Power & Market

The Human Action Podcast

03/29/2019Jeff Deist

We hope you enjoy a new Mises Institute podcast series, focused on Austrian theory in-depth — with the best PhDs discussing core books and core topics. We encourage listeners to look past the white noise and learn — or relearn — real economics. The ultimate goal is introducing more and more people to original sources, from Menger forward.

These are 60+ minutes in length, and unique (we think) in the podcast world. Please subscribe, rate, and review!

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There's No Evidence that Women Were "Forced" to Enter the Work Force "Just to Keep Up"

03/11/2019Ryan McMaken

In discussions about the ease or difficulty with which one may attain the so-called "American Dream" it is not uncommon to hear that in the past, a family needed only a single wage earner in order to attain the alleged dream.

This is generally based on assumptions about the the past in which it is imagined that most married women stayed home and provided domestic services such as cooking and cleaning and childcare. They did the family's shopping, took the children to school, and managed the household.

Now, since the rise of industrialization and departure of working men to a place of work other than the home (of the fields surrounding it) there is no doubt that women took on a role of household management, which grew in economic importance as time went on.

The question remains as to whether or not most households could afford to have the wife do nothing other than household chores and household management.

It appears plausible that many upper middle-class women could indeed afford to do this. Outside of households in the upper reaches of household income, however, attaining the much-vaunted "single-income family" wasn't as easy as many today assume. This can be seen in the fact the number of wage-earning married women, contrary to myth, slowly grew continually throughout the first half of the twentieth century. Moreover, some observers tend to attribute changes in the the working habits of married women only to economic need. But, as we will see, changes in the social acceptability of wage-earning married women changed over time, and not necessarily as a result of economic need. Thus, it is inappropriate to assume women enter the workforce primarily in order to maintain a standard of living that had allegedly been attainable with only one income previously.

A Brief History of the Housewife

Prior to industrialization, the idea of the stay-at-home housewife didn't even exist in most families, largely because it was simply assumed that both husband and wife needed to constantly attend to a wide variety of productive tasks at home. Those tasks were often segregated, but it was assumed that while the husband worked in the fields, the wife would spin yarn on a wheel, attend to the dairy animals, prepare meals, and wash clothing. These were not minor or quickly-accomplished tasks.

As an ideal, the housewife gained increasing popularity during the nineteenth century in part because it seemed possible for middle-class women to possibly attain what was seen as the "idle" lifestyle of upper-class women. Thus, a woman who did no wage work or production work was seen as having attained a higher status.

Over time, this became ingrained in the idea of proper "womanhood," but rarely — prior to the twentieth century, at least — did it ever have much to do with everyday reality. Susan Cruea writes:

The vision of women as wan, ethereal, spiritualized creatures bore little relation to the real world,especially of the working class, where women operated machines, worked the fields, hand-washed clothing, and toiled over great kitchen stoves. Even middle-class girls raised to be idle and submissive found themselves overwhelmed when it came to managing household duties as wives and mothers.

Nor was avoiding this fate a simple matter of finding a quality husband.

Massive economic changes in America also made arranging a desirable marriage difficult. Carroll Smith-Rosenberg notes that commercialization, industrialization, and advancements in transportation led to a mass departure of young men from the New Eng-land agricultural area "either to the West or to the new urban frontier." As a result, women's marital opportunities became limited, and more were forced to seek employment.

Economic historian Claudia Goldin has pointed out the importance of wage work to young and single women who greatly swelled the ranks of wage workers in the late nineteenth century. Once they married, however — assuming the new household was relatively well off — the women usually left the workforce.

This avoidance of wage work, however, could not be assumed in most cases. Sociologist Juliet Schor writes:

At least until late in the nineteenth century, most families could not afford to devote the labor of an adult solely to housecleaning, cooking, and mothering. Although social mores confined them to the home, married women, especially among the working classes and the poor, remained enmeshed in the cash economy. They earned income by taking in laundry, accepting boarders, or doing piecework. In rural areas, they worked on family farms. A large fraction of the population relied on this money for survival.

Throughout the early twentieth century, much of this work done by women in the cash economy remained informal because more institutional types of employment were closed to married women as part of the so-called "marriage bar."

Schor continues:

Why were housewives effectively excluded from the market? Among middle-class women, outright prohibitions on suitable jobs played a crucial role. In teaching and clerical work, women faced "marriage bars" - restrictions against the hiring of married women, or the firing of single women once they did marry. According to economic historian Claudia Goldin, at their peak, these bars were used by 87 percent of local school districts and covered 50 percent of office workers. Teaching and office work were two of the most important occupations for middle-class women whose class position would prevent them from going into factories or other work from which they were not barred.

In the working class, married women were also excluded from the labor market. Their (male) trade-union movement had long argued against women's employment in manufacturing industries. ... Men fought to be paid a "family wage" — remuneration generous enough to "support" a wife at home. But it was not only outright discrimination that kept women out of the labor market. There was also the sense that a family with a full-time housewife had achieved a privileged position in society.

In other words, the number of women "who stayed home" was artificially inflated by the presence of marriage bars and social mores. The number who stayed home was not simply a matter of economic abundance making a single-income household easily attainable.

But even with these marriage bars in place (which nonetheless went into steep decline in the 1940s), the number of married women going into wage work increased throughout the 1930s to the 1950s. Goldin notes:

From 1930 to 1950 the labor force participation rate for married women 35 to 44 years old in-creased by 15.5 percentage points, or from about 10 percent to 25 percent. Whereas just 8 percent of employed women were married in 1890, the number rose to 26 percent in 1930 and 47 percent in 1950. The fraction of single women in the labor force had not declined by much.Rather, the labor force participation of married women had increased substantially.


For married women in the 35- to 44-year-old group, participation increased from 25 to 46 percent from 1950 to 1970.

Some of this was facilitated by the new appearance of "scheduled part time work" which allowed many married women to enter into employment involving fewer than 35-hours per week.

"Need" vs Preference

There are a few things we can extrapolate from this information, and which are relevant to the idea that, allegedly, women did not "need" to engage in any wage work in the past.

First of all, it is simply not true that mothers and married women did not take on wage work or participate in the cash economy prior to the second half of the twentieth century. Agricultural women, of course, did manual labor all day long. But even as these households transitioned to industrial-based economies, married women still took on other types of additional work to supplement incomes. This was especially true in the working classes and lower-middle classes.

Secondly, it's important to remember that the number of women in the workforce was suppressed by social convention and by active, concerted efforts to keep married women out of the work force. Essentially, the marriage bar and efforts by labor unions acted to make it much harder for women to find "respectable" employment. While the marriage bar did not cover all types of employment, social convention prevented many middle-class women from taking jobs as laborers or factory workers. This sort of work was socially unacceptable. Thus, it is not appropriate to assign "economic need" the same level of importance in all time periods. Even if need existed in the days of the marriage bar, many families elected to simply do without in order to conform to social rules.

Thirdly, it is likely many women entered the workforce as a matter of personal preference and due to the desire for an even higher standard of living.  The fact that many women chose to enter the work force over these decades cannot be just assumed to be a function of a supposed decline in real wages. The increase may just as much be a function of the fact that many women chose to enter the workforce because they wanted to — and because it became more socially acceptable — and not just as a function of income needed to maintain a certain standard of living.

In fact, from 1950 to 1970, real wages increased considerably. This would not be the case if women had to enter the workforce "just to keep up" or just to maintain a formerly affordable standard of living as many contend to be true when they point to women joining the workforce after World War II. If that were true, real wages would be flat or nearly flatduring the period in question. As Goldin has described, nearly half of married women in the 35-44 year-old group — right in the middle of child-raising years — chose to enter the work force by 1970, either on a full time or part time basis. And this occurred while household incomes were increasing over the previous two decades.

So, it is not evident that because more women chose to enter the workforce after 1950 that this somehow "proves" the standard of living open to single-earner households was declining.

Moreover, while many contend the "American Dream" was becoming unattainable, we actually find that households were expanding their ownership of homes and cars at the same time more women were joining the work force.

As we've seen, the average size of homes US homes increased by two-thirds from 1967 to 2017, and increased from around 1,000 square feet to over 1,600 square feet from 1950 to 1970. All the while, the number of women joining the workforce increased. At the same time, the number of automobiles available to US households increased significantly during the 1960s, 1970s, and 1980s. The number of households with no car was nearly cut in half from 21 percent to 12 percent from 1960 to 1980. The number of households with access to two or more cars nearly doubled from around 22 percent in 1960 to about 53 percent in 1980.

Some might claim that was because married women "were forced" to get jobs, and thus needed transportation to that jobs. However, one might just as plausibly claim that many women wanted access to their own automobiles, and preferred wage work and an automobile to no wage work and no automobile.

And this brings us to the fundamental problem of assuming that women "have to" enter the workforce. Given that the US standard of living is far, far above subsistence levels, it's obviously not the case that average American households "cannot survive" on a single income. On the contrary, it's obvious that most American households today could certainly attain what would have been considered a middle-class standard of living during the 1950s and 1960s: a 1,000 square foot two-bedroom, one-bath house with a carport for the family's one car. There were rarely annual vacations to resort-like places out-of-state or overseas. In-home electronic entertainment consisted of a single television with four or five channels.

The fact is, however, that most American households don't want that sort of standard of living. They want smart phones, and an automobile for each adult. They don't want the children to have to share a bedroom. They want cable television.

Consequently, many households have elected to choose the benefits of higher incomes — and the downside of less leisure time and child-parent time — for the benefits of a higher material standard of living. It is also entirely possible that many couples would have preferred to do the same in the first half of the twentieth century had it been more socially acceptable to do so.

Usually, when people contend that in the past a single income brought a cornucopia of wealth manifested in the American Dream, they tend to base this on anecdotal experience from the point of view of a middle-class person who grew up in the mid twentieth century. These people forget that the standard of living was much lower then, and they also don't realize that the number of hours worked by the one household breadwinner tended to be higher than in later decades.

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Trump Treasury Secretary Supports French Tax Harmonization Scheme

Much to the consternation of some Republicans, I periodically explain that the Trump Administration is – at best – a mixed blessing for supporters of limited government.

It’s not just that Trump is the most protectionist president since Herbert Hoover, though that’s certainly a damning indictment.

The Trump White House also has been very weak on government spending, and the track record on that issue could get even worse since the President supports a new entitlement for childcare.

Yes, there are issues where Trump has been a net plus for economic liberty.

The overall regulatory burden is declining (though the Administration’s record is far from perfect when looking at anti-market interventions).

And the President gets a good mark on tax policy thanks to the Tax Cut and Jobs Act.

But Trump’s grade on that issue may be about to drop thanks to horribly misguided actions by his Treasury Secretary, Steven Mnuchin. Here are some excerpts from a report by France 24.

US Treasury Secretary Steven Mnuchin said Wednesday that the US supported a push by France for a minimum corporate tax rate for developed countries worldwide… “It’s something we absolutely support, that there’s not a chase to the bottom on taxation,” Mnuchin said in Paris after talks with Finance Minister Bruno Le Maire. Le Maire said last month a minimum tax rate would be a priority for France during its presidency of the G7 nations this year. …France in particular has railed against Amazon, Google and other technology giants that declare their European income in low-tax countries like Ireland or Luxembourg.

Needless to say, it’s utterly depressing that a Republican (in name only?) Treasury Secretary explicitly condemns tax competition.

Politicians and their flunkies grouse about a “race to the bottom” when tax competition exists, not because tax rates would ever drop to zero (we should be so lucky), but because they don’t like it when the geese with the golden eggshave the ability to fly away.

They like having the option of ever-higher taxes.

In reality, the world desperately needs tax competition to reduce the danger of “goldfish government,” which occurs when vote-seeking politicians can’t resist the temptation to destroy an economy with too much government (see GreeceVenezuelaZimbabwe, etc).

I’ll close with a remarkable observation.

The Obama Administration supported a scheme that would have required American companies to pay a tax of at least 19 percent on income earned in other jurisdictions, even if tax rates were lower (as in Ireland) or zero (as in Cayman).

This was very bad policy, completely contrary to the principle of “territorial taxation” that is part of all market-friendly tax reforms such as the flat tax.

Yet Trump’s Treasury Secretary, by prioritizing tax revenue over prosperity, is supporting a proposal for global minimum tax rates that is much worse than what the Obama Administration wanted.

And even further to the left compared to the policy supported by Bill Clinton.

P.S. I’m sure the bureaucrats at the European Commission and Organization for Economic Cooperation and Development are delighted with Mnuchin’s policy, especially since American companies will be the ones most disadvantaged.

Originally posted at International Liberty
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The Transportation Boom Ends

02/16/2019Doug French

Sales of Class 8 trucks (18-wheelers) hit the ditch in January, with orders down 58 percent from a year ago hitting a level not seen since October 2016, near the end of the transportation recession, “when Class-8 truck orders had plunged to the lowest levels since 2009, and truck and engine manufacturers responded with layoffs,” writes Wolf Richter.


The other day I posted about the plunge in the Baltic Dry Index and now news is the Cass Freight Index dropped in December. The Cass “index covers shipments of merchandise for the consumer and industrial economy but does not include bulk commodities, such as grains or chemicals. It was the first year-over-year decline since the transportation recession of 2015 and 2016 — and trucking companies have seen this coming for months:”


Baltic Dry Index

Shipping indexes provide a barometer for how the economy is doing. Less shipping means less buying, selling, and producing. Government interference in the form of low interest rates and the threat of tariffs pulled economic activity forward. However, now the economy is digesting that bubble (malinvestment) of activity. Richter explains,

The trucking business is a barometer of, and dependent on, the goods-based economy. In late 2017 through the summer of 2018, demand for transportation services, such as shipping by truck, surged under the simultaneous impact of a strong goods-based economy led by red-hot e-commerce; a buildup of inventories; pandemic front-running of potential tariffs, a resurgence of drilling activity in the oil patch that required equipment and supplies to be trucked in, etc. Freight rates spiked. Squeezed shippers wheezed in their earnings reports about these spiking transportation costs, while truckers were on Cloud-9 and ordered new trucks to meet the demand, and truck manufacturers were swamped with orders.

Now shipping activity has cooled off and trucking capacity has improved.


The Flatbed Monthly Load-to-Truck Ratio by DAT tracks demand-capacity imbalances. After skyrocketing, the industry figured out how to deal with ELDs just as a slowdown in the industrial sector set in, particularly oil & gas. Now, the average load-to-truck ratio has plunged, down 41% from December a year ago.

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Talking about "Affordable Housing" on the Tom Woods Show

02/05/2019Ryan McMaken

Tom and I talked about how governments make housing less affordable, and how the best way to make housing more affordable is to build more. But both government planners and private owners will often join forces to prevent new housing from being built. Thus, the most commons "solution" ends up being schemes to subsidize housing.


Ep. 1334 The Government's War on Affordable Housing

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The Myth of Swedish Socialism with Per Bylund

02/01/2019Mises Institute

In a new interview with Pete Raymond, Sweden-born economist Per Bylund describes the Swedish economic system and takes a closer look at the claims of those who say Sweden is an example that ‘socialism’ can work in practice.

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The Reforms that Venezuela Needs Right Now

02/01/2019Rafael Acevedo

Venezuela's government is in a state of upheaval. Foreign nations are lining up to support either the regime of Nicolás Maduro — who claims to be the legitimately elected president — or that of Juan Guaidó, who the opposition claims is now the constitutionally mandated interim president.

The current situation has been brought on by nearly twenty years of Chavismo, a hard-left socialist ideology, which has left the Venezuelan economy in ruins.

Understandably, many Venezuelans are now hoping for a political change. and many believe no real change can be had until the current regime is gone.

But no matter who is president a week — or a year, or five years — from now, prosperity can only be regained by enormous reforms to the Venezuelan political and economic systems.

Venezuelans must act now to demand these changes, because bringing in new politicians won't be enough to turn the nation around:

  1. Open the road to monetary freedom, eliminating all legal tender laws and the nation's central-bank supported system of fractional-reserve banks. Allow Venezuelans to adopt whatever medium of exchange they wish. Even dollarization ought to be on the table.
  2. Open the country to International Trade: eliminate all tariffs, taxes, and trade barriers. All of them.
  3. Privatize Everything! All state-owned companies and assets, following Econintech's proposal.
  4. Decentralize the Government: Grant total administrative and budgetary autonomy to Venezuela's twenty-three states . Decentralization is a key to minimizing the damage an abuse central government can do.
  5. Lower taxes drastically, and decentralize tax collection and administration to the state level. All new taxes must be approved by referendum.
  6. Allow private Venezuelans to access and accept both humanitarian and security assistance from foreign organizations.
  7. Guarantee the right to self-defense: demobilize all the armed groups, purge the prisons, implement widespread private gun ownership, and auction to the public all weapons confiscated by the state.

Should Venezuela finally move toward real reform, Venezuela could reclaim its position as one of the most prosperous nations in Latin America. At times like this, Venezuelans can look at former communist countries — such as Poland — that applied radical free-market reforms and now are moving toward a far more prosperous future.

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The Statist (and Senseless) Agenda of Kamala Harris

It seems like every Democrat in the country plans to run against Trump in 2020 and presumably all of them will feel compelled to issue manifestos outlining their policy agendas.

Which gives me lots of material for my daily column. I’ve previously written about statist initiatives from Bernie Sanders and bizarre ideas put forth by Elizabeth Warren.

Today, let’s review the two big ideas that have been unveiled by Kamala Harris, the Senator from California who just announced her bid for the White House.

We’ll start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and health subsidies enrich providers).

Here’s some of what Professor Tyler Cowen wrote for Bloomberg about the proposal.

One of the worst tendencies in American politics is to restrict supply and subsidize demand. …The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices. That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. …Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall… That is basic supply and demand, with supply doing the active work. The Harris bill, in contrast, calls for tax credits to renters. …There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters.

In other words, this is a perfect plan for a politician who understands “public choice” theory.

Ordinary voters think they’re getting a freebie, but the benefits actually go to those with political influence and power.

Now let’s look at her $2.7 trillion tax cut. I believe that people should be allowed to keep the lion’s share of any money they earn, so my gut instinct is to cheer.

But it’s always good to be skeptical when a politician is offering something that sounds too good to be true.

Kyle Pomerlau of the Tax Foundation has done the heavy lifting and looked closely at the details. He has a thorough explanation of her plan and its likely impact.

The “LIFT the Middle-Class Act” (LIFT) would create a new refundable tax credit available to low- and middle-income taxpayers. …LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly). …The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent. …LIFT’s impact on the economy is primarily through its effect on the labor force. LIFT phases in from the first dollar of earned income to the maximum credit of $3,000 per tax filer. It then phases out starting at different levels of income, depending on a tax filer’s marital status and whether they have children. These phase-ins and phaseouts create implicit marginal subsidies and tax rates that impact individuals’ incentive to work.

At the risk of oversimplifying, Harris is proposing a new version of the earned income credit.

And that means some taxpayers get subsidized for working and some taxpayers get penalized.

For taxpayers in the credit phaseout range, tax liability would increase by 15 cents for each additional dollar earned. This means that these taxpayers would face an additional implicit marginal tax rate of 15 percent, which would reduce these taxpayers’ incentive to work additional hours. In contrast, taxpayers in the phase-in range of the credit would get $1 for each additional $1 of income they earn. As such, these taxpayers would benefit from an effective marginal subsidy rate, or negative marginal tax rate, of 100 percent. A negative tax rate of 100 percent would increase the incentive for these taxpayers to work additional hours.

Kyle crunches the numbers to determine the overall economic impact.

While the positive labor force effects of the phase-in of the credit could offset the negative effect of the phaseout, we find that, on net, the size of the total labor force would shrink under this policy. This is primarily due to the large number of taxpayers that would fall in the phaseout range of the credit relative to the number of individuals that would benefit from the phase-in. …We estimate that the credit…would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.

Here’s the relevant table from the Tax Foundation’s report.


This is remarkable. It would seem impossible to design a $2.7 trillion tax cut that actually hurts the economy, but Sen. Harris has succeeded in that dubious achievement.

For all intents and purposes, she has figured out how to have an anti-supply-side tax cut.

And there are two other problems that deserve attention.

  • First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud).
  • Second, Harris is very cagey about how the numbers work in her proposal. Does she want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be substantially higher if financing costs are included.

Considering the poor design and upside-down economics of the rent subsidy scheme and the new tax credit, the bottom line is rather obvious: Kamala Harris wants to buy votes, and she has decided that it is okay to hurt the economy in hopes of achieving her political ambitions.

No wonder she fits in so well in Washington!

Originally published at International Liberty
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The Austrian School at the European Parliament

01/16/2019Max Rangeley

Last year we at the European branch of the Ludwig von Mises Institute (Europe) 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.

Max Rangeley Speech in the European Parliament on the Coming Economic Collapse

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.

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Trump's "Gut Feeling"

01/12/2019Doug French

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.

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