Selgin on Money Creation

by Andreas Hoffmann

George Selgin has a much-discussed post over at Alt-M. I agree with most of it.  However, I am puzzled by the following statement:

Austrian accounts of the money-creation process often exaggerate the ability of fractional reserve banks to create money “out of thin air,” even while sticking to a fixed reserve ratio, by looking at only one part of the bank money creation process.


Actually, it isn’t, for the simple reason that, more often than not, a deposit made at one bank involves a corresponding withdrawal of funds from another bank, as when the deposited sum takes the form of a check.

Continue reading

Clarifications of the Austro-Wicksellian Business Cycle Theory

by Mario Rizzo

There has been a lively debate on forecasts of high inflation made by those worried about the Fed’s recent policy of quantitative easing. For details I refer the reader to Daniel Kuehn’s excellent blog. The question to which I address myself is solely “What do these predictions have to do with core Austrian Business Cycle Theory?” This is my answer.

We must start with a few general points. First, I am talking about the Austro-Wicksellian business cycle theory as developed by Friedrich Hayek and Ludwig von Mises and as synthesized by Roger Garrison in his book Time and Money. I cannot take responsibility for versions constructed by others.  It is not that I think the others are necessarily wrong (and I mean no disrespect to them), but I do not know with sufficient precision what all these others are saying in the name of “Austrian theory.”

Secondly, the Austro-Wicksellian theory begins with either an endogenous increase in credit through the banking system or with an “exogenous” increase initiated by a central bank. In the latter case, however, the theory itself has little to say about the extent to which increases in base money will manifest themselves in increases in bank credit to producers.  (This may not be much of an issue during a boom but may be an issue during a recession or in a recovery.)

Third, the theory is fundamentally one about the “upper turning point” in the cycle – it is a theory about why a credit-induced boom must come to an end. It is not a theory, for better or worse, about the “secondary” factors that develop consequent on the break-up of the boom. These include possible recessionary-problems relating to bank runs (there is an Austrian inspired banking literature, but that is not the cycle theory) or what exactly will get investment expectations to turn around.  As to deflation, Lawrence White has argued that the logic of the theory requires the avoidance of deflation in accordance with Hayek’s very early recommendation to keep M V from falling.  (Hayek departed from this in the Depression, and later admitted he was incorrect to do so.)

Now to more specific points:   Continue reading

Bo as Emblem of State Capitalism

by Chidem Kurdas

The fallen Chinese political chieftain Bo Xilai and his wife are starting to sound like a bizarre combination of Macbeth and his Lady, the US Department of Housing and Urban Development and Fannie Mae—yes, the government created and backed housing finance entity.

Under the leadership of the Mao-admiring “new left” Mr. Bo, the fast-growing city of Chongqing built extensive public housing. Apparently the local government  created investment vehicles to finance its various projects, issuing bonds with land as collateral. The WSJ reports that analysts regard this debt as increasingly riskyContinue reading

What Is Old Can Be New

by Mario Rizzo

This is the unedited version of my letter which appears in today’s (August 9th) Wall Street Journal. The first sentence was edited out. Too bad. 


There is a lot of discussion of the need for “new economic thinking” these days. Henry Kaufman (“Excessive Optimism and Other Economic Biases,” August 2nd) correctly criticizes many economists for underestimating the importance of structural changes in economic behavior and overestimating the capacity of economics to forecast.  

But sometimes the “old” is really the new. Echoing an older skeptical tradition in economics, the Austrian economist Ludwig von Mises said in 1949,” The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratos between various commodities. Every new datum brings about a reshuffling of the whole price structure.”  

In a sense, it was the the “new” that misled us.

The Role of the Perverse Elasticity of Credit Money

by Andreas Hoffmann

I want to bring a recent comment by Sornette and von der Backe to the attention of the reader (in Nature 471, p. 166, May 2011). Sornette and von der Backe remind us to pay more attention to disequilibria caused by the fractional reserve banking system to explain the emergence of crises. They particularly recommend a reconsideration of the Austrian School of Economics to derive short-term policy solutions. “We should relearn and expand some of the old economic wisdom about the specific role of banks.Continue reading

Ludwig von Mises and His Grand Tautology

by Mario Rizzo

There is a tradition of thought in economics that views the rationality of individual actions as non-falsifiable. There are variations in how this tradition might be justified. These do not concern us to any significant degree here.  For concreteness I shall examine the position of Ludwig von Mises (excerpted below) because of the purity and clarity of his argument.  

Economists want to abstract from any particular theory of human motivation. In particular, in the early years of the twentieth century, they were keen to distinguish between the subjective theory of value and hedonistic (pleasure-pain) theories associated with Bentham and later W.S. Jevons and F. Y. Edgeworth. So they wanted to say that people choose according to whatever standard they might consider important or on whatever deep basis psychologists might discover. This is not the concern of economists (or so Mises and others argued).

Therefore, when economists speak of people seeking to increase their well-being they mean that they do so in terms of whatever they consider important – pleasure, moral values, long-term interests, short-term fancy, and so forth. Economists also did not want to take a position on how carefully individuals choose what goals they want to attain. Thus, an individual increases his well-being, as he sees it, when he drinks away his paycheck as when he spends it on supporting his family.   Continue reading

What Austrian Economics IS and What It Is NOT

by Steve Horwitz*

Since the start of the financial crisis and recession, there has been a renewed interest in the ideas of Austrian economics by scholars, public intellectuals, and even the media.  For the first time in a long time, the analytical framework of Austrian economics is being taken note of, if not taken seriously, by a variety of opinion makers.  This is, of course, a good development.

However, at the same time, this popularity has led to many people using the “Austrian” label to refer to their views on issues beyond those involving the analytical framework they bring to economics.  In particular, “Austrian” has become the near-equivalent of “free market” or “libertarian” not only indirectly, but directly through the use of terms such as “Austro-libertarian” to describe particular policy preferences or broader worldviews.  The result is that, despite the additional publicity, what Austrian economics IS has often been distorted into something it is NOT. Continue reading

Austro-Wicksellian Theory of the Business Cycle: An Informed View

by Mario Rizzo

There has been recent discussion in the blogosphere of the so-called Austrian Business Cycle Theory (ABCT). (We must not forget to give the Swedish economist Knut Wicksell credit as well.) Some of it is interesting (mostly because of the comments) but much of it is ill-informed since the bloggers don’t like to read scholarly Austrian work. For a good blog post with references to what others have been saying, see Pete Boettke’s discussion at Coordination Problem.

The first thing to keep in mind is that while this theory embodies “Austrian” characteristics it is not an official Austrian theory. Continue reading

Methodological Individualism Reconsidered

by Gene Callahan

Many Austrian economists embrace the doctrine of ‘methodological individualism,’ as I myself did, for instance, in my book Economics for Real People. But subsequent study on my part, most significantly of the work of Tony Lawson in his philosophy of economics project he calls ‘Critical Realism,’ as well as my readings of the social theories of the British Idealists, has led me to question the soundness of that position.

I will begin by noting that I think the adoption, by Mises, Hayek, and other Austrians of their era, of methodological individualism is understandable, given that the chief alternatives available when they wrote were some sort of ‘social holism,’ a la Durkheim, or Marxist historical and class determinism. If one’s choice is restricted to those three options, I believe methodological individualism is indeed the preferable stance to take. Continue reading

Pigou is the new Keynes

by Sandy Ikeda

A full-page article in today’s Wall Street Jounal begins:

At the Heavenly Models home for deceased economists, an award is being presented to the resident whose work best explains financial crises, global warming, and other pressing issues of today.

The winner, according to author John Cassidy, is A.C. Pigou, the new flavor of the day.

The article implies that Pigou was the first to articulate the concepts of externalities and market failure.  I’m not sure that’s right, though I haven’t gotten around to reading The Economics of Welfare, but I believe we do have to credit him with the Pigou tax.  So in some ways he’s been almost as dangerous as his “smarter colleague,” although I’ve always felt sympathy for someone who was so much in Keynes’s shadow.

The article also has a sidebar quoting Mises (as well as Friedman, Kindleberger, and of course Keynes) apparently calling last year’s economic crisis.

Economics To End Economics

by Mario Rizzo  

I used to think that Ludwig von Mises was exaggerating quite a bit when he suggested that Keynes was not really an economist. One way he did this was to associate Keynes with infamous monetary cranks like Silvio Gesell. The following quotation will give you a flavor of Mises’s opinion:  

“John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume’s and Mill’s views on miracles.”    Continue reading

Mises Featured in the Journal

by Jerry O’Driscoll  

In today’s Wall Street Journal, hedge-fund founder Mark Spitznagel celebrates Ludwig von Mises as “The Man Who Predicted the Depression.”  Spitznagel opens by observing that “Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s.  We ignore the great Austrian at our peril today.”  

Spitznagel deals with The Theory of Money and Credit and does a good job presenting its principal arguments.  What I found most interesting, however, is the author’s argument that the book is a warning today.  Continue reading

Mises Was A Scientist

by Roger Koppl

Over at Division of Labor, Noel Campbell picks a fight with Austrian fans of Mises.  “I always conceived of Mises’ efforts as attempting to build a logically correct and (therefore) irrefutable description of human behavior. As such, I always viewed Human Action as a work of philosophy, not science.”   Noel hints that he doesn’t want to be answered with a lot of philosophy of science.  I might whine about how unfair it is to contrast Mises’ “philosophy” with “science” and then expect a response that doesn’t get into the philosophy of science.  But Noel seems to be a nice guy with a sincere question, so I’ll take a stab at it anyway. Continue reading

Ludwig von Mises (1881 – 1973)

Ludwig von Misesby Mario Rizzo

Tuesday, September 29th is the birthday of one of the great economists of our time, Ludwig von Mises. He was responsible for one of the two greatest accomplishments of twentieth-century economics. This is the demonstration that rational economic calculation is impossible under socialism, that is, in a world without market prices. For a long time economists believed that his argument had been defeated by Oskar Lange and Abba Lerner. But when the socialist economies of Eastern Europe and the Soviet Union collapsed, a re-evaluation occurred. Many former socialists conceded that Mises had been right all along.

I had the good fortune to meet Ludwig von Mises in 1969 when I was an undergraduate student. He gave a lecture at Fordham University. The lecture was chaired by my friend Jerry O’Driscoll who was also a Fordham student at the time. I remember Jerry struggling to keep the microphone close to Mises as he lectured. Mises had a way of moving back and forth in his chair as he spoke. Mises autographed my copy of Human Action that day.

We had asked him to speak on the epistemological problems of economics. He said he would rather speak on inflation. We compromised. He said he would speak on the epistemological problems of money. The day arrived, and he spoke on inflation. We were happy anyway.

I did not really know Mises but he seemed like a kindly and gentle man. Murray Rothbard used to refer to him as “sweet old Mises.”

He carried the torch of classical liberalism during many dark decades. He also resisted the Keynesian fever of his time. We are in his debt.

(For those who care, the other great accomplishment of twentieth-century economics is due to F.A. Hayek. This is the argument that knowledge in society is decentralized and that market prices enable us to make use of knowledge that we do not and cannot possess as individuals.)

Richard Posner on the Precipice

by Mario Rizzo   

Richard Posner’s latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson:

“To have been born as an economist before 1936 was a boon—yes. But not to have been born too long before!”

Then Samuelson quotes William Wordsworth:

“Bliss was it in that dawn to be alive,
But to be young was very heaven!” Continue reading

Horwitz Says: Let There Be Light. And There Is Light.

by Mario Rizzo  

In a series of persuasive posts, Steve Horwitz at The Austrian Economists blog (here, here, and here) shows that Ludwig von Mises’s views on monetary economics were more or less the same as the Selgin-White-Horwitz (and I would argue the Garrison) free-banking, monetary-equilibrium view, rather than the Rothbardian one. This is not surprising given Murray Rothbard’s deviation from Mises on questions of monopoly, the minimal state, utilitarianism and other matters. While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments – and, I hope, into empirical work. (After all, Mises didn’t spend a lot of time on what his forebears really meant!)


Bubble or Growth?

by Jerry O’Driscoll

In an interview with The Wall Street Journal, German Chancellor Merkel called for an end to risky growth policies built on asset bubbles.  “In recent years we’ve had the Asian crisis, the new economy crisis, and now this great international financial and economic crisis — we can’t slide into a crisis every five to seven years.”  As she notes, however, the central banks of the major economies have implemented “unorthdox” policies to increase borrowing and lending in the current crisis.  Those policies risk yet another asset bubble. Continue reading

Exhaustion of the Welfare State’s “Reserve Fund”

by Mario Rizzo  

“An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”  Ludwig von Mises, Human Action: A Treatise on Economics, 3rd edition, p. 858 (1966).  

During the bad old days of the Bush Administration I wrote a post, “The Disorderly Bankruptcy of the Welfare State.”  I stand by it all.  Continue reading

Taylor Rule and Fed Witches’ Brew

By Chidem Kurdas

Bubble, bubble, toil and trouble—that’s an apt metaphor for the Federal Reserve policies meticulously dissected by Stanford professor John Taylor, in the Wall Street Journal and other places.  He shows that the Fed set the financial crisis in motion and then made it worse.

Relative to the pattern that held since 1987 – a standard that has come to be known as the Taylor Rule – the Fed kept interest rates exceptionally low in 2002-2006.  Easy credit got real estate prices bubbling, which convinced folks that property prices go only one way and concealed the risk of price declines. Hence homeowners, developers and banks over-extended themselves.

Once the credit bubble collapsed in 2007, the excessive debt became rancid. Taylor argues that the Fed mis-diagnosed the problem as a lack of liquidity. Once again opening the spigot and cutting US rates, it brought down the US dollar. The price of oil, being denominated in dollars, consequently went through the roof. That wrecked household budgets and people responded by curtailing consumption. Thus economic conditions worsened. Continue reading

Illusion of Confidence and the Confidence of Illusion

by Mario Rizzo


One hears a lot about restoring confidence in the economy these days. What is that? The economy is a complex entity. In fact, Friedrich Hayek wanted to drop the use of the term and replace it with “catallaxy” that is, an abstract order of interpersonal exchanges. The word “economy” has its origins in the idea of household management and consequently of a household manager. It is remarkable how the etymology of the word is preserved in its current meaning (or, at least, connotation). Most macroeconomists seem to believe that the economy can be managed or steered out of its current difficulties. (Is it cheeky to ask how did it get into its current difficulties if management were possible?)


Now the latest is Olivier Blanchard arguing that what fundamentally ails us is “Knightian uncertainty.” If this can be made to go away then our economic difficulties would be many fewer and far less severe. To accomplish this, he proposes the usual array of stimulus. So all of that to get to the “consensus policy.” Continue reading

A Keynesian Christmas Miracle: Stones into Bread

by Mario Rizzo

Some mainstream opponents of Austrian economics have complained over the years that Austrian economics is a “religion.” I have no doubt that in the hands of some it is so. I shall leave it to others to explore this. However, in this post I want to give the reader a taste of the secular religiosity of Keynes’s 1940s followers.

 After reading this, the reader should consider to what extent the intolerance to non-Keynesian ideas shown today by not-a-few journalists and economists wearing journalist hats is in the religious tradition of these early “Keynesians.”  I simply post some excerpts from an article by Ludwig von Mises, addressed to the general public, called “Stones into Bread: The Keynesian Miracle” originally published sixty years ago in 1948. It was reprinted in a volume called Planning for Freedom. Continue reading