The sappy headline said it all: “Ticket scalpers jam computers, spoiling hopes and dreams of Springsteen fans.” The Boss is just Born to Lose in his neverending campaign against the inviolable law of supply and demand.

For decades Springsteen has created shortages of tickets to his shows by grossly under pricing his tickets in order to live up to his reputation as folk hero of the working class. The inevitable result is that secondary sellers of tickets have profited handsomely at his expense, while his fans, shrewdly egged on by their hero, have continually misdirected their outrage at the high prices against unscrupulous “ticket scalpers.” For the New Jersey leg of his upcoming tour, tickets that were listed on Ticketmaster for a face value of $98.00 ($114.00 including shipping and handling) wound up within minutes listed on secondary seller websites for prices ranging up to $6,600.00. It appears that ingenious secondary sellers using sophisticated computer programs called “bots” inundated Ticketmaster computers with orders. Ticketmaster alleges that it was “attacked by ticket scalpers” and blamed “highly suspicious sources” for much of the additional traffic, estimated to be two-and-a-half times greater than the traffic of any major act last year. Worse still, this unanticpated traffic caused computers of some individual fans to malfunction and freeze up.

Predictably, New Jersey pols, ever eager to profit from a perceived crisis, immediately began weighing in with legal solutions. Rep. Bill Pascrell (D-8th Dist.) pledged to reintroduce federal legislation to intensify oversight of the ticket industry. And conservative columnist Paul Mulshine reported that Governor Chris Christie warned that the state Attorney General might investigate. However not everyone was blaming the ticklet scalpers. Some were placing blame where it belonged–on the Boss himself. Mulshine interviewed economist Steve Happel of Arizona State University who put it bluntly:

If I ever got to meet Bruce, I’d like to say to him, ‘I know you’re a nice guy, but you’ve got your head up your (expletive that rhymes with “bass” — the fish not the guitar) when it comes to economics,’

Even music insiders are beginning to recognize Springsteen’s posturing as the reason for the debacle. Bob Lefsetz, a music industry observer and former entertainment attorney wrote:

Ultimately, this is Springsteen’s fault. Bruce should take a stand. Bruce should be an agent for change. But he’s afraid of looking greedy. But the end result is all that money goes to scalpers and fans have to buy tickets on the ‘black market.’ All that money should go to Bruce, he deserves it.

Joseph T. Salerno is interviewed, along with Peter Schiff and Boston University economist Laurence Kotlikoff, regarding the Fed’s articifial suppression of interest rates and America’s looming default. The interviewer and producer of the video is Cody Jennings.
Default America: Suppression of Interest Rates

Gunnar Tomasson is an Icelandic economist now living in the U.S. and a former senior staff member of the IMF from 1966 to 1989. Mr Tomasson is a refreshingly unorthodox thinker, although by no means an Austrian. In a February 2009 Mises blog, I posted a television interview with Mr. Tomasson in which he questioned the equilibrium foundations of modern econmic theory and its usefulness for solving real-world economic problems. Partly as a result of my blog, Mr. Tomasson was recently interviewed on television on the causes of the Icelandic financial meltdown and its implications for the current U.S. and Euroland debt crises. In his latest interview he again challenges the relevance of general equilibrium theorizing and takes a strong position against continuing deficit financing and central bank fiat money creation as a solution to these problems. He even hints that nothing short of sovereign debt repudiation will finally resolve the global crisis. You can view the two segments of this interview here and here.

Almost all contemporary economists, except for Austrian economists, persist in analyzing the performance of the market economy using the model of “perfect competition.” Many of these economists go even further and use this hypothetical fictional construct as a normative standard for judging the performance of real-world market economies. They label as “market failures” huge firms, differentiated products, vigorous price competition, and promotional advertisng, because these market phenomena do not conform to the outcomes specified by the perfectly competitive model. But perfect competition describes the economy of a Never Never Land in which, among other things: all units of a given good are absolutely homogeneous, or indistinguishable from one another, and are available in infinitely divisible units; there is only a single price for a good prevailing throughout the economy; every firm constitutes such a small part of the market that it is a “price taker” and, as such, is unable to raise its price by even one cent above the prevailing “market” price without losing all its customers; nor does any firm ever seek to lower its price because given its minuscule size it can sell all it wants to the market without in the least affecting the overall supply and market price; and all buyers and sellers possess perfect knowledge of bid and offer prices throughout the market. In this world of completely homogeneous and infinitely divisible products, teeny-weeny firms, and perfect knowledge, perfect efficiency means that prices are equal to average (money) costs for each and every good, profits are zero, price and quality competition are nonexistent and advertising is completely absent.

Now economists of the “free-market” Chicago School of economics concede that perfect competition gives a grossly unrealistic portrayal of the market economy. But they claim that the use of this fictitious construction yields accurate predictions about the response of market prices and quantities to changes in tastes, technology, resources, taxes and so on. Other, less market friendly economists argue that while real markets are not, and probably can never be, perfectly competitive, they should be made to conform as closely as possible to the efficiency ideal of perfect competition by government interventions such as antitrust laws, taxes and subsidies, controls on prices, regulated quality standards and advertising claims, regulation of public utilities, etc. Austrian economists strongly demur. They argue that, given the absurd and wildly unrealistic assumptions and implications of perfect competition, it is useless as an analytical tool and, therefore, can neither adequately explain market outcomes nor serve as a valid standard by which to evaluate their efficiency.

Let me illustrate these points by focusing on a market which almost all of us have familiarized ourselves with over the past few weeks: the market for Thanksgiving turkeys. After all, a turkey is a turkey is a turkey. Turkeys are a fairly homogeneous commodity whose units can be divided down to the ounce. There are numerous suppliers on the retail level and the prices they charge can be easily ascertained by buyers. The technologies for raising and processing turkeys and selling them at retail are not proprietary or very complex and costly to learn and are available to anyone who wishes to compete in the market. Superficially, it would seem that the structure and performance of this market should loosely approximate a textbook perfectly competitive market. We would expect a single price for a fairly homogeneous commodity that adheres closely to its per unit costs of production.

Yesterday my wife and I purchased a fresh turkey breast for $2.49 per lb. at our local Stop and Shop supermarket. We did not purchase a whole turkey because we will be having Thanksgiving dinner at a relative’s house and the turkey breast will serve as “leftovers” for the weekend for turkey soup and sandwiches. At the same store we could have purchased a whole fresh turkey at 1.29 per lb., a fresh turkey untreated with hormones or antibiotics at $1.99 per lb., or a frozen turkey at $.58 per lb. Another fresh whole turkey with a national brand name could be had at the same store for a $1.49 per lb. Less than a mile away, Target, a discount store, was advertising a national brand name frozen turkey for .97 per lb. and a frozen turkey breast for .99 per lb. At the same time, two miles away, Shop Rite was offering fresh whole turkeys at .50 per lb. to those shoppers who purchased more than $25.00 worth of groceries. If you were so inclined you could have purchased a 15 lb. frozen Tur-Duc-Hen (chicken inside a duck inside a turkey) for $59.34.

Ranging farther afield , according to a recent article in the New York Times, I could have purchased: old-fashioned or “heritage” turkeys (more thigh meat, less breast meat than regular turkeys) for $114.00 plus shipping for a 16 pounder from a seller in Brooklyn, NY; or free range turkeys for between $99.95 and $175 plus $15 shipping from Sonoma, CA.

So contrary to the perfect competition theorists, the market for turkeys displays a wide dispersion of prices and provides a highly differentiated product (fresh or frozen, brand name of private label, whole or breast only, turkey alone or in combination with other types of fowl, etc.). In addition, there is very little correspondence between selling prices and monetary costs of production. In the New York Times article, the costs of raising and processing turkey were estimated at $1.17 per lb. exclusive of shipping. Many if not most supermarkets sell turkeys far below this cost of production, usually as a loss leader to lure shoppers into the store. For example, an executive of one grocery store chain in Connecticut estimated that his stores will make no profit on its sales of one million lbs. of turkey for Thanksgiving. However, it will profit handsomely from selling side dishes that are typically consumed with the meal.

So is all inexplicable disorder and inefficiency in the market for turkeys and almost all other markets in the economy because they fail to meet the standards of the arbitrary intellectual construction of perfect competition? Of course not. Once we replace the model of perfect competition with the the Austrian concepts of rivalrous competition and consumer sovereignty, we begin to see the orderliness and efficiency of the market.
What we experienced in the turkey market and regularly experience in almost all other markets in the economy is the unfolding of a rivalrous competitive process among entrepreneurs seeking to profit by identifying, combining, and transforming undervalued resources into uses most highly valued by consumers. This process is driven by consumer preferences and their expression in choices of what to purchase and what not to purchase. A turkey is not an objective, homogeneous good but is determined by the subjective values of buyers. Since consumer tastes are radically differentiated from one another, a “turkey” can mean different things to different people. To succeed and profit, therefore, entrepreneurs must produce and supply a “turkey” as a carefully chosen combination of multiple quality and price dimensions that at least some consumers find more attractive than all other available “turkey packages” on the market. The range of prices and kinds of turkeys that you and I encountered while shopping was thus an efficient response by entrepreneurs to fickle and ever changing consumer wants. So is the difference in the size of turkey firms: from the 400-acre Willie Bird Turkeys farm in Santa Rosa, California that sells heritage and free range turkeys to the boutique market to Butterfall, Inc., the largest vertically integrated turkey producer in the United States which accounts for 20 percent of total turkey production in this country. Promotional advertising of existing products like turkeys also becomes intelligible as an inherent feature of the competitive process as a method of alerting consumers to the existence of the variety of new suppliers, brands, and kinds, and prices of turkeys which are continually emerging on the market.

So now you can enjoy your turkey dinner–whatever it is.

It is true that in his popular writings during the 1950s, Mises occasionally acquiesced in using a version of the conventional pre-Keynesian definition of inflation as an increase in the quantity of money that was not offset by an increase in the demand for money resulting in a rise in overall prices or decline in the purchasing power of money. Mises used this definition in order to counteract the Keynesian explanations of inflation in terms of excessive spending (“demand pull”) or excessive increases in wages or monopolistic pricing practices (“cost push”) which were increasingly prevalent in textbooks and the media at the time. His purpose in these articles was to emphasize the point that a general and continuing increase in prices could only be caused by increases in the money supply. He was not interested in instructing his readers in the finer points of monetary theory.

By the time Human Action was published in 1949 (actually, by 1940 when the German-language forerunner to Human Action, Nationalökonomie, was published) Mises had come to recognize that the concept of inflation was completely empty and useless for the purposes of technical monetary theory. For the later Mises, it was impossible to separate the effects on market prices of monetary influences from the effects of “real” influences emanating from the markets for goods. The supply of and demand for money were intertwined with the supply of and demand for every good, because goods and money were ranked together and compared on individuals’ value scales. Any change in the demand for money inevitably affected the relative demands for the various goods, and vice versa. This meant that in a real-world economy where prices, and therefore the purchasing power of money, fluctuated constantly, there never could exist a state of monetary equilibrium. In such a mythical state: there would be no “inflation” or “deflation”: the “price level” would be absolutely stable (or fluctuate only as a result of changes of the overall supply of goods); and money would therefore never influence entrpreneurial calculations or resource allocation decisions, which would be driven purely by changes in supply and demand conditions for real goods. Mises rejected the concept of monetary equilibrium or what was then called “neutral money” precisely because money was a dynamic element, an agent of change that had a “driving force” of its own. Money could not and did not affect the height of prices without necessarily and simultaneously altering the supply and demand conditions in every market and, therefore, the entire structure of prices. Since all changes in the supply of money had precisely the same qualitative effects regardless of the relation they bore to changes in the demand for money, the concepts of inflation and deflation were meaningless and must be rejected

Mises made these points clearly and emphatically in Human Action (pp. 422-23):

The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.

However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts.

Given this and other similar statements in Human Action, it continues to mystify me that this debate about how Mises defined inflation goes on and on and on. Why is it so difficult to accept that Mises’s views on monetary theory, including his analysis of the phenomena of inflation and deflation, developed and advanced between 1912 when he published Theory of Money and Credit and the 1930s when he was working on the manuscript that was to become Human Action? In fact Mises himself tells us that this is precisely what happened, writing in his Notes and Recollections in 1944:

My Nationalökonomie finally afforded me the opportunity to present the problems of economic calculation in their full significance. . . . Only in the explanations offered in the third part of my Nationalökonomie did my theory of money achieve completion. Thus I accomplished the project that had presented itself to me thirty-five years earlier. I had merged the theory of indirect exchange with that of direct exchange into a coherent system of human action.

There is a wonderful article by Princeton health care economist Uwe Reinhardt on today’s New York Times Economix blog arguing that “make-work jobs” created by the increasingly complicated tangle of government regulations do not add value to the economy. Reinhardt includes in this category of “nonenjoyable GDP” the services of the army of tax lawyers and tax accountants created by the byzantine U.S tax code as well as the services of the sizable compliance staffs and numerous outside consultants that hospitals must hire in order to avoid running afoul of the incomprehensibly complex rules and regulations governing Medicare, Medicaid and other health care programs. Reinhardt does not mention Bastiat and uses his homegrown Slashed Tire parable instead of the venerable Broken Window parable to illustrate his point. But, hey, he is from Princeton.

I was quoted in an article by Greg Bresiger in the Sunday New York Post commenting on Discover’s Survey of consumer spending plans, which revealed that 64 percent of consumers rated the economy as poor. Only a snippet of my response to the questions posed were quoted in the article.

The two questions and my full response follow:

Some 70 percent of respondents in the Discover Spending survey rate the economy as poor, a five percent jump from the previous month. Are they right to rate the economy as poor and why? What policies would you recommend?

The respondents to the Discover Spending survey were correct in rating the U.S. economy as poor. Job growth has ground to a halt and business investment has been stifled by uncertainty and distrust concerning both fiscal and monetary policy. The unknown, and probably huge, costs, of Obamacare still hangs over the head of business. Trillion dollar Federal budget deficits are likely for the foreseeable future. Even if an agreement is hammered out between the ruling parties to cut future deficits, these cuts will be a drop in the bucket and will be spread out over a decade with little effect–if they are even implemented. Despite trillions lavished on stimulus programs and super-low mortgage rates, the housing market is dead in the water.

On the monetary policy front, markets are uncertain whether there will be another burst of monetary expansion, since Chairman Bernanke seemed to imply that QE3 would be a topic of discussion at the next FOMC meeting. Given these factors I think we are facing the frightening prospect of a repeat of the 1970s in which high unemployment and chronic economic stagnation and recession are combined with high, possibly double-digit, rates of consumer price inflation.

To avoid this grisly scenario, I recommend making deep and meaningful cuts across the board in the Federal budget and reducing it by 50 percent in one fell swoop beginning next year. Since the U.S. government is currently spending 43 percent more than it is taking in in tax revenues, this would solve our deficit woes and leave room for slashing the personal income tax and giving relief to the long-suffering and productive middle class. No department, agency or program should be spared the meat axe, even and especially the Pentagon.

We are in a dire situation. A nation rapidly approaching sovereign default can no longer afford to spend tens of billions a day fighting wars and “nation building” in far flung places. Nor can it afford military bases in 110 foreign nations and a military presence in 150. Although many economists on the left and right seem reluctant to admit it, interventionist foreign policy is an economic, as well as a political, problem and should be fair game in economic policy discussions. Military spending is as “discretionary” as any other type of government spending.

Regarding monetary policy, the Fed must be stopped from continuing to arbitrarily and unpredictably manipulate the money supply and interest rates. Its recent operations have tremendously exacerbated volatility in financial markets and have cut business expectations loose from their moorings in economic fundamentals. In the short run, Congress should step up and pass emergency legislation that prevents the Fed from engaging in any further open market operations or lowering the discount rate below a steep penalty level.

When I think of all the worries Keynesians seem to find
And how they’re in a hurry to complicate their minds
By chasing after money with nothing else in view
Austrians are different, we see the problem through
(sung to “Let’s Live for Today,” with apologies to the Grassroots)

In a recent series of blog posts on the meaning of saving, Bob Murphy gives the following example intended to illustrate and defend his interpretation of the concept of saving:

15-year-old Johnny mows my lawn every week, and I pay him $20 each time. Every week, he spends $15 of it going to the movies with his friends, but he puts $5 in a piggy jar on his bureau.

After a year, he has accumulated $5×52 = $260 which he uses to buy a nice watch. Johnny says, “I’m sure glad I consumed less than my income all year, saving $5 per week. Then I used my accumulated savings to buy a watch. I deferred consumption all year in order to buy a nice good later on.
Bob then goes on to ask rhetorically, “Are you guys all comfortable with that? You don’t think Johnny was saving $5 per week?”

Although debates about the meaning of words are always treacherous and seldom fruitful, in this case, I believe we can add some clarity to the conceptual issues at stake by analyzing Murphy’s simple example more closely.

Unspecified in Murphy’s example is exactly when little Johnny goes to the movies. Let us suppose that he regularly cuts Murphy’s lawn and receives his pay of $20 on Monday and spends $15 going to a matinee with his friends the following Sunday. Everything else remains as specified in the original example. Thus, in order to carry out this plan, Johnny must retain $15 of his weekly income in his cash balance for a full week. The question that immediately arises is whether this would also be considered saving by Murphy. Indeed little Johnny could easily say, presumably without fearing contradiction from his economist-employer, “I deferred consumption all week in order to see a good movie later on.”

Now, let’s tweak the example a bit. Let us say that Johnny is always thirsty after he cuts Murphy’s lawn, because Murphy refuses to supply him with refrigerated bottled water and permits him only to drink the warm, coppery-tasting swill from his garden hose. So Johnny routinely goes to the local convenience store and orders a big Slushy for $2 one hour after he cuts Murphy’s lawn. (He therefore foregoes a large tub for a small bag of popcorn at the movies the following Sunday.) But this wouldn’t this be just as much saving according to Murphy, because Johnny holds the $2.00 in his cash balance, refraining from consumption for a full hour?

The broader point that emerges from this analysis is that Murphy is simply defining “saving” as the holding of cash balances. For consider the ineluctable fact that in a monetary economy everyone must retain a money payment in his cash balance for a shorter or longer period of time, whether he intends to purchase an immediately consumable service like a movie or restaurant meal, a consumer durable like a car or a house, or an investment asset of some kind. In other words, all income and spending (on both consumption and investment) must flow through cash balances. It follows from the very nature of money as the general medium of exchange that there is always a lapse of time between monetary receipts and expenditures. Whether it is a matter of hours, weeks or years, money income once received must always be held in cash balances before it can be spent.

Getting back to Murphy’s main argument: Is it therefore his contention that all monetary income is necessarily saved because it is held for a time in cash balances? If not, then what is his criterion for distinguishing those parts of cash balances that constitute “saving” from those that do not? It would seem that any attempt to establish such a criterion would be entirely arbitrary. Is money that is spent on consumer goods within a month, a week, 5 hours, 15 minutes of its receipt considered consumption or saving? Where is the line to be drawn?

Let us change Murphy’s example one more time to illustrate the point from another angle. Suppose that Murphy is the franchise owner of the local multiplex theater and also a silent partner in a local jewelry store. Assume further that he makes a deal to pay Johnny a voucher for a matinee ticket and concession items worth $15 plus a $5 credit to Johnny’s layaway account for a watch at his jewelry store. In this scenario Johnny receives and holds no cash balances, precisely because money enters the transaction only as a numeraire or accounting device and not as a true medium of exchange; in effect, Johnny’s income and expenditures are simultaneous, i.e., he purchases the movie voucher and layaway account credit instantaneously upon receiving his money. Nonetheless Johnny achieves exactly the same ends on the market—a movie every Sunday and a watch at the end of the year—as he does when he is compensated in money.

Thus, however Murphy may wish to characterize Johnny’s temporal pattern of consumption in relation to his receipt of income, it has nothing to do with the holding of money. In the case in which Murphy compensates Johnny with money, Johnny earns $1,040 (= $20 x 52) and holds an average daily cash balance during the course of the year of $145 (= $15 every day + $260/2—assuming for ease of calculation that he holds the $15 for the entire day each Sunday rather than only part of it). In the second scenario Johnny also earns an annual income of $1,040, but now he holds an average of zero cash balances. So to put the question at issue in another way, does Johnny save any more in scenario two compared to scenario one just because he holds $145 in cash on average? Murphy must answer this question and those posed above in order to make his definition of saving coherent and meaningful.

Due to the heroic efforts of the Austro-friendly Post journalist, Gregory Bresiger, I was quoted in his article “Price Is Wrong”. But of course space constraints and other considerations ensure that the one’s complete response to the questions posed rarely make it past the editors, so herewith is the full text of my remarks.

The economy is experiencing a weak recovery that is being driven mainly by QE2, which is simply a euphemism for Fed money printing. The unemployment rate remains stubbornly high and job growth is far below the average job growth that we have seen during recoveries from past severe recessions such as the 1974-1975 and 1981-1982 recessions (240,000/per month versus 400,000/per month). Also the average duration of unemployment set a record high of 39 weeks earlier this year. The 45.5 percent of the unemployed who have been out of work for more than 26 weeks is also a record high. Real GDP growth is remarkably weak for a recovery from a severe recession. Yet, I believe, even this weak recovery is ultimately unsustainable, because of its inflationary origins. Signs of inflation are all around us, with headline CPI rising at an annualized rate of 3.4 year to date in May compared to 1.4 percent for 2010. Commodity prices have gone through the roof in the last year and are turning up in consumer prices for gasoline, food and so forth. Since August 2010 when the Fed announced it would implement a second round of quantitative easing, we have seen a stock market boom that is not based on substantial improvements in the fundamentals. In particular there appears to be a bubble forming in the high tech sector, where in the past year prices of tech IPOs have jumped by an average of 19 percent on the first day. There is also a bubble-like run up in the prices of farmland in the U.S. Midwest where prices have increased at double-digit rates last year. Growth in monetary aggregates such as MZM and M2 are starting to pick up again and are running at annualized rates between 5 and 7 percent.

The bottom line is that we are experiencing a false, inflation-driven recovery. When it is finally unable to ignore the signs of inflation any longer,the Fed will raise interest rates and terminate QE2 (scheduled to end this month). At that point the economy will begin to stagnate like the Japanese economy of the 1990s and we will face a protracted period of extremely slow growth and high unemployment. This will compound the problem of getting our runaway deficits under control. The alternative to this grim scenario is even worse: if the Fed persists in its inflationary policy then it will usher in galloping inflation like the U.S. experienced in the 1970s combined with high unemployment–and I do not think that price and wage controls will be too far behind.

In his brilliant article on “The Intellectuals and Socialism,” Friedrich Hayek suggests a strong causal connection between copyright laws and socialism. In discussing the development of the intellectual class, whom he characterizes as “secondhanders in ideas” and inherently inclined to promote socialism, Hayek writes:

One of the most important points that would have to be examined in such a discussion would be how far the growth of this [intellectual] class has been artificially stimulated by the law of copyright.

However, in a footnote he goes on to express doubt that an open debate on this issue could take place in a society in which the intellectual class itself controls the media:

It would be interesting to discover how far a seriously critical view of the benefits to society of the law of copyright, or the expression of doubts about the public interest in the existence of a class which makes its living from the writing of books, would have a chance of being publicly stated in a society in which the channels of expression are so largely controlled by people who have a vested interest on the existing situation.

So yet another benefit of the abolition of copyright laws may very well be a liquidation of the professional intellectual class that defends and propagandizes for the American Welfare-Warfare State.

Larry Sechrest, who passed away much too young was a good friend, a great teacher and a productive scholar of varied interests who was trained as an economist. But most of all, he was a committed and intransigent seeker of truth in the cause of liberty. In his autobiographical essay written for Walter Block’s collection I Chose Liberty, Larry offered sage advice for students of Austrian economics who aspire to pursue an academic career in economics:

[T]he course of study at UTA [University of Texas Arlington, where Larry earned his PhD] was quite mainstream. There were, as I recall, four semesters of econometrics and two semesters of mathematical economics, for example. Moreover, virtually every class in the Ph.D. program required that the student write an econometrically based term paper. I would like to say that I strongly believe all graduate students interested in the Austrian School, despite the reservations they may have about mainstream methodology (reservations I share), will benefit from undergoing a similar course of study. To do otherwise is to shut ourselves off entirely from the rest of the economics profession. And we cannot persuade them of the “error of their ways” if we cannot speak in terms familiar to them. . . .

I would like to offer some hopefully encouraging observations for the benefit of young libertarians and/or Austrians seeking an academic career. It is not necessary that you do your graduate work at an elite university, nor that you achieve a faculty position at such an institution. There can be no doubt that both are helpful, but neither is ultimately essential. I have done neither, and yet I have achieved some reasonable degree of success in my field. Many will also advise you to hide your libertarian sentiments and your interest in Austrian economics, at least until you have obtained secure employment. That might be prudent under certain circumstances, but I did not do that either. What is essential is that you follow your mind and heart wherever they lead you. Treat your own independent judgment as something sacred. And please keep in mind Herman Melville’s admonition: “It is better to fail in originality than to succeed in imitation.”

As a general rule, we should treat our intellectual opponents with the utmost charity and respect. After all, we are all fallible and presumably united in a common pursuit of truth. BUT (I bet you knew that was coming) when one is continually subjected to ponderous drivel and endless preachments from an opponent whose severely limited abilities belie his lofty reputation and whose pseudo-scholarship is bought and paid for by an interested and wealthy patron, one understandably reaches a breaking point. The great philosopher Arthur Schopenauer evidently reached such a point when he wrote of the Prussian State’s favored philosopher:

Hegel, installed from above by the powers that be, as the certified Great Philosopher, was a flat-headed, insipid, nauseating, illiterate charlatan, who reached the pinnacle of audacity in scribbling together and dishing up the craziest mystifying nonsense. This nonsense has been noisily proclaimed as immortal wisdom by mercenary followers and readily accepted as such by all fools, who thus joined in as a perfect chorus of admiration as had ever been heard before. The extensive field of spiritual influence with which Hegel was furnished by those in power has enabled him to achieve the intellectual corruption of a whole generation. (Quoted in Karl R. Popper, The Open Society and Its Enemies, Vol. 2, pp. 32-33.)

HT to Max Raskin.

Have the recent movements in stock, bond and currency markets been solely the result of QE2, or has the Fed been flogging the markets in a more direct way to make its quantitative easing program look successful? We soon may know. New York Post columnist John Crudele reports that the neocon tabloid is putting together a new FOIA request for the Fed’s trading records that will reveal which markets it has recently intervened in directly or through surrogates. As Crudele points out, “The stock market, in particular, has been suspiciously calm lately despite nuclear disasters, widening unrest in the Middle East, rising inflation, lower economic expectations and sovereign debt fiascoes in Europe.” Given the public outrage over the recent revelation of the gobs of taxpayer-guaranteed loans that the Fed shoveled out the discount window into foreign institutions, it is going to be interesting to see if the Fed has the gall to oppose a FOIA request again in court. However, if the Fed is manipulating stock and bond prices, it would be difficult to believe that it would not fight the request with all the resources at its command. Whatever strategy the Fed adopts in dealing with the request, it can only help the campaign to audit the Fed.

In the same column, Crudele looks forward to getting a peek at the most recent schedule of New York Fed President William Dudley, which is soon to be posted. It seems that Bill Dudley’s January schedule revealed that he had been meeting with selected outsiders during the Fed’s so-called “blackout period” leading up to FOMC meetings. During the this period Fed officials are supposed to maintain a low profile to avoid (the perception of) passing on information about likely policy moves that might provide profitable trading opportunities for friends, associates and, of course, future employers in the private sector. Dudley’s behavior betrays either sheer studpidity or the overweening arrogance of power or both.

As Murray Rothbard used to point out, the ruling elite that controls any State, democratic or otherwise, always has a very tenuous grip on power supported ultimately only by a false ideology designed to veil its true nature and intentions. One false move or random event may cause the ideological curtain to flutter back and reveal the self-serving knaves and dolts trying to operate the creaky and unstable institutions of the mighty State. The Fed, with a rigid and bumbling academic and political naif as its Chairman, may just have set the curtain afluttering.

Zipcar Inc., the car-sharing company, has not turned a profit since its founding in 2000. Its net loss climbed to $14.1 million in 2010, up from a $4.7 million loss in 2009. Yesterday it filed for an IPO in which it is offering 8.33 million shares for $14 to $16 each. It expects to use the proceeds to pay off debt, oh yeah, and for “business expansion.” Hmmm, a company with a history of 11 consecutive years of losses expecting to raise as much as $133 million from an IPO–when have we seen that before? Maybe Ben should put aside his obsession with the Great Depression for a moment and investigate the late 1990s.

The economist Alfred Kahn passed away last month at the age of 93. Kahn, a self-described “liberal Democrat,” was by no means an Austrian economist nor even a consistent proponent of the unhampered market economy (e.g., he was, recall, Jimmy Carter’s “inflation czar”). Nonetheless, Kahn was justly known as the “Father of Airline Deregulation” for his work in the late 1970s as Chairman of the Civil Aeronautics Board (CAB). Created in the late 1930s, the CAB was the government agency responsible for organizing and controlling the cozy and profoundly anti-consumer commercial airline cartel that restricted free entry into the industry and suppressed internal route and price competition among existing airlines. As CAB Chairman, Kahn planned and implemented almost complete deregulation of the airline industry, opening the industry to competition from new discount airlines that led to a steep and welcome decline in air fares for consumers. Prior to deregulation routine air travel was affordable ony for business travelers and wealthy consumers while leisure travel for the middle class on airlines was prohibitively expensive. Kahn also presided over the dissolution of the CAB–a glorious moment in postwar U.S. history when a Federal regulatory agency actually dissolved itself.

Even before his stint at the CAB, Kahn pressed for deregulation as chairman of the New York Public Service Commission. In this role, he permittted electric utilities to institute peak load pricing, which more efficiently allocated electrical generating capacity and lowered production costs. He also enabled telephone companies to do away with the wasteful practice of providing “free” directory assistance, which used scarce personnel and equipment to look up telephone numbers that most users could find more cheaply themselves by using telephone books. And, of course, these directory assistance services were not really free to consumers at all because they inflated the phone bills of all ratepayers.

In his tribute to Kahn, Robert Frank, who was Kahn’s chief economist at the CAB and is now a prominent behavioral economist, emphasizes that Kahn’s devotion to deregulation went hand in hand with his devotion to “plain English.” Frank reminds us of Kahn’s “celebrated memo” written shortly after he took over at the CAB entreating his staff of lawyers and economists to write more clearly. The memo created a stir that went beyond the agency and the memo was even published in its entirety in The Washington Post. Frank quotes some of the scintillating passages. For example:

Every time you’re tempted to use ‘herein’ or ‘hereinabout’ or ‘hereinunder’ or, similarly, ‘therein,’ thereinabove’ or ‘thereinunder,’ and the corresponding variants,” try ‘here’ or ‘there’ or ‘above’ or ‘below,’ and see if it doesn’t make just as much sense.

And also:

The passive voice is wildly overused in government writing. Typically its purpose is to conceal information — one is less likely to be jailed if one says, ‘He was hit by a stone,’ than if he says, ‘I hit him with a stone.’

Kahn fearlessly pressed his campaign against the use of confusing and obfuscating language beyond the confines of policy memos and reports to the very heart of mainstream economic theory. Thus Kahn, Frank tells us, counselled macroeconomists in particular, “If you can’t describe what your model says in plain English without provoking derisive laughter, it probably doesn’t say anything of value.”

Clearly, Fed Vice Chair Janet Yellen was not heeding Kahn’s sound advice when she recently cited the meaningless model in the Federal Reserve Bank of San Francisco working paper “Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?” to support her ludicrous pronouncement that printing $600 billion under QE2 will create 700,000 additional jobs.

Today is a historic day in Austrian economics. Today a Ph.D.-level seminar in Austrian economics commences at the University of Missouri. What is so important about this event is that the course is not part of a niche Austrian program dependent on external funding, but is part of the regular curriculum of a mainstream program at a major research university. This is a clear signal that Austrian economics is beginning to be taken seriously by mainstream economists. The course is being taught by Professor Peter Klein, a former student of Nobel Prize winner Oliver Williamson. Klein has emerged as the leading “micro” theorist of the Austrian school since the retirement of Israel Kirzner from NYU. His work on entrepreneurship, price theory, and firm organization has appeared in a broad spectrum of mainstream and Austrian journals. His recently published book on The Capitalist and the Entrepreneur: Essays on Organizatioin and Markets sets a fresh agenda for future research on Austrian micro theory. It is clear from his work that Klein himself is the quintessence of the “mundane” Austrian economist. He does not give advice or preach about how to do good economics, he simply rolls up his sleeves and does it–and teaches it superbly.

The title of Klein’s course is “The Austrian School of Economics: Theory, Applications, Debate.” The course emphasizes the essence of Austrian economics: its uniquely integrated system of economic theory that derives from Carl Menger. It is not a course that talks about Austrian economics, what it is or what it was; it is a course that introduces the student to technical Austrian economic methods and analysis. The course will illustrate this theory by selective applications to real world issues and by featuring several intellectual controversies that accompanied and promoted the theory’s development. Of course, the course will acquaint the student with the thought and works of the early masters, Menger, Bohm-Bawerk and Wieser as well as those of the twentieth-century giants Mises, Hayek, Rothbard, Lachmann and Kirzner. But it is not a history of thought course: it deals in depth with theoretical refinements and cutting edge contributions made by current Austrians like Huelsmann, Herbener, Garrison, Foss, Armentano, Lewin, Salerno, Rizzo, White and Selgin, and Klein himself.

For those who are as excited as I am about the course, you may be interested in browsing through the syllabus, which is here.

Kudos to the Center for Freedom and Prosperity Foundation for a brilliant and hard-hitting short video demolishing the perennial economic fallacy that minimum wage laws benefit low-skilled workers. It is perfect for introducing the topic to a Principles of Economics class.

Recently Steve Horwitz has adamantly defended Larry White’s interpretation of Mises’s attitude toward fiduciary media, an interpretation which I have criticized. Steve is surprisingly uncompromising and has even gone as far as to stake Mises’s reputation as a historian of economic thought and monetary theorist on the correctness of White’s interpretation. Writes Steve:

To read Mises as a 100% reserves supporter is to disrespect him as a historian of economic thought and a great monetary theorist. The guy knew his shit and he understood monetary theory better than just about anyone who claims his mantle on any side today. To think he rejected the basics of monetary theory that inform the ME/FB [i.e. Monetary Equilibrium/FreeBanking] argument is to say that he didn’t understand some pretty fundamental economics.

In other words, Mises is a monetary equilibrium theorist who favors the creation of fiduciary media, dang it, and if he is not, well then so much the worse for Mises’s reputation as an economist. Now I suggest that before venturing out on a limb with such an irrevocable statement, it would have been wise for Steve to have consulted the book by his mentor George Selgin on The Theory of Free Banking (pp. 61-62). There Selgin explicitly denied that Mises either was a monetary equilibrium theorist or ever maintained that the issue of fiduciary media in any quantity would not generate a business cycle. As Selgin put it, correctly in my view,

A contrasting view of bank credit appears in the writings of several of the Austrian economists, especially Ludwig von Mises. . . . According to these writers any credit expansion or increase in the supply of fiduciary media–inside money [i.e., bank notes and deposits]not backed 100 percent by reserves of commodity or base money–is unwarranted. . . . In other words, all net expansion of fiduciary credit is a cause of loan market disequilibrium. It causes bank rates of interest to fall below their ‘natural’ levels, leading to forced savings and other trade-cycle phenomena. This contrasts with the view defended here, which holds that no ill consequences result from the issue of fiduciary media in response to a greater demand for balances of inside money. . . . However one intreprets it, Mises’s view of commodity [i.e., non-created] credit as the only sort of credit consistent with loan market equilibrium causes him to be critical of fractional reserve banking. . . . Indeed Mises’s support for free banking is based in part on his agreement with Cernuschi who. . . believed that freedom of note issue would automatically lead to 100 percent reserve banking.

I await with great interest Horwitz’s response to Selgin, given that Selgin expressed precisely the same view that Murray Rothbard held.

It appears technology has moved the world one small step closer to a sound money. On Wednesday, a hotel in Abu Dhabi unveiled the GOLD To Go ATM, a gold dispensing vending machine created by a German firm. The machine dispenses 24-carat gold bars in 1, 5, and 10 gram sizes as well as gold coins. A computer inside the machine keeps track of the gold price in real time and updates it every ten seconds but maintains the price for a given buyer for ten minutes. The machine itself sports a gold leaf finish. There are plans to install 200 more machines in Austria, Germany, and Switzerland.  It is noteworthy that the technology of tracking the gold price in real time could be adapted to tracking the gold-silver exchange rate thus reducing the transactions costs and facilitating the development of gold and silver parallel standards. Silver coins would be much more convenient than gold coins for everyday transactions. At current prices, a 1 gram silver bar would have a purchasing power of about $.70 and a 5 gram bar of about $3.50. “Small change” would be provided by bearer vouchers printed on base metal or on paper notes issued by nationnwide merchants like Walmart, McDonald’s, Best Buy etc. which would not be claims directly redeemable in gold or silver money but redeemable in their merchandise (like mall or store gift certificates). As long as these vouchers were not issued in excess they would be readily acceptable as small change in exchange.

When I was an undergraduate at Boston College in the 1970s, one of the weekly underground newspapers that catered to the 250,000 college students in the Boston metropolitan area featured a page length ad by the left-wing graduate economic students of the Boston chapter of URPE (Union of Radical Political Economists).  The ad appealed to the college students of Boston to withdraw all the cash from their checking and saving accounts the following Friday as a protest against the Vietnam War. Being an economics major and neophyte Austrian, I realized that such an action would cause severe difficulties for the banks, because they only held (at the time) about 13 cents of every dollar of demand deposits and 3 cents of every dollar of saving deposits in the form of cash.  The rest of the deposits were lent out for longer or shorter periods of time despite the fact that the banks had contractually obligated themselves to redeem the entire amount on demand.  There was much discussion of such an action on the BC and other Boston campuses during the week leading up to the planned mass action. Of course, when Friday rolled around the event fizzled, because students were too busy partying (Thursday being the unofficial start of the weekend).  But the idea was a brilliant one.

Murray Rothbard never tired of pointing out that in a free society plain citizens could bring inflationary fractional reserve banks to heel through a deliberate and concerted campaign to get people to withdraw their deposits in cash.  “Antibank Leagues,” as he called them, would be formed by those “who know the truth about the real insolvency of the banking system” to “urge bank runs.”  The bank runs or their very threat would “be able to stop and reverse monetary expansion.” What Has Government Done to Our Money pp. 47-48.

Now we have the first stirrings of the formation of such a league in the Move Your Money campaign. This modest but growing movement is urging people to move their money from big banks to small community banks and credit unions.  Establishment media such as Time, Newsweek, The Nation, Salon and CBS News have already taken note of the campaign.  The organizers are urging people to lobby their friends, organizations, and municpal governments to move their money and to use online social networks to propagate the idea.

The organizers of the Move Your Money campaign of course are superficially focused on the fact that big banks and financial institutions were at the eye of the recent financial storm.  They do not understand that it is the entire system of fractional reserve banking, which has been cartelized, regulated and bailed out by the Federal Reserve System for nearly a century,  that is mainly at fault for the financial meltdown.  Still, the idea underlying Move Your Money is a sound one that needs to be expanded to include mass deposit withdrawal from all banks.

Depositors have more power over banks than customers have over normal businesses in a market economy.  The reason is that banks are permitted by law today to hold only about ten percent of demand deposits and zero percent  of so-called “saving” deposits in reserve, even though they are contractually obligated to redeem these deposits in cash whenever the depositor requests.  (In fact, very little of even its “cash” reserves is held in actual cash in a bank’s vault and ATMs; most of its reserves has only a virtual existence as a  digital credit entry on  the bank’s reserve deposit account recorded in the computers of its regional Federal Reserve Bank).  Thus the banking system would not be able to withstand a concerted campaign to withdraw cash and the Fed would have to shut down the banking system (including ATMs) to sort things out.  It would take months, if not longer, before the Fed could print up and deliver sufficient quantities of cash to the banks to meet all of their depositors’ demands in full. In the meantime cash withdrawals might be limited to small quantities biweekly or monthly as occurred in Argentina during the last meltdown of the peso in 2000-2001

So the weapon to thwart inflation and deficit spending and by extension socialized health care and imperialist wars is at last partially unsheathed and in the grasp of American citizens.  Let us wish the Move Your Money campaign success and nudge its economic knowledge and political ideology in the right direction.