Power & Market
Last year we at the European branch of the Ludwig von Mises Institute organised the first ever Austrian School event in the European Parliament. Member of the European Parliament Amjad Bashir — a great supporter of free enterprise within the Parliament — kindly sponsored the event, which was set up to coincide with the release of one of the best books on the Austrian School in recent years, Banking and Monetary Policy from the Perspective of Austrian Economics.
As well as me, the other two speakers were Member of the European Parliament Professor Joachim Starbatty MEP, and Brendan Brown, Chief Economist of Mitsubishi Bank, arguably the largest bank in the world by assets other than China’s state banks. While there have been other pro-enterprise and free market events in the European Parliament, they have all neglected the “money issue” so far, at least as those within the Austrian School would see it. Professor Starbatty MEP gave an eloquent outline of the Austrian Business Cycle Theory, while Brendan Brown brought Austrian principles to bear on current issues in the banking sector. I decided to speak about the current bubble and how this can be explained with Austrian concepts. This event also reinforces the place of the Ludwig von Mises Institute (Europe) as one of the premier think tanks in Europe; within a few months we have published a defining textbook and introduced the Austrian School within the European Parliament itself.
In my experience, more and more free market thinkers are tending towards the Austrian School, and it is the farce of years of zero percent interest rates that has achieved this. When the current Super Bubble bursts, we must be prepared to provide answers to how this bubble was created as many will blame the “free market” and demand the government “take action”.
Below you can see my speech in which I outlined how central banks’ policies of zero percent interest rates and quantitative easing have created the largest bubble in all of human history. The West has had a Faustian Pact with the central banking system for an entire generation, with each recession being responded to by creating an even larger debt bubble with ever lower interest rates -- and of course ever worse debt dependency.
The book “Banking and Monetary Policy from the Perspective of Austrian Economics” is published by Springer, one of the best academic publishers. The Ludwig von Mises Institute (Europe) did the excellent work of gathering contributors for the book, which includes Jesus Huerta de Soto, Walter Block, Guido Hulsmann and Gunther Schnabl as well as other great contemporary Austrian School thinkers. Annette Godart-van der Kroon, President of LvMI-Europe, edited the book. If you are a student or lecturer see if you can persuade your institution to get a copy.
Let’s hope the trend can continue with policy-makers taking an interest in the Austrian School. We have to be patient in explaining some of these issues, but more and more minds are open to explanations for how central banks distort the economy.
Incidentally, two days later I also gave a speech at the “Future of Money Conference” at the Frankfurt School of Finance and Management. People from the Bank of England, European Central Bank and Swedish Riksbank among others were discussing how money will develop over the next generation, including so-called Central Bank Digital Currencies (CBDCs, of which you will no doubt hear more over the coming years). I had the pleasure of hearing William White, former chief monetary economist at the Bank for International Settlements and Chief Economist at the OECD, give a terrific speech about the bubble created by radical monetary policy. Bill has had distinct Austrian tendencies during his time at the top of the global monetary establishment, citing Hayek and others in his work.
The intellectual tectonic plates within economics are shifting, and the Austrian School is well placed to provide explanations for the coming bursting of the Super Bubble.
Joe Salerno recently joined Tom Woods to discuss the legacy of F.A. Hayek. From the site:
F.A. Hayek, illustrious member of the Austrian School of economics, won the Nobel Prize in 1974, and wrote prolifically on both economic and non-economic topics. He has been a source of controversy within libertarian circles because of some aspects of his work. Joe Salerno helps us sort everything out about this central figure. Read the original article at TomWoods.com.
On the Lions of Liberty podcast, Marc Clair and Ryan McMaken discuss the government shutdown and the need to decentralize the national parks:
Media Accuses Rand Paul of Hypocrisy for Visiting Canadian Hospital: Turns Out It's a Private Hospital
Kentucky Senator Rand Paul recently announced he was receiving hernia surgery as a result of being blindsided in an attack from his neighbor. While a senator undergoing common surgery is of questionable newsworthiness, one may expect that the reminder that the Senator is still suffering from the 2017 incident as cause for sympathy. Instead, major media outlets decided to try to use the news as an example of hypocrisy on the part of Paul due to the fact he is receiving treatment at a Canadian hospital.
As published in USA Today:
Kentucky Sen. Rand Paul, one of the fiercest political critics of socialized medicine, will travel to Canada later this month to get hernia surgery....
He is scheduled to have the outpatient operation at the Shouldice Hernia Hospital in Thornhill, Ontario during the week of Jan. 21, according to documents from Paul's civil lawsuit against Boucher filed in Warren Circuit Court....
Paul, a Republican, often argues for private market solutions to American's health care woes.
In Canada, medical care is publicly funded and universally provided through the country's Provincial Ministry of Health, and everyone receives the same level of care.
Paul has called universal health care and nationalized options "slavery."
Of course, if the author had decided to do a two second internet search for “Shouldice Hernia Hospital,” they would have found that it is one of few private hospitals that were grandfathered in prior to the government’s takeover of Canadian healthcare.
Of course, the same media outlets that jumped to cry "hypocrisy" at Senator Paul are also guilty of ignoring the very real consequences of Canada’s socialist healthcare system. For example, patients dying due to a lack of access to basic medical supplies such as hospital beds.
For more on the disaster of Canada's socialized healthcare system, check out this series by (Canadian author) Lee Friday:
This month’s Liberty Matters forum is a discussion of the American economist Frank Fetter. Though he is neglected today, Fetter made vital contributions to Austrian economics and was a major force in spreading the ideas of the early Austrians in the United States (see here and here). In my contributions to the discussion, I explain why Fetter’ work is important and how it can continue to provide fresh insights to contemporary economists. So far, the focus of the essays has been on key elements of economics, especially foundational concepts like price, market, equilibrium, capital, and rent. I’m joined in the conversation by Joseph Salerno, Peter Lewin, and Geoffrey Hodgson.
The first essays and responses in the discussion have now been published, and the forum will remain open for the rest of the month for short rejoinders by all the participants. I hope you’ll take a few minutes to read through some of the contributions. Here is the abstract for the discussion:
Matthew McCaffrey, assistant professor of enterprise at the University of Manchester, explores the economic and political work of the “forgotten giant” of economics, the Indiana-born Frank Fetter. At the height of his career in the early 20th century, Fetter was one of the most respected, cited, and debated economists in the United States. He taught for over 40 years at prestigious universities, including Stanford, Cornell, and Princeton, and his research appeared in practically every major publication in economics and political science. Yet today he is virtually forgotten outside a small group of Austrian economists. In his opening essay, McCaffrey explores two aspects of his thought in particular: his contributions to theoretical economics and their relationship to Austrian ideas, and his political views as they relate to the philosophy of classical liberalism. He is joined in the discussion by Geoffrey M. Hodgson, Research Professor of Business Studies in the University of Hertfordshire, Peter Lewin is Clinical Professor in the Jindal School of Management, University of Texas, Dallas, and Joseph T. Salerno, professor of economics in the Finance and Graduate Economics Department in the Lubin School of Business of Pace University in New York.
Speaking to the Washington Post, President Trump said, “My gut tells me more sometimes, than anybody else’s brain can ever tell me.” This comment generated scoffs aplenty, as people imagine the receptacle of a daily intake of gallons of Diet Coke and multiple Big Macs somehow provides anything intelligent. However, this classic Trump quip has some merit after reading John Coates’s The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind.
Part II of the book is titled “Gut Thinking,” and the book’s thesis is that our minds and bodies are connected in our actions. Coates focuses his story on treasury bond traders who successfully act by instinct gained from experience. He writes, “Thinking, one could say, is something we do only when we are no good at an activity.”
“There are few phenomena in finance more remarkable, even mysterious,” Coates writes, “than this close linkage between market and body.”
The fact is, our bodies react to news and risks quicker than our brains do. Conscious thought is left in the dust when we react and especially when we take risks. Of course neoclassical economists would poo-poo the notion of our bodies reacting to threats and risks, after all, we’re all rational beings, doing what’s rational at all times. Yeah, right.
While the above is essentially Coates’s contention, he later writes,
Lifting the hood of our brain does not reveal the netherworld of Kant’s unsayable, nor the volcanic will of Nietzsche’s superman, nor yet the hellish subterranean den of Freud’s subconscious. It reveals something that is a lot closer to the inner workings of a BMW.
Not everyone’s brain is of BMW quality, not to mention the various levels of body quality. Traders, Coates contends, must have IQs that are “high enough,” but more important is “a hearty appetite for risk and a driving ambition.” Also important is physical stamina. He points out that many traders are ex-athletes.
Certainly, the president, has the ambition and risk appetite. His gut feelings, as Coates describes gut feelings generally, “act powerfully,” and “are not only real; they are essential to rational choice.”
The author contends the gut “has its own ‘brain.’ The vagus nerve, the main nerve in the rest-and-digest nervous system, links the brain stem, voice box, lings, heart, pancreas and gut. In total, 80 percent of its fibers carry information back to the brain, mostly from the heart and gut.”
As the book progresses, the focus turns to dopamine, testosterone, and cortisol. Dopamine modulates levels of motivation, how eagerly humans (or animals) want things. Dopamine drives humans to try new things and solve F.A. Hayek’s knowledge problem. “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” explained Hayek, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”
Trying new things involves taking risks and that’s where testosterone comes in. Traders and entrepreneurs are driven by testosterone. Coates worries that testosterone lowering obesity, “may be dimming the gut feelings and entrepreneurial drive upon which our prosperity and happiness depend.”
Winning trades increase testosterone while market crashes deplete the hormone, sometimes for years. Testosterone feedback, unfortunately, can lead to traders and entrepreneurs to believe themselves invincible. And thus, rallies turn into bubbles. Coates mentions ill-conceived takeovers and record-breaking skyscrapers, providing biological support to Mark Thornton’s work on The Skyscraper Curse.
Cortisol is testosterone’s opposite. As markets crash, cortisol is released “causing [the] body and brain to hunker down for a long term.” Cortisol essentially immunizes the body against trauma, suppressing testosterone production, while being a powerful anti-inflammatory.
Cortisol levels rise with volatility. Coates speculates that this hormone forms “the physiological foundation of the derivatives market.”
Cortisol and CRH (a chemical produced during stress) lead traders (and everyone else one can assume) to be vulnerable “to rumor and suspected conspiracy.” Coates writes, “Each rumored catastrophe is now given as much credence, and has as much effect on markets, as hard economic data.”
“Cortisol is the molecule of irrational pessimism,” explains Coates. Older folks are especially susceptible because they stop producing testosterone and produce high levels of cortisol.
While professional traders and investors have high amounts of testosterone flowing through them, amateurs have “chronically raised cortisol levels.” The constant anxiety forces them to bail out of what could be winning trades.
The November 30th edition of the Elliott Wave Financial Forecast cited examples of the financial press attempting to keep individual investor spirits high. This was before the December downdraft in stock prices. For example, “Ignore the Gloom,” USA Today said.
Trump’s gut has it right. The stock market is in trouble and he knows he needs to blame someone — Fed Chair Jerome Powell — early and often.
Why does support for socialism persist?
The short answer may be simple human nature, our natural tendency toward dissatisfaction with the present and unease about the future. Even in the midst of almost unimaginable material comforts made possible only by markets and entrepreneurs—both derided by socialists—we cannot manage to conclusively defeat the tired but deadly old arguments for collective ownership of capital. We're so rich that socialists imagine the material wealth all around us will continue to organize itself magically, regardless of incentives.
It's a vexing problem, and not an academic one. Millions of young people across America and the West consider socialism a viable and even noble approach to organizing society, literally unaware of the piles of bodies various socialist governments produced in the 20th century. The fast-growing Democratic Socialists of America, led by media darlings Rashida Tlaib and Alexandria Ocasio-Cortez, now enjoy cool kid status. Open socialist Bernie Sanders very nearly won the Democratic Party's 2016 nominee for president before being kneecapped by the Clinton machine. New York City mayor Bill de Blasio helpfully announces "there is plenty of money in this city, it's just in the wrong hands." He freely and enthusiastically champions confiscation and redistribution of wealth without injury to his political popularity.
Rand Paul and Thomas Massie are outliers on the Right. Ocasio-Cortez and de Blasio are not outliers on the Left.
How is this possible, even as markets and semi-capitalism lift millions out of poverty? Why does socialism keep cropping up, and why do many well-intentioned (and ill-intentioned) people keep falling for something so patently evil and unworkable? Why do some battles have to be fought over and over?
The Soviet Union collapsed and the Berlin War fell decades ago. The Eastern Bloc discovered western consumerism, and liked it. Bill Clinton declared the era of Big Government over, and Francis Fukuyama absurdly pronounced that Western ideology had forever won the day. Even China and Cuba eventually succumbed to pressure for greater economic freedoms, not because of any ideological shift but because it became impossible to hide the reality of capitalist wealth abroad.
Yet economic freedom and property rights are under assault today in the very Western nations that became rich because of them.
Today's socialists insist their model society would look like Sweden or Denmark; not the USSR or Nazi Germany or Venezuela. They merely want fairness and equality, free healthcare and schooling, an end to "hoarded" wealth, and so forth. And they don't always advocate for or even know the textbook definition of socialism, as professors Benjamin Powell and Robert Lawson learned by attending socialist conferences (see their new book Socialism Sucks: Two Economists Drink Their Way Through the Unfree World). In many cases young people think socialism simply means a happy world where people are taken care of.
Never mind the Scandinavian countries in question insist they are not socialist, never mind the atrocities of Stalin or Mao or Pol Pot, and never mind the overwhelming case made by Ludwig von Mises and others against central economic planning. Without private owners, without capital at risk, without prices, and especially without profit and loss signals, economies quickly become corrupted and serve only the political class. Nicolás Maduro feasts while poor Venezuelans eat dogs, but of course this isn't "real" socialism.
History and theory don't matter to socialists because they imagine society can be engineered. The old arguments and historical examples simply don't apply: even human nature is malleable, and whenever our stubborn tendencies don't comport with socialism's grand plans a "social construct" is to blame.
These most recent spasms of support for the deadly ideology of socialism remind us that progressives aren't kidding. They may not fully understand what socialism means, but they fully intend to bring it about. Single-payer health care, "free" education, wealth redistribution schemes, highly progressive income taxes, wealth taxes, gun bans, and radical curbs on fossil fuels are all on the immediate agenda. They will do this quickly if possible, incrementally if they have to (see, again, the 20th century). They will do it with or without popular support, using legislatures, courts and judges, supranational agencies,university indoctrination, friendly media, or whatever political, economic, or social tools it takes (including de-platforming and hate speech laws). This is not paranoia; all of this is openly discussed. And say what you will about progressivism, it does have a central if false ethos: egalitarianism.
Conservatives, by contrast, are not serious. They have no animating spirit. They don't much talk about liberty or property or markets or opportunity. They don't mean what they say about the Constitution, they won't do a thing to limit government, they won't touch entitlements or defense spending, they won't abolish the Department of Education or a single federal agency, they won't touch abortion laws, and they sure won't give up their own socialist impulses. Trumpism, though not conservative and thoroughly non-intellectual, drove a final stake through the barely beating heart of Right intellectualism, from the Weekly Standard to National Review. Conservatism today is incoherent, both ideologically and tactically incapable of countering the rising tide of socialism.
Generals always fight the last war, and politics is no different. We all tend to see the current political climate in terms of old and familiar divisions, long-faded alliances, and obsolete rhetoric. We all cling to the comfortable ideology and influences that help us make sense of a chaotic world. As one commenter recently put it, liberal Baby Boomers still think it's 1968 and conservative Baby Boomers still think it's 1985. Generation X and Millennials will exhibit the same blinders. It may be disheartening to keep fighting what should be a long-settled battle against socialism, but today we have no other choice.
Dr. Mark Thornton joined Glenn Beck for an interview on how Austrian economists have predicted every major crisis of the last century.
The Skyscraper Curse is available now as a hardback, paperback, e-book, and audiobook at the Mises Store.
The book and audiobook are also available for free in the Mises Library.
I’m starting to wonder whether President Trump has any power over US foreign policy at all. Many people believe that the US president is just a figurehead, with actual foreign policy firmly in the hands of the deep state. Trump’s latest dramatic U-turn on pulling troops from Syria certainly feeds such theories.
When President Trump announced just a couple of weeks ago that the US was removing its troops from Syria and possibly reducing troops from Afghanistan, the neocons, the media, the military-industrial complex, and the left-wing “never-Trump” people were livid. They were silent when President Obama made the horrible decision to overthrow Assad in Syria and sent weapons to jihadists to do so. They never said a word when billions of dollars were committed to this immoral and dangerous “regime change” policy. They weren’t interested in the rule of law when President Obama thumbed his nose at Congress and sent troops into Syria.
But when President Trump declared the obvious – that ISIS was effectively defeated and that we had no business being in Syria – these above groups in unison declared that actually bringing US troops home was a “gift to Russia.” They said bringing US troops home would create instability in the regions they left. Well, is there any proof that occupation by US troops actually brings stability?
No sooner did President Trump announce our departure than his neocon advisors began walking his words back. First he had to endure a lunch with Sen. Lindsey Graham reading him the riot act, where, according to the Senator, Trump agreed to no timetables for departure. Then his National Security Advisor, John Bolton, and his Secretary of State, Mike Pompeo, began to tell the world that President Trump’s statements on troop pullout were just empty words, not US policy.
While Syrian Christians newly liberated from the rule of US-backed extremists celebrated Christmas for the first time in years, John Bolton dusted off the old warning to Assad that the US would attack if he “again” gassed his people. With the Syrian president personally taking part in some of the Christmas celebrations, does anybody really believe he’d go back to his office and order a gas attack?
Bolton then claimed that the US would shift troops from Syria to Iraq to continue fighting ISIS and that the US fully backs Israeli airstrikes on Syrian territory. Did President Trump even agree to any of this?
Even worse, Secretary of State Pompeo is embarking on a Middle East tour where he will essentially tell leaders in the region that the US president is a liar. According to one State Department official quoted in a report on Sunday, Pompeo’s message to the Middle East will be, “Despite reports to the contrary and false narratives surrounding the Syria decision, we are not going anywhere. The secretary will reinforce that commitment to the region and our partners.”
Calling the US president’s actual words on Syria “false narratives”? How is this not insubordination?
Will President Trump stand by and watch this coup taking place under his nose? Does he realize how his credibility suffers when he boldly announces a US withdrawal and the does a U-turn days later? Has he noticed recent polls showing that the majority of the American people agree with him? Why is he so intimidated by the neocons?
That didn't take long. Now that the Democrats hold a majority in the House of Representatives, Democratic Rep. Steve Cohen (Tenn.) introduced a constitutional amendment to abolish the electoral college.
Cohen surely doesn't expect the legislation to pass. But now that the Democrats have the Speakers' chair and committee chairmanships, Cohen can now get more political mileage out of the bill rather than have it immediately "disappeared" by a Republican House leadership.
The bill does little more than revive the longstanding claim among leftwing populists that the US presidency ought to go to whichever candidate wins a majority of all the votes from all the states added together.
The effect would be to lopsidedly favor heavily urbanized coastal regions over other regions of the US. Without an electoral college, it becomes far more economical for candidates to focus their views and election efforts on a small number of highly-populated regions, while ignoring the rest of the country.
In an age when politicians continually decry how the US is so "divided," abolishing the electoral college would only serve to further drive apart politically distinct regions of the US by eliminating a political institution that encourages candidates to take positions more likely to appease voters outside the areas with the most heavily-concentrated populations.
Moreover, in an age when we're told to decry populism, and embrace a politics of "compromise," a rejection of the electoral college seems rather odd indeed.
After all, the purpose of the electoral college is to ensure that a successful presidential candidate appeals to a broader base of voters than would be the case under a simple majoritarian popular vote.
This, by the way, is a big reason that Hillary Clinton lost, and why the Democrats are convinced the electoral college is stacked against them.
The electoral college makes it harder to win by doing what Clinton did during the 2016 campaign: focus on a thin sliver of rich Hollywood and business elites, coupled with urban ethnics.It's true that those two groups can offer a lot of votes and a lot of campaign dollars. But they also tend to be limited to very specific regions, states, and metro areas.
The groups Clinton ignored: the suburban middle class and working class make up a much larger, more geographically diverse coalition. This can be seen in the fact that Trump won such diverse states as Alabama, Pennsylvania, and Wisconsin.
In 2016, the electoral college worked exactly as it's supposed to — it forces candidates to broaden their appeal. Or as a cynic like myself might say: it forces politicians to pander to a broader base.
There's Nothing "Undemocratic" About the Electoral College
The party-line on the electoral college, of course, has long been that it's undemocratic. In its coverage on Cohen's bill, the Huffington Post editorialized:
Another bill would get rid of the Electoral College, an archaic system of electing presidents that allowed Trump to win the presidency despite his rival, Hilary Clinton, receiving millions more votes.
The conclusion you are supposed to draw here, of course, is that the electoral college works against what we can all see is common sense: that the candidate with the most votes ought to win.
Unfortunately, many supporters of the electoral college adopt this line of thinking as well, and many think the primary benefit of the electoral college is that it's undemocratic. These claims are often accompanied by tiresome bromides about how the United States is allegedly "a republic not a democracy."
The truth, however, is not that the electoral college is undemocratic. It is, in fact, more democratic.
It's true that the electoral college prevents Clinton-style demagoguery. But 50 separate presidential elections (plus DC and the territories) is not somehow less democratic than holding one big national election. It's simply a democratic method designed to ensure more buy in from a larger range of voters, not less. Other similar tactics include "double majorities" as used in Switzerland. And for all these reasons, as I note here, the electoral college should be expanded:
Double-majority and multiple-majority systems mandate more widespread support for a candidate or measure than would be needed under an ordinary majority vote.
Unfortunately, in the United States, it is possible to pass tax increases and other types of sweeping and costly legislation with nothing more than bare majorities from Congress which is itself largely a collection of millionaires with similar educations, backgrounds, and economic status. Even this low standard is not required in cases where the president rules via executive order with " a pen and ... a phone ."
In response to this centralization of political power, the electoral college should be expanded to function as a veto on legislation, executive orders, and Supreme Court rulings.
For example, if Congress seeks to pass a tax increase, their legislation should be null and void without also obtaining a majority of electoral college votes in a manner similar to that of presidential elections. Under such a scheme, the federal government would be forced to submit new legal changes to the voters for approval. The same could be applied to executive orders and treaties. It would be even better to require both a popular-vote majority in addition to the electoral-vote majority. And while we're at it, let's require that at least 25 states approve the measures as well.
These sorts of measures mean more voting, more debate, and more public buy-in. It prevents knee-jerk policies designed to attack unpopular minority groups. Eliminating the electoral college, on the other hand, moves in exactly the opposite direction.