The Austrian School of Economics

Posted by PITHOCRATES - March 3rd, 2014

Economics 101

(Originally published February 27th, 2012)

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.

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Keynesian Economists are Narcissists who don’t know the First Thing about Economics

Posted by PITHOCRATES - March 2nd, 2014

Week in Review

There was a sketch on the Benny Hill Show that reminds me of Keynesian economists.  Benny was singing a song and they were showing the unrequited love around him.  They showed one woman who loved a man.  But that man loved another woman.  Who loved Benny.  And who did Benny love?  The camera remained on Benny.  Because that’s who he loved.

Keynesian economists are a lot like that.  They like to sound erudite.  They like to write things with impressive economic jargon in it.  The layman can’t understand a thing they say or write.  But that’s okay.  As they are writing to impress their peers.  People who are as narcissistic as they are.  And they tell each other how brilliant they are with all of their demand-side pontificating.  Pinching each other’s cheeks and saying, “Who’s a good economist?  You are.  You’re a good economist.  Yes you are.”  Even though they are always wrong.  Reminding me of another television show.  Hogan’s Heroes.  Where Colonel Hogan and Colonel Klink were disarming a bomb in the compound.  They’re down to two wires.  One disarms the bomb.  The other detonates it.  Colonel Hogan asks Colonel Klink which wire to cut.  He picks one.  And just as he’s about to cut it Colonel Hogan changes his mind and cuts the other wire.  Disarming the bomb.  Colonel Klink asks him if he knew which wire to cut why did he ask him.  And he replied that he wasn’t sure but he knew for sure that Colonel Klink would pick the wrong wire.

This is just like a Keynesian economist.  Ask them what to do to help the economy and you can be sure they’ll pick the wrong thing to do.  Because they love their demand-side economics with all their charts and graphs and equations.  For it feeds into their superiority complex.  As they can baffle people with their bull s***.  Well, the truth is that the economic data doesn’t support demand-side economics.  For all of the stimulus spending Keynesians have encouraged governments to do have never pulled an economy out of a recession.  It has only extended a recession.  And made it more painful.  For if you want to help the economy you have to work on the supply side.  Make it easier for people to be creative and bring things to market.  Things people will buy.  Even if they had no idea that they existed before seeing them in the market (see How Taco Bell’s Lead Innovator Created The Most Successful Menu Item Of All Time by Ashley Lutz posted 2/26/2014 on Business Insider).

The Doritos Locos Taco is one of the most successful fast food innovations of all time.

Taco Bell released the product in 2012 and sold more than a billion units in the first year. The fast food company had to hire an estimated 15,000 workers to keep up with demand…

The team went through more than 40 recipes, and Gomez told Business Insider he sometimes felt like the idea would never come to fruition.

“Execution was so difficult,” he said.

Gomez was eventually able to perfect the shell by using the same corn masa found in Doritos. He also discovered a process that would evenly distribute the seasoning on the shells. And the company found a way to contain the cheese dust in the production process.

Even after Gomez created the ultimate shell, he still had to design production facilities that would make millions of them.

But for Gomez, the years of effort was worth it.

“When we shared the idea with our consumers, they loved it,” Gomez said. “I was blown away with how immediately popular Doritos Locos Tacos became.”

The taco is the most popular menu item in the fast food chain’s 50-year history.

This wasn’t demand-driven.  As Keynesians believe everything is.  Get more money into the hands of consumers and they will demand things.  Thus increasing economic activity.  But not a single consumer was demanding the Doritos Locos Taco.  As there was no such thing to demand.  And giving them more money wasn’t going to bring it to market.  Only creative people with an idea and an indefatigable passion brought this to market.  Spending a lot of years and lots of money to bring to market something people weren’t demanding.  And might not even like.  But they did.  And it was a big success.  This is how you create economic activity.  On the supply side.  Cut tax rates and costly regulations.  Like Obamacare.  So other people are encouraged to be creative and use their indefatigable passion to bring other things to market.  Creating a whole lot more economic activity than just giving people a stimulus check and telling them to go out and create economic activity.  Because once that Keynesian stimulus is spent it cannot create any more economic activity.  Unlike all of the economic activity it takes to sell a billion or more Doritos Locos Tacos a year.

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Paul Krugman says there is no Problem with Social Security showing why we shouldn’t listen to Keynesians

Posted by PITHOCRATES - March 16th, 2013

Week in Review

Paul Krugman is a Keynesian economist.  He even won a Nobel Prize.  And the Left loves him.  Because he says it’s okay for the government to spend money it doesn’t have.  In fact, government should be spending more.  The reason why the stimulus failed according to Krugman is that the $800 billion wasn’t enough.  Which is why the Left loves this guy.  Because he says things like spending $800 billion is not spending enough.  Giving them moral authority to spend more.  For, after all, this guy is a Nobel Prize winning economist.  So he must know what he’s talking about.

Then there are real economists. People who actually understand how business and the economy as a whole works.  People of the classical school of economics.  The Austrian School.  And the Chicago school.  Who don’t think much of Mr. Krugman.  Or Keynesian economics.  For all they see is a historical record littered with failure.  They know why those in government only listen to Keynesian economists.  Because they simply want to expand government spending.  For they like having all of that money flow through their hands.  While reputable economists want that money where it benefits the economy most.  In the private sector.

Krugman gets a lot of air time.  Because he advances the government’s agenda.  Which the mainstream media is helping the president pass.  So you see him on television a lot.  And sometimes someone with a real understanding of the economy will have a little dustup with him.  As someone did recently on ABC.  The topic was Social Security and the Social Security Trust Fund (SSTF).  Senator Ron Johnson (R, WI) said Social Security was going bankrupt.  Krugman said Johnson’s facts were all wrong.  That Social Security had a dedicated revenue stream.  And the SSTF was fat with investments not only earning interest but can be used to pay benefits.  Bruce Krasting does a little fact checking.  Here are some excerpts (note: this article appears to have missed the editing process and contains quite a few typos some of which we corrected) (see Paul Krugman Has Got His Social Security Facts Wrong by Bruce Krasting posted 3/11/2013 on Business Insider).

CR[S] [Congressional Research Service] had this to say about the TF for FERS [Federal Employees’ Retirement Service]

The assets in private-sector pension funds represent a “store of wealth” that firms can use to meet pension obligations as they come due. The CSRDF [Civil Service Retirement and Disability Fund], however, is not a store of wealth for the federal government.

Got that PK [Paul Krugman]? The CR[S] says there is no wealth (aka money) in the TF:

The OMB [Office and Management and Budget] provides more clarity on TFs. From the Budget of the United States Government, Fiscal Year 2010: Analytical Perspectives

Balances in the trust fund are available for future benefit payments and other trust fund expenditures, but only in a bookkeeping sense.

Ah! There is no money in the TFs. They are bookkeeping entries. OMB concurs with CR[S] – TFs are not a store of wealth. More:

The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits.

How many ways does OMB have to say this to convince PK? Another:

The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.

Is this getting through to progressives like PK? This is not the tin hats talking PK. This is your “guys”.

Senator Johnson made the statement that the SSTF accounting was similar to a person who writes themselves an IOU for $20, and then somehow believes he actually has an asset. PK objected. This is what the OMB has to say about it; no wiggle room for PK with this:

These trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the Government as a whole.

Got that PK? The Senator was correct. Writing an IOU to oneself nets to zero. If the OMB was the arbiter of the TV debate, it would have said that the Senator had the facts, and Krugman was blowing smoke.

Let me explain this in another way.  Remember the movie Dumb And Dumber with Jim Carrey and Jeff Daniels?  Where they drive to Colorado to return a women’s briefcase?  That briefcase was full of money and was supposed to pay a ransom to get that woman’s husband back.  Jim Carrey’s character picked it up before the kidnappers could because he had just driven the woman to the airport and was smitten with her and wanted to return it to her.  So she would marry him and they could live happily ever after.  And hence the road-trip to Colorado to return it.  Much hilarity ensued.  But then that briefcase opened.  And the boys saw all of that money.  These guys who had no money and no place to sleep.  In a cold Colorado winter.  And there was all that money.  So they did the only responsible thing.  They borrowed from that briefcase.  Leaving an IOU each time they did.  Then they bought some bare necessities.  The finest hotel suite.  A Lamborghini sports car.  New designer clothes.  Etc.  You know, bare necessities.  Near the end of the movie the briefcase is opened by the kidnapper who only sees slips of papers.  Their IOUs.  The kidnapper is enraged.  And Jim Carrey’s character reassures him that those IOUs are as good as gold.  Because they intend on repaying all of that money.  Even though each of them is dirt poor and unlikely to earn that amount of money in their remaining lifetime.

That briefcase is the Social Security Trust Fund.  All of that money poured into the Trust Fund.  While all those politicians looked at it.  And then thought about all the spending they wanted to do.  So they did the only responsible thing.  They spent the money in the Trust Fund and left IOUs in its place.  IOUs that they never will repay.  And everyone knows this.  Except, perhaps, Paul Krugman.  All rational people know how the government will replace those IOUs.  They will print money as they need it to pay benefits.  Causing even more inflation.  Raising prices further.  Forcing our retirees who paid into the Trust Fund to get by on less in their retirement.  Basically like what is happening right now.  And will only get worse.

You can’t loan money to yourself.  You can’t spend your personal savings and replace it with an IOU.  Because it nets out.  For if you borrow money you owe money.  Which means you’re doing stuff on both sides of the ledger.  And when you figure out your net worth (subtracting what you owe from what you have) you find there is little there.  The balance of your savings less the sum total of your IOUs is what you have to live on in retirement.  Nothing more.  For once you spent your savings they’re gone forever.  Just like that money in the Social Security Trust Fund.  They spent it.  And it’s gone forever.

Paul Krugman apparently doesn’t understand this.  As do few Keynesians.  For they keep spending money.  And running up more debt.  But never see any problem.  Unlike real economists.  Who, sadly, are not advising the government.  For they refuse to tell the government what they want to hear.  Like Paul Krugman and his fellow Keynesians.  Who say things like they’re just not spending enough.  Which is what every politician wants to hear.  No matter how ridiculous or asinine it may be.

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Economists say Falling Inventories, Steady Unemployment and Shrinking GDP is actually Good News

Posted by PITHOCRATES - February 2nd, 2013

Weekin Review

There is a slew of bad economic news but you wouldn’t know that if you listened to the economists.  Who say that this bad news is some of the best news bad news can be.  Even with unemployment rate ticking up slightly and GDP shrinking they still see the glass is half full.  Eternal Keynesian optimists they are.  But even their explanations are cause for concern (see US economy shrinks 0.1 pct., 1st time in 3 ½ years by Christopher s. Rugaber, Associated Press, posted 1/30/2013 on Yahoo! Finance).

The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter and the first contraction since the second quarter of 2009.

Economists said the surprise decrease in the nation’s gross domestic product wasn’t as bad as it looked. The weakness was primarily the result of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

Those volatile categories offset a 2.2 percent increase in consumer spending, up from only 1.6 percent in the previous quarter. And business spending on equipment and software rose after shrinking over the summer…

Subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.

Keynesians focus on consumer spending.  For them an increase in consumer spending equals a healthy economy.  Despite that economy shrinking by 0.1%.  They explain that away as just being a fall in inventories.  As if businesses will go back to increasing their inventories in the next reporting period.  Making everything fine once again.  But if non-Keynesians take all of this data together they arrive at a different conclusion.  The economy is bad.  And will be getting worse.

Consumer spending rose while inventories fell.  And no one is hiring.  What does this mean?  Businesses above the retail level (wholesalers, manufacturers, industrial processors, raw material extraction, etc.) don’t like what they see.  So they’re cutting back production.  They’re not expanding or hiring people.  With these businesses producing less there is less product flowing into inventories.  With less flowing in while there’s more flowing out inventory levels fall.  Which eventually will lead to higher retail prices as goods become scarcer.  Leading to a fall in consumer spending.  And less hiring at the retail level.

So what does this mean?  Businesses above the retail level see a recession coming.  And they’re already hunkering down to limit their losses.

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The Left still attacks Free Market Capitalism and the Invisible Hand despite the Left’s Record of Economic Failure

Posted by PITHOCRATES - April 14th, 2012

Week in Review

No matter how many times their policies fail those on the left never give up.  The free market capitalism that gave us the Industrial Revolution was not as good as the mercantilism it replaced.  The free market capitalism that won World War II was not as good as Nazi Germany’s National Socialism.  The free market capitalism that won the Cold War was not as good as the Soviet Union’s communism.   No, any economic system that doesn’t place smart people in the government (and from our most prestigious universities) in charge is an inferior economic system.  At least, according to those on the Left (see There Is No Invisible Hand by Jonathan Schlefer posted 4/10/2012 on the Harvard Business Review).

One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.

Interesting.  Using the economists of the Seventies as the authoritative position for government interventionism into the economy.  Why, that would be like having the captain of the Titanic being the authority on how to miss icebergs in the North Atlantic. 

The Seventies were the heyday of Keynesian economics.  Where the government was aggressively intervening into things economic.  And the results of their policies were so bad that we had to create new words to describe it.  Like stagflation.  A heretofore unheard of phenomenon.  And something that just wasn’t supposed to happen when the Keynesians used inflation to lower unemployment.  But it did.  Even though you weren’t supposed to get inflation and high unemployment at the same time.  Stagflation.  Like we did.  In the Seventies.

Believing far too credulously in an invisible hand, the Federal Reserve failed to see the subprime crisis coming. The principal models it used literally assumed that markets are always in instantaneous equilibrium, so how could a crisis occur? But after the crisis exploded, the Fed dropped its high-tech invisible-hand models and responded with full force to support the economy.

The subprime mortgage crisis was a government-made crisis.  Precisely because government refused to allow the Invisible Hand to guide the market place.  Instead they stepped in.  Forced lenders to make risky subprime loans to people who couldn’t qualify for a mortgage.  With tools like the infamous Adjustable Rate Mortgage (ARM).  And then they had Fannie Mae and Freddie Mac buy those risky mortgages.  To get them off the lenders’ balance sheets so they would make more risky loans.  Then Freddie and Fannie chopped up these risky loans and repackaged them into ‘safe’ investments to unload them to unsuspecting investors.  Getting these toxic mortgages off of their balance sheets.  (In case you don’t know, Fannie and Freddie are Government Sponsored Enterprises (GSE).  Which are for all intents and purposes the government.)  This house of cards imploded when the Fed raised interest rates.  After keeping them below what the Invisible Hand would have set them at for far too long.  The government created the real estate bubble.  Then blew it up when those higher interest rates reset all the AMR mortgage payments beyond the homeowner’s ability to pay.

There are many economists in the world.  And the consensus of economic thought tends to be one that supports large government intervention.  Which proves the economic consensus is wrong.  For if history supported this consensus the Soviet Union would have won the Cold War.  East Germany would have absorbed West Germany.  China would not be experimenting in ‘Invisible Hand’ capitalism.  And Cuba wouldn’t be experimenting with a little capitalism themselves to fix their broken government command economy.

All these market failures economists like to point to aren’t market failures.  They are the unintended consequences of government intervention into the market.  As the subprime mortgage crisis clearly proved.  Which never would have happened in the first place if the government didn’t try to be smarter than the Invisible Hand.

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The Austrian School of Economics

Posted by PITHOCRATES - February 27th, 2012

Economics 101

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.

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If Bigger Stimulus puts more Money into Consumers’ Pockets so will Bigger Tax Cuts

Posted by PITHOCRATES - November 19th, 2011

Week in Review

Economists are like climatologists.  They can look at a lot of data.  And come to all the wrong conclusions (see Whatever Happened to Discipline and Hard Work? by Tyler Cowen posted 11/12/2011 on The New York Times).

The second problem is that many conservatives have become so attached to their cultural vision that they have ceded sound, technocratic reasoning to the left and center. For instance there is a common willingness among conservatives to defend the Bush tax cuts, even though the evidence does not show much of an economic payoff.

Conservatives’ own culture, and the sheer desire to validate wealth, discipline and reward through law and the tax code, may have convinced them that the tax cuts have been beneficial. Measuring the actual effects of a tax cut isn’t always their main concern, even if they sometimes cite such numbers for rhetorical purposes. They feel in their bones that antagonism toward the rich is a dead end and so don’t favor highly progressive taxes.

That rhetorical line appeals to tax-weary voters, and seems part of a core conservative vision, but it is treading on dangerous ground because it moves away from testable theory: those tax cuts have already been in place for many years, yet it remains to be seen when or if they will spur the economy.

Interesting.  The Keynesians never talk this way.  When their stimulus spending hasn’t spurred the economy you know what they say?  The stimulus wasn’t big enough.  But when we’re wallowing in a recession that doesn’t want to end in large part due to the specter of Obamacare hanging over us like the sword of Damocles what does someone on ‘our’ side say?  Doesn’t look like the Bush tax cuts are working.  They don’t blame the rash of Obama policies that have squelched this economy.  No.  They go straight to the tax cuts.

Perhaps we should think like Keynesians.  And say the reason why the Bush tax cuts aren’t working is because they’re not big enough.  Make them bigger and those savings may offset the great new costs of Obamacare.  And they might just then turn this economy around.  Because if bigger stimulus puts more money into consumers’ pockets so will bigger tax cuts.

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Price Controls make Scarce things Scarcer

Posted by PITHOCRATES - October 23rd, 2011

Week in Review

If there’s anything that tells us not to take mainstream economists or the United Nations or the International Monetary Fund or other global organizations seriously it’s this (see Economists Call for Crop-Trading Limits to Curb Volatility by Alan Bjerga posted 10/10/2011 on Bloomberg Businessweek).

Hundreds of economists including scholars from Oxford University and the University of California, Berkeley, are asking the Group of 20 nations to impose limits on speculative positions in food commodities to curb volatility in crop prices…

Research sponsored by the United Nations, International Monetary Fund and other global organizations suggest speculation in crop futures by index funds and large banks may cause price spikes that can put grocery costs out of reach for poorer people. Global regulation of speculators has been a goal of French President Nicolas Sarkozy during his term as leader of the G-20 this year.

What’s the common thread in all these organizations?  They’re all Keynesian tax and spend big world government.  And, surprise, surprise, they want more control over the world’s economies.

Have we learned nothing from the Nixon’s price controls of the Seventies?  Price controls make scarce things scarcer.  Did rent control make more low-income housing available?  No.  Did price controls make gasoline more available?  No.  Why?  Because market prices match supply to demand.  And when you mess with the market price mechanism, you mess with supply and demand.  Resulting in shortages.  Such as low-income housing and gasoline during the Seventies.

Messing with prices doesn’t make scarce things less scarce.  So why do it?  Because that’s what Keynesian tax and spend big world government does.  It’s not about the economy.  It’s about power.  Their power.  And they want more.

The 2008 spike in gasoline prices is an example of this pricing mechanism.  The run up that peaked in July 2008 was due to a fall in OPEC production, not speculation (see Federal Reserve Bank of Dallas Clearly Explains Why Speculation Didn’t Drive Oil Prices in 2008 by Kay McDonald posted 10/14/2011 on big agriculture picture).  The high gas prices in 2008 just made sure that a scarce resource was available for those who really needed it.  People drove less over the summer.  Which made a scarce resource available for those who really needed it.  The result?  No gas shortages.  And no gas lines.  Like in the Seventies.

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Keynesian Economics and Job Creation just don’t go Together

Posted by PITHOCRATES - October 12th, 2011

It’s Competition between Intel and AMD pushing Chip Technology to New Heights, not Government Investment

With Solyndra going belly up after that half billion dollar government investment people have been asking questions.  One of which is how government should invest into the private economy.  Well, here’s one example (see AMD’s Bulldozer Fails To Meet Expectations by Devin Coldewey posted 10/12/2011 on TechCrunch).

The Intel-AMD war has been going on a long time, and I hope it will be going on longer. The last few years have been hard on the underdog, however, with huge growth by Intel in both the low-power and high-performance sectors. The Core 2 Duos excelled, as did the Core i* series, and its most recent consumer series, the Sandy Bridge update to the i*s, is a monster. AMD has consistently lagged behind, though from the other side of the table you might say they’ve been nipping at Intel’s heels quite effectively for years…

Unfortunately, despite the new architecture and insane transistor count (the 8-core 8150 has around 2 billion), performance and efficiency per core just plain isn’t that good. There are a few tests on which Bulldozer takes on Sandy Bridge well, such as those truly optimized for high core counts, but on single-core tasks it gets destroyed.

In other words, government shouldn’t invest in the private economy.  Because, when they don’t, the private economy does very well.

Does any of that techno-speak make sense to you?  If you’re not in the hi-tech industry, or a kid, the answer is probably ‘no’.  But the beautiful thing is that we can enjoy the end product of putting 2 billion transistors on a chip.  That we can understand.  And that it is competition between Intel and AMD pushing chip technology to incredible new heights.  Not government investments.

Obama wants to Raise Taxes on Small Business Owners, the Number One Job Creators in the Country

The most successful companies out there making the things we all want and must have need help from government.  The kind of help only government can give.  That thing only government can do.  Cut tax rates (see Business groups push for business-friendly tax reform by Bernie Becker posted 10/12/2011 on The Hill).

The National Federation of Independent Business, the Independent Community Bankers of America and more than 40 other groups are calling on key policymakers to tackle both the individual and the corporate tax codes together and to end double taxation on corporations.

“By embracing these broad concepts, Congress can move the taxation of business income in a direction that helps ensure that all employers, regardless of how they are organized, continue to invest and create jobs here in America,” the groups wrote to the top Democrat and Republican on both the Senate Finance and House Ways and Means panels.

The Left keep saying businesses don’t object to high taxes and costly regulations.  The Keynesian economists like to cite poll after poll that business owners’ only concern is the lack of demand.  And then interpreting that as meaning that they want government to invest and stimulate the private economy.  But these businesses are saying otherwise.  They’re saying it is the high taxes.

The Obama administration also has, so far at least, spent more time pushing for corporate tax reform, while Republicans like Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, want a more comprehensive approach.

Camp has taken that stance in large part because many small businesses, called pass-through entities, pay their taxes through the individual code and would be left behind in any corporate-only reform.

And it’s worse than that.  Obama wants to raise taxes on these ‘pass-through’ entities.  To make them pay their ‘fair share’.  Those so called rich people earning $250,000 or more.  These small business owners whose business incomes ‘pass through’ to their private tax returns.  These same people that have risked everything they own to create a business.  And create jobs.  Who are, in fact, the number one job creators in the country.  But many fail.  And lose everything.  These are the rich people that Obama wants to raise the tax rates on.

Public School Education is Bad because Dumbing Down of our Kids is Necessary to Fool our Young Voters

Which calls into question the bedrock of all their policy.  Tax and spend Keynesian economics (see SCHOLAR COMMENTARY by Matthew Mitchell posted 10/10/2011 on Mercatus Center).

Sargent and Sims’s work is particularly relevant today as it explains the way that peoples’ expectations of the future can impact their current behavior. This is reflected in every economics story today that uses the phrase “policy uncertainty.”

Their work came along at a time when Keynesian economic models were facing challenges: There were theoretical challenges by economists like Milton Friedman and Robert Lucas, both of whom have previously won Nobel Prizes, but there were also empirical challenges. Keynesian economics didn’t seem to make much sense of the 1970s when the economy experienced high unemployment and high inflation, whereas it had worked pretty well in explaining macroeconomic trends in the 1960s.

The problem with the faux science Keynesian economics (a social science not a real science) is that it tries to quantify human behavior.  Which is something many people believe we can’t do.  Those in the Austrian school of economics.  Ronald ReaganMargaret Thatcher.  And most economists not wedded to their governments.

The 1970s were the heyday of Keynesian economics.  Even Republican Richard Nixon adopted Keynesian policy and declared he was a Keynesian, too.  Then Jimmy Carter continued many of these same policies.  And how did that work?  You can ask Jimmy Carter.  Who lost to Ronald Reagan in a landslide.  By asking a simple question during a presidential debate.  Are you better off than you were four years ago?

Part of these failures had to do with the fact that these earlier Keynesian models relied on people’s naiveté. They worked so long as people could be fooled by government. For example, government-induced inflation might boost the economy if enough producers are fooled into thinking that higher prices are the result of increased demand for their products. Sargent’s work explains how people’s beliefs about the future impact their behavior. He found that if you make modest assumptions about peoples’ ability to understand how policy will affect their future, Keynesian policy prescriptions like short-term fiscal or monetary stimulus don’t work very well.

And there’s your answer to why the quality of our public school education is lagging other countries.  It’s not the money.  It’s the curriculum.  And the dumbing down of our kids.  So government can fool them.  To make them believe bad economic policies are good.  So these young voters keep voting for them.  Which is important to them.  Because once people wise up, they lose their votes.

As Long as there is a Democrat Politician Somewhere there will be a Vote to Buy

The best government policy for investing in the private sector is no policy.  Successful companies don’t need help.  They just need to be left alone.  So they can do what they do best.  Create great things.  And jobs.

Higher taxes do not create jobs.  They destroys jobs.  At least according to those who create jobs.

And the tax and spend Keynesian myth of active government participation has been debunked once again.  By real economists.  This time by the Nobel in Economics winners.  Sargent and Sims.  Thus proving once again that you can’t quantify human behavior.  And that people consider more than the interest rate before spending their money.

So you’d think this would put an end to any further stimulus spending.  But no.  Because stimulus spending isn’t about stimulus.  It’s about getting votes.  And as long as there is a Democrat politician somewhere there will be a vote to buy.

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When Democrat Policies Fail and they Fall in the Polls they Scramble to Endorse Reaganomics

Posted by PITHOCRATES - October 5th, 2011

Democrats have Blamed every ill known to Mankind on Reaganomics

The Left hates Ronald Reagan.  Proclaimed the era of Reagan was over.  No more were these Reagan Republicans going to screw over the poor so the rich can live a better life.  Yes, they hated this man with a passion.  And everything he stood for.  This supply-sider of the Austrian School.  He and is unfunny Laffer Curve.  This cold-hearted tax cutter.  But now they love him.  Why?  Because he supported taxing the rich.

I’ll pause a moment for those of you who have fallen out of your chairs.  Ready?  Good.

You know Congressional Democrats are grasping at straws to promote their policies when they claim their archenemy would have supported them, too.  You know why they’re trying, though, don’t you?  If you listened to the protesters on Wall Street you should know.  With their control of public school teachers and college professors (both dependent on taxpayer money for generous pay and benefit packages), they can revise history.  And keep kids ignorant.  Hopefully keeping them oblivious of things they don’t want them to know.  Such as the true legacy of Ronald Reagan (see MILLER: Ripping off the Gipper by Emily Miller posted 10/4/2011 on The Washington Times).

Liberals are trying to twist Ronald Reagan’s words to muster support for raising taxes. House Minority Leader Nancy Pelosi’s press office sent a memo on Monday to congressional Republicans claiming they’d found evidence proving that President Reagan was the real inspiration for President Obama’s tax-the-rich “Buffett Rule.” The California Democrat posed the question: “What would Reagan do?”

The correct answer is: He would cut taxes. Mrs. Pelosi’s memo sends people over to the liberal Think Progress website, where a video montage interweaves clips of Mr. Obama and Reagan saying apparently similar things about tax rates. “We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” said the Gipper.

You’re supposed to think that’s just what Mr. Obama is doing, but the liberals edited out the context of the 40th president’s remarks. In a June 1985 speech at an Atlanta high school, he called for a total overhaul of the tax system. He wanted loopholes closed to lower the tax rates for everyone, for a net reduction in the tax burden. Congressional Republicans point out that’s precisely the opposite of what the Democrats are now trying to do.

You see, the Democrats can’t rely on telling the truth to pass their policies.  Because their policies only benefit those in government.  And those who live like parasites on the wealth creators.  Such as those protestors on Wall Street.  Who want the wealth of the wealth creators.  But want no part of capitalism which created that wealth.  And are too ignorant to understand that you can’t have one without the other.

Thank you public school teachers and college professors.

So they must lie.  Revise history.  To try and fool people into believing that their policies are just like Ronald Reagan’s.  And apparently hoping people don’t remember that Democrats have blamed every ill known to mankind on these very same policies.  ReaganomicsTrickledown economics.  The scourge of mankind.  But the majority of Americans apparently love the big lug so they’ll swallow back their bile and say, hey, we love him, too.  And hope that the grimace on their face doesn’t look as bad or as painful as it feels.

Fannie Mae and Freddie Mac created America’s Financial Mess, not Wall Street

So where did these Wall Street protests come from?  Where did the primary impetus come from?  Apparently Canada.  Thanks, Canada.  As if the corrupting influence of Terrance and Phillip wasn’t enough already.  So I guess we have to Blame Canada (Warning:  Blame Canada contains adult content) for this, too (see Occupy Toronto leaderless, unfocused but hopeful by Dana Flavelle posted 10/4/2011 on the Toronto Star).

The Wall Street protests were inspired by Canadian anti-consumer magazine Adbusters.

Editor in chief and co-founder Kalle Lasn said he’s been calling for this kind of protest movement for 20 years.

It’s finally happening because people are angry with the financial fraudsters on Wall Street who created America’s economic mess and largely went unpunished, he said in a telephone interview from Vancouver.

But that isn’t who created America’s financial mess.  It was government.  Specifically the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  If it wasn’t for them buying and/or guaranteeing risky subprime mortgages there would have been no subprime mortgage crisis.

That was government policy.  Putting as many people into houses as possible.  Even if they couldn’t afford them.  That wasn’t Wall Street.  Wall Street was merely an accessory after the fact.  Aiding and abetting Fannie Mae and Freddie Mac.  By selling those toxic subprime mortgages in collateralized debt obligations (CDOs).  Promoting them as high yield yet low risk.  Because they were backed by mortgages, historically the safest loans in all of America.  So investors bought these.  Not knowing how risky they were.  But you know who knew how risky they were?  The GSEs Fanny and Freddie.  Because they bought them.  And remember what the ‘G’ stands for in GSE.  Government.

If you removed government from this equation mortgage bankers would not have approved these risky subprime mortgages.  Because that risk would have been on their books.  But when government said ‘don’t worry  we’ll take that risk off of your books’ what did they have to lose in approving risky subprime mortgages?  Less harassment from the government for not approving mortgages for the poor and minorities who didn’t qualify?  Yeah, like they were going to miss that harassment.

If these protestors want to protest those responsible they should protest government.  Not Wall Street.

Damn Canadians.  If it’s not making our kids fart and curse they’re getting them to protest the wrong people.  (Editor’s note:  We like Canada and Canadians.  And mean them no disrespect.  We’re just having a little fun with the movie South Park: Bigger, Longer & Uncut.  In which incidents lead to war between Canada and the U.S.  A premise so ridiculous that it’s funny.  For Canada and the U.S. have been the best of friends.  And will always be the best of friends.)

The more Public Sector Union Employees paying Dues the more Money is collected for Democrat Coffers

Perhaps that’s the problem.  Too much government.  The federal government has grown into a behemoth.  On top of thousands and thousands of local governments throughout the country (see Infographic: Local government by the numbers by Mary Mahling and Carla Uriona posted 10/4/2011 on Stateline).

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

That’s a lot of government.  And there’s only one way to pay for a lot of government.  With a lot of taxes.

So we have government upon government upon government.  Surely with all that government we must be getting some value for all of these taxes.

More than two centuries of American democracy have resulted in a profusion of governments at the local level, not only cities and counties but villages and townships, park districts and sanitary districts and a host of others. To those trying desperately to bring a state’s budget into balance, many of these are useless anachronisms incapable of providing any service that could not be provided higher up the governmental chain. But to the tens of thousands of people who hold office in these local entities — and to millions of citizens who live within them — multiple local governments are a crucial piece of evidence that American democracy reaches down to the grassroots level.

Apparently not.  And don’t call me Shirley.

They just provide a lot of jobs for the unemployable.  By taxing the wealth creators.  And redistributing it to people whose job is a duplicate of one at another level of government.

They do serve a purpose, though.  Being totally funded by taxpayers, they have a vested interest to keep raising taxes on the taxpayers.  Which is, of course, helpful to Democrats.  So the more local governments the better.  The more public sector union employees paying dues the more money finds its way into Democrat coffers.

Any Attempt to Quantify Human Behavior will Ultimately Fail

And then you have academe.  And Keynesian economists.  Furthering the growth of government with their government-spending Keynesian economics (see Tis The Gift To Be Simple by Paul Krugman posted 10/5/2011 on The New York Times).

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

I have a criticism.  Any attempt to quantify human behavior will ultimately fail.  Because you can’t quantify human behavior.

Economics belong to the branch of science we call social sciences.  That is, it’s not real science.  Because the wildcard is that human behavior can always produce some unintended consequence to government action.  Such as Prohibition giving us organized crime.  Whereas the equations of science typically don’t.  We can use science to build bridges, buildings and airplanes.  And they work pretty much as planned.  Without any unintended consequences.

You can’t represent human behavior by mathematical formulas.  We know some behavioral responses.  Such as sex in advertising gets men’s attention.  But that’s a base primeval instinct.  There’s not a whole lot of thinking going on.  Not so in a complex economy.  Where there is a lot of thinking going on.  Keynesians like to think the economy is as simple as impulse buying at the point of sale checkout aisle.  Put more candy on display and you sell more candy.  Not so with buying a house.

Everyone will like to own a beautiful home.  But people won’t buy a house on impulse.  Not when there’s record unemployment.  And talk of a double-dip recession.  Because if you learned anything from the subprime mortgage crisis it’s this.  Too much debt is bad.  And there is no such thing as a guaranteed job.  Playing with interest rates won’t change that.  Only time will.  When enough time has passed to let people feel secure in their jobs again.  Then and only then will they consider taking on debt again.  No matter what the IS-LM model predicts.  Because you can’t quantify human behavior.

The Wall Street Protestors with Student Loan Debt Probably don’t have Science or Engineering Degrees

All government policy is social science.  It’s not an exact science.  That’s why strange things happen.  Unintended things.  Whenever government tries to influence behavior.  And when government tries they have a track record of failure.  Which is why they don’t run for reelection on the success of their policies.  They run on the success of someone else’s (Ronald Reagan’s) policies.  And say that their policies are the same.  And they are except with a few minor changes.  And by ‘few’ I mean they couldn’t be any more different.  So they lie.  Or they just demonize their opponents.

But our kids are blissfully ignorant.  Thanks to public school teachers.  And college professors.  Who care more about improving their taxpayer funded pay and benefits than education.  That’s why government grows.  And why we have degrees like women’s studies.  And poetry.  Degrees that offer no hope for employment in a capitalistic economy.  For what business that relies on pleasing their customers (like Apple does consistently) need people with these skills?

No.  They need people with science and engineering degrees.  You know, the hard ones.  So the kids who took the easy route in college must depend on teaching others their worthless knowledge.  Or get a government job.  Which has a lot to do with the anger of these protestors who have huge student loan debt.  And no job.  Because if they hate capitalism you can guess what their degrees are in.

(Editor’s note:  This was written before news of Steve Jobs’ passing broke.  Our condolences go out to his family.  We decided to leave the Apple reference in as a tribute to Steve Jobs.  He was one of America’s greatest entrepreneurs.  The world is a better place because of him.  For the gifts he gave us.  And the inspiration he gave to the next generation of great entrepreneurs.)

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