Friday, February 1, 2013

#19.3 The Austrian School, agreements and divergences – Part 3

Source - http://wiki.mises.org/wiki/Austrian_School

Notable theories

 

Economic calculation problem
Main article: Economic calculation problem


The economic calculation problem was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek.[6][43] The problem referred to is that of how to distribute resources efficiently in an economy. The capitalist or free market solution is to produce and distribute goods and services according to the price mechanism; Mises and Hayek argued that this is the only viable solution, as the price mechanism co-ordinates supply and investment decisions most efficiently, favouring the production of desired goods and services and eliminating those goods and services that are not wanted by reducing their prices and thereby rationing the resources given to "unwanted" or inefficient producers.


We are in agreement with all of this.

Without the "feedback" information being provided by market prices, centrally planned socialism lacks a method to efficiently allocate resources over an extended period of time in any market where the price mechanism is effective (an example where the price mechanism may not work is in the relatively confined area of public and common goods).


This theorem implies that a socialist planned economy could never be sustainable in the long term for the vast bulk of the economy, as huge shortages of desired goods and large surpluses of unwanted goods would continually occur in the economy, resulting in mis-allocations and dislocations that would eventually cause chaos throughout the economic system.

What socialism produces is serfdom for the vast majority of people who live under it. A few who get jobs nannying the rest of the population, may believe they are really acting as part of a rational and “scientific” system (some even display something approaching a religious fervour), when in fact the only difference between socialism and a more naked form of tyranny is that socialism claims to get the people's assent to its activities. If you have been following along, you will recall that Ayn Rand made the characteristic distinction, as do the elites, that physical labour is only worth what it costs to feed the labourer, whereas their superb brains require more pay. We really want all that to sink in. The people who should be better rewarded for their labour are the physical labourers who carry the rest of the society. What think you of these elites who try and convince you that you are nothing but a “useless eater” and you'd do better for the earth if you'd just ... go off somewhere and die quietly, etc.?

Again, we who would follow E. C. Riegel's clear and obvious observations have the solution. So far, with a few exceptions, it looks to me that the Austrians offer NOTHING of crucial concern and do NOT understand money, or more likely they have fallen for the bankers' business model without criticism, because they were part of it themselves? No matter, the second some economist starts talking about interest rates, that's a dead giveaway that they have accepted the legitimacy of the monetary status quo, whereas we do not.

The debate over whether socialism was a viable economic system raged in the 1920s and 1930s, and that specific period of the debate has come to be known by historians of economic thought as The Socialist Calculation Debate.[4] Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[4] This led him to declare "…that rational economic activity is impossible in a socialist commonwealth."[6]

We agree.

Inflation 

The Austrian School has consistently argued that a "traditionalist" approach to inflation yields the most accurate understanding of the causes (and the cure) for inflation. Austrian economists maintain that inflation is
by definition always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.[44]


We agree with this too.

Given that all major economies currently have a central bank supporting the private banking system, money can be supplied into these economies by way of private bank-created credit (or debt).[45] Austrian School economists therefore regard the private bankers and the state-sponsored central bank as the main cause of inflation in an economy where the bulk of the money supply is created through debt, because they regard the central bank as the institution charged with supporting the banking system and supplying cash to the banking system when needed by the banks.[46][47]

We agree with this also. The solution is first to separate forever the functions of exchange and finance as they will be in an E. C. Riegel based system. These functions are merged and or carried out by the same institutions under the present system, creating what we consider an obvious conflict of interest. 


A traditional bank operates from the basis of its reserves, supposedly the money deposited in their customers' accounts, and then loans out multiples of this, the standard ratio (rarely observed) is 9 to 1, that is a bank may loan out 9 times its reserves. We know that the ratios have grown much higher over the last few decades. The banker wants to keep the liquid assets that flow through his institution high, so they count as reserves, while the customers are only really concerned with having the bank clear transactions with other people, businesses, the government, etc. The Value Unit exchanges' function is to clear transactions with other exchange members either in the local IE or a distant one. Those offering finance, usually in specialized product areas, will operate as exchange members offering credit contracts; operating as distinctly separate entities from the exchanges.

The crucial differences, to be explained in a forthcoming post, are that 1) absolutely no new money may be introduced into the system, that is only 100% reserve financing is ever allowed and 2) no interest may be charged. Interest is never created in the first place; the eleventh marble, so where is the money to pay it back coming from? We will explain with examples just how finance in a Value Unit based system works in a future post. 


The Austrian School also views the "contemporary" definition of inflation as inherently misleading in that it draws attention only to the effect of inflation (rising prices) and does not address the "true" phenomenon of inflation, which they believe simply involves the debasement of the means of exchange.
 

We agree with the Austrians here. As can easily be seen, from our earlier comments, the core issue is finance, which determines who gets to issue money, thereby creating it. We said along with E. C. Riegel, that the only people entitled to create money were those who didn't have any. You can see that any successful finance business would require its own reserves. But we are used to thinking about finance in mega corporation terms rather than finance being a venture capital business that might get started among a few interested VEN members. What we envision happening in finance is that far more finance businesses would be established that would cover this economic function. Again bigger is not necessarily better.

They [the Austrian economists] argue that this semantic difference is important in defining inflation and finding a cure for inflation.[48] Austrian School economists maintain the most effective cure is the strict maintenance of a stable money supply.[49] Ludwig von Mises, the seminal scholar of the Austrian School, asserts that:

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.[50]

We agree. After our posts on the subjects of markets and finance perhaps we will get far more people to agree. Where enough people agree there can be a common interest and trading can commence.

Austrian economists tend to measure the inflation by calculating the growth of what they call 'the true money supply', i.e. how many new units of money that are available for immediate use in exchange, that have been created over time.[51][52][53]

The or an VEN will have an instantaneous way of measuring how much money was created and by whom, to be discussed in a future post on the structure of VEN exchange accounts. 

Austrian School economists claim that the state uses subtle forms of inflation as one of the three means by which it can fund its activities, the other two being taxing and borrowing.[54] Because of the disruptive and dislocating effects of inflation, many Austrian School economists support the abolition of the central banks and the fractional-reserve banking system, and advocate instead a return to money based on the gold standard, or less frequently, free banking.[55][56] Money could only be created by finding and putting into circulation more gold under a gold standard.

To reiterate: we deem that central banks are dinosaurs that will fail and their money with them. The fractional reserve system creates an accordion effect on the money supply; as the banks loan money out, the money supply increases, as debt grows and the need to keep the banks solvent becomes a problem, perhaps loans are called in or foreclosures occur, the money supply shrinks. The banker, in a privileged position by government FORCE, makes out both ways; as the money supply expands he takes back his interest, as the money supply shrinks, he ends up with foreclosed or repossessed property he can sell cheaply and still make money.

We have also said many times now, but will say it again a little differently; that “gold bugs” are in fact the useful idiots of the banking cartel, because gold and silver bullion brokerage are among their oldest businesses, going back easily hundreds if not thousands of years. Remember this goes back to Babylon and back then gold and silver mines manned by slaves, which were the prisoners of wars financed by the same people, was big business. Look around you, it's still their primary business plan. Therefore, the prices of gold and silver have been and are artificially manipulated by them to achieve their geopolitical objectives, which run counter to what humanity really wants for its future. The ONLY purpose we see for gold and silver bullion in a Value Unit system is to provide a means of common exchange between VU's and other currencies; a way for those who want to move into the VEN trading world to do so with the least amount of effort.

In the absence of a return to commodity money, many Austrian analysts predict catastrophe for the economy. For example, Austrian commentator Robert K. Landis has written the following:[57]

No, the die is cast: we shall have the catastrophe. Our fiat monetary system got a reprieve in the 1980's, not a deliverance. All that has happened since, with the fantastic mispricing of credit the Greenspan Fed has engineered, and the massive global mal-investment this has engendered, is that the dimensions of the unravelling have become more dire. Mises called this one too:

"Certainly, the banks would be able to postpone the collapse; but nevertheless, as has been shown, the moment must eventually come when no further extension of the circulation of fiduciary media is possible. Then the catastrophe occurs, and its consequences are the worse and the reaction against the bull tendency of the market the stronger, the longer the period during which the rate of interest on loans has been below the natural rate of interest and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted."
 

Observations: when no further extension of the circulation of fiduciary media is possible describes some ultimate point in a period of inflation beyond which economic collapse happens because the fiduciary media becomes totally worthless. How does this process happen? It begins with answering the question, who gets to issue the fiduciary media.
(A fiduciary (from Latin fiduciarius, meaning "[holding] in trust"; from fides, meaning "faith", and fiducia, meaning "trust") is a legal or ethical relationship of trust between two or more parties.)
We could examine the concept implied here; money is a media that holds value by faith and trust. In other words, you aren't really using money for anything other than how to assess values earned and spent; splitting barter. We accept the use of money because we know by now what money looks like and how it works; as an appliance. What many of us do not know is how that money came into existence and how and why that matters.

If
money came into existence by agency of a bank through a loan at interest, that money will have unforeseen effects, unintended by those who assume they understand the simplest ideas concerning reward for the use of capital, a subject we shall examine in a future post.

The bull tendency of the market is the idea that in general, under normal conditions, trade will find a way and its natural tendency is to increase as demand is afforded the sufficient means to trade. Here is where the “gold bugs” theories have some relevance. They contend that during times of catastrophe or distress where civilization breaks down, as during the 4th century when a third of humanity in the West was probably wiped out by invading nations from the east, gold and silver would have been the means of trade because everyone would accept them. We will approach this subject from another perspective in an upcoming post on markets.

The period during which the rate of interest on loans has been below the natural rate of interest as many “conservative” economists have been suggesting is true of the current economy, and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted. I'd like here to call to your attention the roundabout processes of production all around us in the modern world, entirely to satisfy the needs of globalist interdependence schemes (which is another thing that will ultimately bring the system down), rather than representing any rational efficiencies to scale or anything else. As Mises declares, the economy cannot long endure.

With respect to the form the denouement will take, much has been written within the gold community on the subject of whether we face hyperinflation or deflationary depression as the prelude to monetary collapse. Both sides of the debate appear to accept the premise that whatever may transpire will bear a linear relationship to what now exists.

We don't know; because of the debt service load at present and other factors with unforeseen consequences being applied in societies all over the world, the secular trend is deflationary; money is withdrawn from trade as it needs to service debt, while no new money is effectively circulated where it is needed most, at the bottom.

The disagreement centres on the direction the line will go. But today's markets are fully linked by derivatives and technology, and they are patrolled by wolf packs of large, leveraged speculators not noted for their patient outlook. So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident.
We accept this as likely, either a strong deflation in which money becomes scarce even while shelves are well stocked, or an inflation which causes money to become worthless overnight.
We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system. All we can hope is that once the curtain falls on the current system, the wisdom in the gold bugs' submissions to the Gold Commission will finally find a receptive audience.
We heartily hope not and shall explain explicitly why in the forthcoming post concerning markets.

Advocates argue that the abolition of legal tender laws and the spontaneous return to a gold or silver monetary system would effectively constrain unsustainable and volatile fractional-reserve banking practices, ensuring that money supply growth ("inflation") would never spiral out of control.[58][59]

I want everyone to notice something; originally bankers were warehouse keepers who secured people's gold and silver bullion, because these same folks had talked and FORCED their system on societies by war (which tells you something about why we still fight wars and who benefits from them as nothing has changed), gold and silver coins as a means of trade. That was maybe as long as 4,000 years ago. The “gold bug” solution isn't a real one, because it does not separate the functions of exchange and finance and never questions the right of the bankers to make loans of “bad notes” on their reserves, which becomes necessary the moment trade needs to go very far, because gold and silver are heavy and bulky and are themselves commodities, which disqualifies them for use as a standard measure of value.


Consider a distance measured by something irrelevant like the time it takes a certain horse to gallop between point A and B. That's what a “gold backed” money is. Since all money is essentially backed by what it buys, not by what it is, the gold bug solution plays right into the hands of the bankers, who can just jolly well go back and do what they did in ancient times with interest rates that might be as high as 50% to 60% per year. Would the Austrian economists then regard this standard as the natural rate of interest? We believe they would, because just as with the Keynesians, neither side would dare directly attack the basis of the entire banking system, the fraud that is usury. We have sound reasons why people at this juncture should be buying gold and silver bullion, but not for the reasons the “gold bugs” suppose.
 

In relation to the current central bank-managed fractional reserve fiat currency system, Austrian economist Murray Rothbard stated the following:[60]
Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear:

(a) to return to a gold standard, a commodity standard unhampered by government intervention; NO! Besides these would be hampered as they are now by banking and bullion brokers in places like London and New York. So what's the difference? There is none.

(b) to abolish the Federal Reserve System and return to a system of free and competitive banking; We think it likely that all these banks will fail before they are closed by public action. Just what that action may be is beside the point and not really our concern.

(c) to separate the government from money; and YES, and the VEN does that.

(d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative. No, free banking doesn't because it relies on essentially the same models of finance.

What the Value Unit system would do is start a new monetary system in parallel with the existing system that would supersede it as the present system collapses. In this new system, from inception, fractional reserve banking is eliminated as finance takes on an entirely new character based on the direct risk factors affecting retailers. This subject will get more attention on the forthcoming post on markets.
Ludwig von Mises asserted that, in addition to reducing the severity of business cycles and eliminating inflation, civil liberties would be better protected through a return to the gold standard:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings.[61]

Bullshit! Why didn't you bother observing that the government or some central bank as the chief source of issue of money is a primary factor? It does not matter whether we have heavy pieces of precious metals in our pockets with which to trade as long as a government mints, issues and taxes the money away. It's all the same. Please do not fall for this crooked deception. As I said before, the Austrian economists as chief representatives of the “gold bug” solution, represent the other side of the coin from the collectivists. They are as suspect as the Keynesians in the final analysis, and the same goes for Ayn Rand, the paid spokesperson of the globalist elite, those savage babies who presently imagine that they run the world.


To be continued,

David Burton


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