the jobs market, beyond a basic minimum wage, has also had a complicated system of “Joint Labour Committees” which are capable of imposing additional wage requirements on particular sectors of the economy (affecting about 200,000 people). This system was found to be unconstitutional last summer. Replacement legislation is coming down the pipeline now, with the government promising to extend an employer’s right to plead “inability to pay“.
The current legislative proposals permit an employer – subject to certain conditions – to apply to the Labour Court for a derogation from the wage rates set in the sectoral wage agreement on the basis of inability to pay.
The derogation can be granted for between three months and two years – provided an employer has not been granted an exemption within the previous five years for the same workers.
The Labour Court must be satisfied that without the exemption, there would be a substantial risk to jobs or to the sustainability of the employer’s business.
The change is described by a government spokesman as “minor”. They don’t want to be seen to be undermining the wages of the low-paid, but the truth is that this system does no good at all for the people who need the most help, who are just below the bottom rung of the jobs ladder: those who are looking for work.
Involuntary “unemployment” would not exist in the free market; anyone who can work would be hired, if they would only lower their asking price. When market-clearing wage rates are illegal, however, unemployment is inevitable.
Thought experiment: Imagine that the price of a new car was set by government at an artifically high level, as a result of the government having been lobbied by manufacturers of some of the more expensive models. Imagine that you could only negotiate a lower price if you presented your case formally to a special government committee, who would decide whether or not you could afford it. Do you think that more or fewer new cars would be bought?
Ever taken a statistics course? Most stats lecturers devote a special moment to highlight how statistics can be misused. For instance my tutor once showed us a graph like this:
We can clearly see that there’s a correlation between ice-cream consumption and deaths by drowning. But what can we infer from this? It’s possible that eating ice-cream causes drowning (due to stomach cramps while swimming). It’s also vaguely possible that drowning deaths cause increased ice-cream consumption (mourning relatives might go for an ice-cream to cheer themselves up). However the most sensible explanation is that both ice-cream consumption and drowning deaths increase is due to another factor: the weather. People eat more ice-cream and go swimming more often in summer.
However, such a straightforward explanation is hardly ever seen in economics. The empirical approach often remains unquestioned. Consider this syllogism: in the past, taxes were low. Today, taxes are high. We were poor in the past but now we are rich. Therefore, increasing taxes causes prosperity. Such a view is completely ridiculous, yet almost completely unquestioned.
Or take the suggestion in the graph below. Income inequality sharply increased before two major recessions. Therefore it’s fair to assume that one causes the other.
Milton Friedman’s Free to Choose was one of the first books on libertarian political philosophy and market economics that I ever read. It’s an excellent chronicling of the economic and social decline of the United States (which has unsurprisingly run parallel to its embracing of ever more socialist policies). Here are two videos doing the rounds at the moment that go into some basic Friedmanite concepts.
I can’t be everywhere at once. This means I can’t refute every fallacious argument out there in cyberspace. But once in a while, one person manages to collate several spurious arguments and create a video out of them. Consider amhemsley‘s “Don’t want to pay taxes? Then stop stealing from those who do”.
The video is little more than a tissue of trite arguments; tax resisters are thieves, the government provides us with services, if you don’t love it you can leave it, and so on. Here’s a brief discussion of why the guy in the video is wrong.
State = Society?
One common tool used by the anti-capitalists is the equivocation of fairly distinct and unambiguous terms. State, society, law, order, protection and peace are all mixed together. In amhemsley’s mind, anyone who is against the State is against society, and subsequetly for lawlessness, poverty and chaos.
It is important to challenge this simpleminded view. Stateless socities have existed in the past, even for centuries. Parallel to the history of State-made legislation runs the history of private law provision. Society is nothing more than the lose web of interaction among people who share a common heritage. The State is a territorial monopolist of lawmaking and taxation. Society typically uses ostracism and exclusion to punish those who engage in unlawful or distasteful activities. But society will find it difficult to legitimately use force against you, which is precisely the point of the State.
A post at Peter Rollins unmasks Batman as the ultimate capitalist superhero. I disagree with the heart and soul of his thesis, namely that
Batman is unable to see that the subjective crime he fights on a nightly basis is the direct manifestation of the objective crime he perpetrates on a daily basis. The street crime is the explosion of violence that results from greedy, large industries obsessed with the increase of abstract capital at the expense of all else.
I consider the exact opposite to be the case. Bruce Wayne perpitrates no crime by day; he violates no property rights nor does he have a State-granted monopoly over his industry. His workers and customers are free to associate with other businesses. From this it follows that Wayne can only satisfy his greed from creating products that satisfy his consumers needs and by offering his workers decent working conditions.
This is precisely the reason that socities built on private property ownership were historically regarded as the most altruistic and charitable. In addition to providing really cheap kerosene to Americans, John D. Rockefeller was a prominant philanthropist. Socities where forced altruism is the norm result in cultures of entitlement, violence and contempt for property and fellow humans.
There is however one obvious reason why Batman is the ultimate capitalist superhero. The buraucrats of Gotham city preside over a monopolised judicial and domestic defence system. All monopolies are bad from the point of view of the consumer as such arrangements will tend to raise the price and diminish the quality of the service provided. Gotham is constantly under threat from thieves, drug-dealers and murders. However Gotham’s residents cannot choose an alternative defence provider, nor will they receive compensation from the city if it fails in its defensive duty.
Quite simply, Batman is the challenger to Gotham city’s self-sanctioned monopoly over justice and protection from coercion. He circumvents the State’s monopoly on legitimate violence and acts as a privately-provided “public” good as an alternative to a poorly maintained, currupt State-run monopoly.
Perhaps this is why Batman is Ron Paul’s favourite superhero!
As World War II raged, an amazing thing happened in Irish politics. According to Wikipedia’s entry for Seán T. O’Kelly:
O’Kelly was appointed Minister of Finance in 1939. He secured the passing of The Central Bank Act in 1942. On 17 July 1942 at the fifth and final stage of the Dail debate on the “Central Banking Bill”, he argued that the owner of the credit issued by the Central Bank of Ireland, should be the private property of the joint stock banker and not the property of the people of Ireland. This debate was carried out when only five Deputies were present in the Dáil.
“There are two methods of rebutting the contention that credit money here belongs to the Irish people. One is the method of denying its existence, and that, as I understand it, is the position of the Leader of the Opposition. The position taken up by the Leader of the Opposition and by those who think with him is that a banker lends the money of his depositors and shareholders and nothing else, and that, therefore, the public have no concern with the activities of a bank, other than their personal dealings with it.
I propose to submit to the House that, far from that being true, the day the banker gets established, the least of his business is the lending of his money or that of his depositors and shareholders, that that represents only one-tenth of his activities and that the remaining nine-tenths of his total activities consists in lending and dealing in a commodity called credit money which he creates on the strength of the fact that he is functioning in a community consisting of law-abiding men who maintain, by their several individual exertions, a stable community.
This conception is so revolutionary to many persons who have never given any study to banking that a large number of people, without examining the evidence, simply throw their hands in the air and say that it could not be true; but the astonishing fact is that it is true, and, by the mercy of Providence, these facts were made manifest and placed forever on record in the evidence of the Committee on Finance and Industry which sat under the chairmanship of Lord MacMillan in 1931, and the minutes of whose evidence have been reported.”
I sometimes feel like I’m living in some kind of bizarro world. Eichengreen and O’Rourke have done an excellent job at tracking the Second Great Depression. Here is the link for those of you who’ve been living in a cave. After showing us excellent graphs of falling industrial output, they graph the overall policy responses of governments and central banks in 1929 and 2009. Take a look:
Now the conclusion to draw from this surely is: “world governments and central banks are doing exactly the same as what they were doing in 1929 only on a bigger scale”. And yet, this is not the conclusion that E-O draw: “The good news, of course, is that the policy response is very different.” Bizarre, no?
Anyone who’s interested in failings of empiricism should read the article “Bad Distribution of Income Led to Great Depression: History Repeats in 2008“. It refers to John Kenneth Galbraith’s claims that maldistribution of incomes led to the Great Depression, and was a contributing factor to the Great Recession.
Simply becuase the income share of the rich increases during a boom doesn’t mean that it is a trigger for the economic collapse. In fact, they are more likely to be a consequence of the manic boom than anything else. Without a sound economic theory to underpin discussion of real events, we’re simply going to be stabbing in the dark for cause and consequence.