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Source link: http://archive.mises.org/10940/the-gold-standard-and-the-great-depression/

The Gold Standard and the Great Depression

October 30, 2009 by

Remember that “abandoning gold” isn’t akin to shaving one’s mustache. When a country dropped a peg, it effectively ripped off every investor who had been holding assets denominated in it. FULL ARTICLE by Robert Murphy

{ 35 comments }

Bogart October 30, 2009 at 8:29 am

PK is famous for taking snapshots of times that fit his theory. The problem with the Depression was that the moves by HH and FDR made a necessary adjustment in the productive structure of the economy that in 1920 took less than 2 years into something that dragged on into 1947. That is 18 years, the stock market did not recover NOMINALLY until 1952, 23 years. In inflation adjusted terms, the stock market did not recover until the 1962, 33 years.

anonymousaurus October 30, 2009 at 8:39 am

There was a series of extensive discussions over monetary policy and the Great Depression over at the Austrian Economists blog – in particular, Horwitz’s conclusion is quite different. So I’ll just post the relevant links:

Part 1: Hayek on Deflation and the Great Depression
http://austrianeconomists.typepad.com/weblog/2009/10/hayek-on-deflation-and-the-great-depression.html

Part 2: 1920-21 and the Great Depression
http://austrianeconomists.typepad.com/weblog/2009/10/192021-and-the-great-depression.html

Jacob October 30, 2009 at 8:59 am

Krugman’s charts only show that government sponsored industrial production went up through the use of inflation by the Federal Reserve. Government shifted the economies of the world from production for private consumption to production for war. This is done by inflation and taking money produced by the private sector. It produces no increase in wealth but in fact produces a decrease in wealth as a result of the money taken by force through taxes and inflation.

Abhilash Nambiar October 30, 2009 at 9:38 am

So in a nutshell, if the government fixes wages and prices during a depression and prints money at the same time, more people will stay employed and nominal wages will stay more or less flat. People with jobs will make stuff, so industrial output will increase so the economy will apparently recover. Not only that they will buy stuff too. So it is a good idea to get off the gold standard?

What could be wrong with this picture? Why is this recovery not real? Because it was achieved by reneging on promises to deliver gold for greenback, I suppose. In other words it is achieved with stolen money. But if there is a crisis, people will look the other way when the government steals from the minority that made prudent decisions.

Knowing there is a better way, I still think this could work for the majority, provided the government allocates the new money sensibly, which does occasionally happen. Some market correction may happen later on depending on how efficiently the bureaucrats had initially distributed the new funds; but not too much if they did a good job. I think it is possible for the government to do a good job; they just do not have the incentive private players do.

There is also the long-term social degradation that will follow. Knowing that your property can be seized at any time for politically correct reasons is a disincentive to be productive. Quality of life will suffer. Liberty will die. It is a shot sighted way of resolving problems, but that is what you get when politicians think in terms of election cycles.

Bob Stafford October 30, 2009 at 10:52 am

First, the Austrian theory does not address the production decisions of firms – more importantly, it is implicit within that both gross production and consumption in all sectors would be higher in a downward direction. I do not dispute that central banks policy is possible of having an exacerbating effect on business cycles, however this is a very weak foundation for a theory to rest as: 1) it fails to explain the existence of business cycles before the establishment of Federal Reserve (1869, 1873, 1882, 1884, 1896, 1901, and 1907); 2) It implies that these titans of business have the mentality of a two year old when it comes to basing investment decisions on interest rates. In all honesty, can you tell me that these people base the whole of their investment decision on a number flashing before their screen, that this number signifies the large extent of their long term decision making? Do you not think that these people watch the position and decisions of the monetary authorities like hawks and adjust their decisions for margin of error based on artificiality? You are completely out of your mind, as in the real world – where you should take a vacation someday – there exist myriad strategical and otherwise unrelated decisions that these individuals base their short term – and more importantly long term – investment decisions on. I find it somewhat telling that, for a person who puts extreme emphasis on complexity and information you are quite willing to limit the impact of the sheer amount of information when it suits your religion.

Second, If every captain of industry and financial titan is as ignorant as we think, perhaps there is something to our business cycle theories. Anyway, there is a nice little book called, ‘This Time is Different’ which highlights most of my assertions. Try Kindleberger’s ‘World Economic Primacy; 1500-1990′ as well. If you are making the claim that usury laws and gold standard suspension are a historical bases for financial bubbles as opposed to speculative excess, then you need psychiatric help.

Third, the framework within which Keynesian and Marxian analysis – even neoclassical, which I rarely say – works is far superior to the simplistic and superficial Austrian approach. While they take into account human fallibility and uncertainty, you simply assume some magical ignorance stick hits human beings for your cyclical garbage that must be absent in the majority of your subsequent arguments.

mpolzkill October 30, 2009 at 11:06 am

Here you go with another one, Abhilash. Instead of you all having to dispell afresh Mr. Stafford’s wild propaganda for new readers who might think it has merit, there should be an easier way.

Perhaps another method could be a databank tied to the IP address that automatically links one to all the dozens of times a serial propagandist such as this has been thoroughly whipped in previous debates.

Jon O October 30, 2009 at 11:47 am

Personally, I can concede the idea that counter-cyclical policy can have a positive short-term effect, much the same way that a hit of dope can get an addict functioning at a higher level than he was pre-dope. With more dope the addict is more productive – until he ODs.

Stop trying to fight the mainstream on whether CC policy works or not, it clearly does in the short-term. If you dispute this you haven’t been paying attention to current events from the March bottom in the markets, gdp etc. coinciding with the high in the USD. The reflation is working. The “deflation psychology” has been broken.

When you create more dollars and allow the Gov. and the public to borrow/spend them you will artificially boost demand before there is a commensurate rise in prices, giving the illusion to producers that times are good and investment and production should be increased, regardless the levels of slack and excess capacity.

Of course by the Gov devaluing and spending they are basically forcing holders of cash to move up the inverted pyramid of liquidity (into riskier money substitutes, financial instruments, goods etc.) when they really shouldn’t be. They are screwing with peoples’ time preferences. Now people are going further into debt (thanks to the perception of neg real rates, the break in the “deflation psychology”, dropping rates on risk-assets etc etc) to buy things they shouldn’t. It’s just pulling forward demand.

At a certain point though society has mortgaged it’s future to such an extent that debt service becomes onerous and no level of interest rates will spur the borrow-spend system. This is where unconventional monetary policy (attempts to orderly devalue) and CC fiscal policy (attempts to orderly increase money velocity) will at some point, if policies makers are committed enough, stop the debt deflation through backdoor default (devaluation).

But of course this has consequences. First is a fall in credit-worthiness. If a country can’t borrow “sterilized” domestic currency it will either borrow foreign currency or “un-sterilized” (printed) domestic currency. Eventually this will put downward pressure on the currency, on both the forex markets and on domestic prices. The question is: can we devalue our debt obligations (public and private) through debasement before creditors and dollar holders take defensive action. (Of course, much of this is moot, because the U.S. maintains an empire to support its reserve status, for the time being)

Here’s the basic game plan:
1) Tax until the serfs get restless
2) Borrow until the creditors balk
3) Print.
4) Repeat Step 3 until the credulous stop believing.

So, why don’t we just accept the fact that easy monetary policy and CC fiscal policy are efficacious in the short-term but destabilizing in the long-term? This whole crisis is an example of what happens in the Keynesian long run: eventually the junky, instead of being prudent and going to rehab, shoots up one last giant dose of stimulus and his heart explodes.

Abhilash Nambiar October 30, 2009 at 11:56 am

mpolzkill

I have not seen him before. I suppose he does not post that regularly. I nevertheless feel the urge to correct him.

Bob Stafford

The current President of the Mises Institute, Douglas French, has a special taste for Bubble economics prior to the era of the Federal Reserve. He starts from the Tulip Mania of the 17th century way back. I think reading it will help address some your doubts.

http://mises.org/store/Early-Speculative-Bubbles-P578.aspx

Then there is this article:

http://mises.org/daily/3632

You see Central Banks have come and gone in the past.

And you could be right about major titans in the industry not being fooled by government efforts. They recognize and profit from it, they work with the government and even if they fail to profit, they get bailed out because they are major titans!! They got it made.

It is the common man that is fooled by it all, he is not a sophisticated thinker and complicated explanations befuddle him, especially when there are people out there specifically trying to do just that. His money gets ripped off as taxed to blow the bubble. He tried to make up by investing and loses out when the bubble bursts and when it is all said and done he goes rushing for help to the people who where responsible for this!! His ignorance is their power. But if desperation propels him, he will eventually see through the deception despite people like you. Mark my words.

mikey October 30, 2009 at 12:35 pm

This site must have some people really worried.

Inquisitor October 30, 2009 at 12:35 pm

Stafford, would you perhaps descend from your high pedestal, read Austrian works and get a clue what you’re talking about, or do you wish to remain ignorant? Because right now… your objections betray an unfamiliarity with responses to your rather weak points that have been countered by Austrians in various works. I’m not going to even asked what works you’ve read because your comments betray a lack of any understanding of the theory whatsoever, so it’d be pointless.

“Third, the framework within which Keynesian and Marxian analysis – even neoclassical, which I rarely say – works is far superior to the simplistic and superficial Austrian approach.”

*Yawn* Assertion. BTW when you allude to something as a ‘religion’ it helps to know what the fuck you’re talking about. Sorry, I do not wish to upset ‘erudite intellectuals’ such as yourself by pointing out how full of hot air you are.

“Try Kindleberger’s ‘World Economic Primacy; 1500-1990′ as well. If you are making the claim that usury laws and gold standard suspension are a historical bases for financial bubbles as opposed to speculative excess, then you need psychiatric help.”

Ah yes, typical. Disagree and you need ‘psychiatric help’. Try reading all the books and articles on this site on the topic of business cycles. If you still disagree, you need more than psychiatric help, maybe a brain transplant.

Are you done peddling pseudo-science? In future, reduce it to one line objections, which is all the space it really need consume. Makes it easier to just reference you to works dispelling your ‘understandable’ confusion.

Ohhh Henry October 30, 2009 at 12:47 pm

“I still think this could work for the majority, provided the government allocates the new money sensibly, which does occasionally happen.”

It is unlikely that they would invest sensibly. Ordinary people invest sensibly by taking into account their own desires. So in the absence of government, sensible behavior takes place spontaneously. Before government even exists, therefore, there is no case to be made for needing the government.

But what if you’re stuck with a government, how will they tend to allocate resources? There are two problems inhibiting them from investing for the greater good. First, they don’t know what is “sensible” (for the good of the public) because they can’t read the minds of the public and determine what they want. Second, being ordinary humans and given a monopoly power, those in government will naturally tend to use their power for their own benefit, not for the benefit of others. The feedback of democratic elections is far too delayed, diffuse and corruptible for these beauty contests to ever be an effective corrective mechanism on the behavior of government.

A free market trader also can’t read the minds of the public and must guess what they want. However he will receive instant feedback in the form of rejection by the public if his goods are not desired, and he will be replaced by a competitor who has better anticipated the public desire. Competition has the effect of constantly correcting and honing the allocation of resources, directing the resources always towards what the public themselves know to be the greater good, since it is good for them individually. In the absence of a government monopoly no individual has enough power to skew the system and tilt the resources towards himself and his cronies, because any attempt to do so by force would be met with force and any attempt to do so by fraud would result in rejection and banishment from the marketplace.

Abhilash Nambiar October 30, 2009 at 1:06 pm

Ohhh Henry

I agree it is less likely that governments will allocate resources effectively. But I think it not to be impossible. Even tough monopoly power has great potential to the fact that there is no other option will also attract people who are somewhat ‘incorruptible’. In the US we have Ron Paul as an example.

‘They can’t read the minds of the public and determine what they want’
Unfortunately they can. That is how they win elections. That is how they effectively deceive.

‘democratic elections is far too delayed, diffuse and corruptible for these beauty contests to ever be an effective corrective mechanism on the behavior of government’
The bright part about that is that it undermines their capacity to deceive. Which is good.

Eric October 30, 2009 at 1:26 pm

Krugman is a perfect example of what Lew Rockwell was talking about in “Economics and Moral Courage”.

He is simply in it for himself, as Lew describes:

“With the state, there are even more prizes: to be close to politicians, to get outside gigs in which you serve as an expert in drafting legislation or in legal proceedings, to testify before congress, to get called by the MSM to comment on national affairs, and the like. The point is not to advance ideas, but rather to advance oneself in a professional sense.”

This describes Krugman perfectly.

Thomas October 30, 2009 at 1:30 pm

Fun Fact of the Day: Hoover getting together with big business and big labor to fix wages was an ideology popular at the time known as Fascism.

-also fixing prices and such in an effort to make the economy run efficiently and provide for all. That’s why Churchill called Fascism ‘the antidote for Communism.’

Isn’t it funny how history tells us that Hoover was a non-interventionist and Nixon was a Conservative Free Marketeer?

And could it be that WW2 brought us out of the Depression because we were forced to abandon FDR’s regressive policies? You can’t afford to burn down farms while fighting a war on 2 fronts.

Thomas Talionis October 30, 2009 at 1:45 pm

When people talk about the ‘redistribution of wealth’ they are insinuating that the wealth was distributed in the first place.

And is that really the proper function of government? Is government in the distribution business?

Abhilash touched on a good point. If the government can arbitrarily seize private property/assets they kill all incentive to produce.

Most 3rd world countries don’t have strong property rights. So they stay undeveloped. America, by contrast, has strong property rights (knock on wood) and allows foreigners to own property. Mexico does not. Hmmm . . . .

Abhilash Nambiar October 30, 2009 at 2:02 pm

Thomas Talionis

I did not say that the government could or would arbitrarily seize private property.

If they did or reserved the right to do that, then they would become unpopular because of that and thus lose power, except in rare instances like the Soviet Union.

I said:
‘Knowing that your property can be seized at any time for politically correct reasons is a disincentive to be productive.’

See. They can only cease for politically correct reasons. Like the time the US government seized the property of Japanese Americans. Reasons that their power base will support or at the least tolerate. They do not kill all incentive to produce, only politically incorrect incentive to produce. They have limits. They cannot take any action that will corrode their power base.

Michael A. Clem October 30, 2009 at 3:42 pm

1) it fails to explain the existence of business cycles before the establishment of Federal Reserve (1869, 1873, 1882, 1884, 1896, 1901, and 1907)
I, too, was puzzled by the pre-Fed cycles of the second half of the 19th century, until I learned that the U.S. had a 3-tiered banking system with Federal banks at the top that were essentially doing what the Fed does, although they were not as centralized as the Fed. The point remains that the Fed was allegedly supposed to end these cycles–instead we got an even bigger cycle as a result.

Stephen Grossman October 30, 2009 at 4:16 pm

Clem’s explanation of pre-Fed business cycles doesn’t go far enough. As Rothbard, in _History of Money and Banking in the US_, makes clear in mind-numbing detail, there has been govt intervention in money and banking since the colonial era. This intervention has increased and decreased in many complex ways and has been both state and national. The long-term trend, with occasional 19th century decreases, has been for an increase in intervention. Every once in a while intervention reaches a tipping point and we get what I call the Socialist Inflation Cycle and the conventional listing of US business cycles. Intervention does not have to be as unified as socialism to be destructive. A patchwork of interventions will have a patchwork of destructive effects.

As a rational hypothesis, pre-Fed, low-level intervention caused many more business cycles than on the conventional list noted in this blog. These low-level business cycles were not distinguished from normal business fluctuations because there was no sufficiently powerful business cycle theory before the 20th century to guide research. Ayn Rand, in _Capitalism: The Unknown Ideal_, noted the lack of a systematic study of the difference between the effects of capitalism and controls in US economic history.

Bob Roddis October 30, 2009 at 6:35 pm

Mr. Stafford:

1. Ron Paul explains the origins of pre-Fed booms and busts in Chapter 2 of “End the Fed” which is free here. Austrian theory does not fail to explain pre-Fed booms and busts. Here is a short little pamphlet that helps explain this further.

2. Your criticism of Austrian Business Cycle Theory (ABCT) is misplaced. Goods and services ultimately exchange for other goods and services. Money is not only a medium of exchange, but it is a measure of exchange. All value is subjective with each person. Economic value can only be determined from free market prices, which are historical events.

All that a central bank can do is dilute (or contract) the money supply. Persons receiving the new money first (which was created out thin air) are in essence stealing purchasing power from those holding the existing money, the value of which is thus diluted. The central bank’s primary activity begins in fraud and theft.

Not only does this monetary dilution affect interest rates, but it makes economic calculation exceedingly difficult, if not impossible.

Why were people buying houses in our recent boom? The most obvious reason (other than everyone likes a big new house) is that real estate was seen as an inflation hedge. People were scrambling to find a store of value in the face of their constantly diluted dollars. Shrinking the measure of exchange during the economic game is like shrinking the length of the first-down chain in football. But an economy is more complicated than measuring first-downs and the measurements must be accurate over a long period of time covering billions and billions of transactions. This is especially important for long term investments in capital goods where a regime of constantly diluted dollars invariably causes malinvestments that cannot be sustained and will collapse in a bust (like we have just suffered).

3. You say, “It implies that these titans of business have the mentality of a two year old when it comes to basing investment decisions on interest rates.”
As my kids would say, “Your point?” The monetary dilution boom did in fact occur recently and “these titans of business” sure seemed to me to have no idea about the pernicious malinvestments caused by Fed money dilution. The banks were certainly clueless as were the home buyers. Since the establishment likes to convince everyone that the ABCT is just a “fringe” theory, I suppose we can say that these folks had “the mentality of a two year old” when it came to blindly refusing to see the reality of monetary dilution.

4. Hayek explains the essence of Keynesian theory here. When unemployment is high because wages are too high, Keynes proposes diluting the currency and lowering the workers’ wages without them realizing it. Now there’s a highly moral philosophy.

Ohhh Henry October 30, 2009 at 7:34 pm

From what I witnessed in the hi tech bubble up until about 2001, the titans of industry who disdained the easy credit were left in the dust by their debt-laden competitors. It did them no good to stand on principle because their own shareholders insisted that they get with the play and go out and borrow a ton of money and do things with it like invest in competing “me-too” products. They even started to finance their own customers and re-lend the money so that neophytes could go into business as telecom service providers. The really wise thing to do would have been to walk away before the bubble burst but since the timing of the burst was a mystery, you could not justify walking away and leaving bubble money on the table without taking a whack at it.

I have no doubt that the same thing happened in banking, mortgage and insurance industries in the real estate bubble that was spawned after the crash of the tech bubble. Titan or no titan, when someone hoses cash around and you happen to be near the spigot then you have no choice except to run around trying to grab as much of it as possible.

An inflationary bubble corrupts everything it touches. It turns cash into trash, wise men into fools and the prudent into beggars.

Bob Roddis October 31, 2009 at 8:15 am

The world’s largest cruise ship. Is this another example of Mark Thornton’s “giant skyscrapers at the end of the boom” theory?

Oasis of the Seas, which is nearly 40 percent larger than the industry’s next-biggest ship, was conceived years before the economic downturn caused desperate cruise lines to slash prices to fill vacant berths.

“Obviously we did not want or anticipate she’d be born into the most significant economic downturn since the Depression,” Royal Caribbean International President & CEO Adam Goldstein told The Associated Press in an interview earlier this month.

What’s all this about questioning whether “these titans of business have the mentality of a two year old“?

Bruce Koerber October 31, 2009 at 9:16 am

http://moneyandethics.blogspot.com/
Friday, October 30, 2009

Marxians And Keynesians Destroyed The Dollar!

Like usual, the socialistic interventionists attack capital. This ignorance and economic fallacy is exactly why Karl Marx cannot ever be considered an economist with an alternative economic system. He illegitimately denied that capital is an essential economic reality.

And Keynes was not much different. He treated capital as some constant as if it was a non-economic factor. On top of that absurdity he built his bogus ‘economic’ model which has permitted the ego-driven interventionists to bring the world to the brink of total economic collapse.

That said, gold is not capital to be taxed. It is the medium of exchange of choice in a free world.

And it is such a powerful tool to eliminate the economic terrorism of the ego-driven interventionists that they will do everything in their power to resist the re-establishment of gold as the standard for all the world.

{This includes designating Paul Krugman as the Nobel Laureate for Wackonomics and then using him to slander the gold standard.}

However, the forces of economic equilibrium are far, far, far greater than the puny resistance of the counterfeiters.

Gene Berman October 31, 2009 at 5:14 pm

I want to remind all that the “Gold Standard” is a construct of (and subject to the whims of) government.

By no means can the Gold Standard be re-instituted to serve as an enduring basis for a proper monetary system. It is one of the steps that brought us to the monetary conditions of today and, though re-institution might prove temporarily durable, would eventually be likely to occupy a similar situation in a future progress toward even more catastrophic collapse than has ever been witnessed in times past.

The failure of the Gold Standard lies not in any sort of deficiency of gold as money; the stuff is as highly suited to the purpose as ever it was (perhaps even higher, now that the inferiority of several other media, in comparison, has been exposed). Gold has been money for a very long time, is certainly money now, and shall likely be money for as long into the future as our species inhabits the planet with any semblance of the social harmony we call civilization.

What history and the study of Economics should show all who would learn and know is that a prosperity characterized by efficient use of the world’s resource wealth and workable, relatively stable money relations between virtually all the world’s peoples is likeliest in a world characterized by the widest-possible acceptance of gold as a medium of exchange NOT subject to restrictions on its use, accumulation, storage, or transfer by any authority whatever. No existing government will ever accede in freeing the monetary power from their determined grip; it must be wrested from them, either by force or by being faced with such certain destruction and ensuing chaos that surrendering monetary power seems the “lesser evil.”

Once any significant industrial nation successfully severs the link between government and money, it will (barring malicious military attack) attain success to such degree that “monetary freedom” will spread (and call into question many practices by which governments lower the prosperity of their own people) widely. Freedom of money (and probably, freedom of private banking) is a fundamental requisite of any real human freedom.

(Please do not interpret what I have written in the light of what might or might not be said by the U.S. Constitution with regard to monetary or legal tender or other economic-related laws. It is simply a fact that the Founding Fathers were at least as ignorant of the basis of all modern economic understanding–that value is in the mind and not in things–as were even the greatest of classical economists. I like to think that, brought back and acquainted with “Subjective Value Theory,” they’d INSIST on a rewriting of the document to reflect their new-found knowledge; a few might even become “Austrians!” You can be certain, even before mastering monetary theory, they’d be for striking out or rewriting to “tighten” such idiocy as the “commerce clause.”)

Bob Stafford November 1, 2009 at 8:39 am

It will be rare to find an economic historian other than those of the Austrian or otherwise libertarian orientation to go behind those words of Murphy, as the majority weight of economic history – such as Kindleberger; I believe I already mentioned his book, though his book on the financial history of Western Europe is also good – show the exact OPPOSITE of Murphy’s claim to increased severity of cyclical behavior (and more specifically financial crises) after the establishment of the Fed. He will, of course (as he already did) change the subject to inflation to avoid the question. The irony is (aside from the fact that the false conclusions Murphy is claiming to be Austrian were in fact established by Marx long before – i.e. the increasing span and scope of crises in proportion to the extent of the market, as Marx thought it impossible that capitalist governments would impinge on profits to intervene in the market) that, in regards to the intrusion of capitalist production on an enormous quantity of previously untouched relations, the success of the Federal Reserve and other regulatory institutions in preventing the increased severity of crises is impressive. Especially from post WWII until the seventies. The fact of the matter is, until seeing the method and statistical data, nobody trusts Austrian analysis for data that will come under scrutiny because it is usually made fit to provide desirable results.

alan November 1, 2009 at 9:09 am

“the success of the Federal Reserve and other regulatory institutions in preventing the increased severity of crises is impressive”

I have trouble with Murphy’s analysis, but I find it difficult to agree with your statement too. Global imbalances have been exacerbated especially after the fall of Bretton Woods. I quote the illustrious former president of the SNB – Fritz Leutwiler, “The gold standard is the best monetary system humanity has had.”

Renegade Division November 1, 2009 at 11:14 am

It implies that these titans of business have the mentality of a two year old when it comes to basing investment decisions on interest rates.

People wanna be rich, even if they know bubble is being formed, either they can stay out of the market or stay in the market going with the tide and try to get out of it, or try to make money by going against the market(that is shorting when market is bullish).
If you stay out of market then you aren’t really titan of the market to start with, as I said people wanna be rich so they will take either of the positions. If you stay with the market you have taken part in the bubble and like everybody else you will not be able to pull at at the right moment.

If you decide to go against the market, but the bubble does not crash for two years, you will be screwed enough that you will now decide to take part in the bubble and then you will be double screwed.

The point is even when you know the bubble is being formed and its going to crash, because you don’t know when its going to be crashed you need ginormous balls to be able to make profit with a crash(and the ability to show your portfolio in net loss for years). For most investors that’s just not the case.

Imagine if this is 2006, the height of real-estate bubble, and you know like Peter Schiff that the bubble is going to an end, you decide to take opposite positions in the bubble, but the bubble keeps on growing for another year before it slows down and eventually another 9 months before it crashes drastically to show your portfolio any profit.

Third, the framework within which Keynesian and Marxian analysis – even neoclassical, which I rarely say – works is far superior to the simplistic and superficial Austrian approach. While they take into account human fallibility and uncertainty, you simply assume some magical ignorance stick hits human beings for your cyclical garbage that must be absent in the majority of your subsequent arguments.

It is so funny that people claim Mathematical models based on statistics(which show contrary results all the time) to be superior to Logic-based Austrian Economics because the former take ‘human falliability and uncertainty’(human nature), in account, whereas the latter which is fully derived from human nature fails to take human nature in mind.

When Tony Sopranos is running a scamming the government on television, selling drugs, only Austrians can chuckle and shout ‘Way to go Tony’, because we see an unfair demand created by the government’s actions and that’s being fulfilled by a guy with a gun.

I have been told this many times by many people. Although they rarely have a clear idea what Austrian Economics is exactly, most fo them replace Austrian Economics with neo-classical economics mentally because that’s what some of our arguments sound like.

Usually I think it works like this(from their perspective).
They say: “Govt must step in and fix the broken market”
We say: “No, the govt must stay out of it and allow market to fix itself”
They say: “Oh you are so naive, you and your faith in the market, believing that market can never do anything wrong, your theories don’t take human nature in mind, look at Keynesian economics it takes human nature in mind, when market crashes govt steps in to fix it and when market is doing well govt stays out”.

Inquisitor November 1, 2009 at 12:26 pm

Bobbie dear, how about you quote Marx and show how it is analogous to quotes from Austrian theory rather than pulling garbage out of your backside, k?

Inquisitor November 1, 2009 at 12:29 pm

“The fact of the matter is, until seeing the method and statistical data, nobody trusts Austrian analysis for data that will come under scrutiny because it is usually made fit to provide desirable results.”

You mean like government ‘economist’ produced claptrap? Oh snap. But of course Kindleberger disagrees so we’re wrong, end of.

mikey November 1, 2009 at 1:05 pm

Having just read The Vampire Economy (Gunter Riemann) I am sceptical of the increase in German industrial output.Most of this was in war material, and thus did not increase the standard of living.Guns before butter.

Bob Stafford November 1, 2009 at 8:08 pm

@Inquisitor,

I am critiquing positivism on the one hand and Austrian circular reasoning on the other. I understand they have differences, however my point was that they both merge – which I showed above. You need to get away from labels and examine the actual process through which these schools build frameworks of analysis.

Bpb Stafford November 1, 2009 at 8:15 pm

To Everyone Else,

Learn this lesson: Keynesian and Marxian theories of crises are both internally stable and general to the point that Austrian theory can easily be derived from them, while Austrian theory must identify processes outside of its own framework to explain internal instability and is unable to derive the former. The same holds for monetarist theory.

Next, I assume everyone will try to show how paper money issued in the past deviated from gold reserves? What can I say, all of you are very predictable. And you will fail.

Inquisitor November 2, 2009 at 6:36 am

To Bobbie Boy: Make all the assertions you please. They’re meaningless. Either put up by quoting or shut up. What can I say, you are very predictable. Poor little troll.

Ben November 2, 2009 at 4:36 pm

“The fact of the matter is, until seeing the method and statistical data, nobody trusts Austrian analysis for data that will come under scrutiny because it is usually made fit to provide desirable results”

Bob, as a scientist (Chemist), you should learn a lesson or two about quality of data. The statistics that 99% of academic economists base their theories on have no credibility. Maybe you should ask yourself why nearly every follower of the Austrian School knew that the economy was in bad shape in 2001 and saw the credit bubble disaster waiting to happen well before any other award winning economists did without referencing a single mathematical model. Oh that’s right….common sense is soooooooooo 100 years ago. Not for nothing, but any mathematical model that defies logic is completely irrelevant and nearly all the mathematical models for the macroeconomy fall into this category. Btw…math is ultimately a form of logic. There’s nothing wrong with the Austrian approach of logic to analyze the economy. Economists like Krugman make faulty assumptions in their applied models and they get a solution that completely defies logic.

The typical Keynesian’s favorite model is:
Y = C + I + G

Do yourself a favor. Why don’t you try to figure out why a model that assumes the best possible economic outcome is achieved when consumers spend 99.999999999999% of their income? Hell, I could argue that consumers spent 500% of their income the past decade and look where we are.

neo_austrian November 3, 2009 at 9:30 am

I think Murphy’s point regarding the gold standard of money supply is only half the battle. As Desoto (1997) discusses in great detail, fractional reserve banking is just as dangerous. Furthermore, states can’t resist getting involved in banking when they see that they can “borrow” demand deposits to expand their own wealth.

P.S. Don’t feed the trolls. They just keep coming back for more scraps.

Tim Singleton December 9, 2009 at 7:19 am

Wow, there are some seriously PO’d folks here…you might even be given to think that some of the more strident attacks have more than just an avocational interest in the issue.

Gold standard, silver standard, whatever. If I have one million ounces of either, I am a REAL millionaire. It cannot be inflated away entirely, and as I see it, the purchasing power has stayed fairly constant for a couple of millenia.

Mathematical models can be beautiful, consistent, and WRONG all at the same time. Keynes has yet to go 500 years with stability, the gold and metals standard has been stable for millenia at a time.

I invest in companies following Rogers, Buffet, etc. My savings are in silver Eagles and gold.

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