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Reckoning about finance and economics is endlessly fascinating. There is always something to ponder. There are actions and reactions, and more reactions. The market twists and turns. It never rests.
But reckoning on a day like today, after seeing the devastation the Queensland floods have brought about, seems futile, or even callous. Possessions and wealth cease to be important when lives are on the line.
And lives are on the line. Some of the stories are heartbreaking. Once again, we just want to let all those affected, in any way, know that our thoughts are with you.
Separating what happens in financial markets from what’s actually happening on the ground isn’t really possible though. One influences the other, although you wouldn’t know it sometimes – especially in the modern era of activist central banking.
Ben Bernanke seems to think you can create wealth simply by buying government bonds with money that didn’t previously exist. He doesn’t realise that wealth is created from the bottom up, not the top down. In good time, he will find out otherwise.
One man who really understood economics and markets was the great Ludwig von Mises. He called his magnum opus ‘Human Action’. The following is from the foreword to the fourth edition:
Mises’ contribution was very simple, yet at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do. Individuals act, choose, cooperate, compete and trade with one another.
In this way Mises explained how complex market phenomena develop.
Mises did not simply describe economic phenomena – prices, wages, interest rates, money, monopoly and even the trade cycle – he explained them as outcomes of countless conscious, purposive actions, choices and preferences of individuals, each of whom was trying as best he or she could under the circumstances to attain various wants and ends and to avoid undesired consequences.
Hence the title Mises chose for his economic treatise, Human Action.
That the market is simply the collective ‘human’ action of millions of individuals is lost on most economists. But that’s hardly surprising given Mises doesn’t even get a mention in undergraduate education these days.
Not long ago I was speaking to an economics student at the University of Sydney. One of his subjects was Economic Theory. I asked whether Mises popped up in the text. Nope. Nothing.
That one of the giants of one of the most insightful schools of economic thought (the Austrian school) can’t make it into a history of economic theory textbook is disturbing.
But they’re churning out thousands of these economists and analysts every year. If you’re handy with a spreadsheet and have solid ‘quantitative skills’, you’ve got a job with an investment bank.
Most of the finance world believes all of human action can be reduced to equations, numbers and spreadsheets.
Good luck with that.
By the way, if anyone knows of any ‘mainstream’ university that actually teaches anything related to Austrian economics, we’d be glad to hear of it.
Here’s something to ponder for today. Could falling unemployment in the US be bad for the stock market?
That sounds a little wacky but let’s think about it for a minute.
The US stock market has strongly outperformed the Aussie market (and many others) over the past year. Yet their unemployment rate is roughly twice as high as ours.
One of the reasons for the strong market performance is the decent earnings numbers of US corporates. Of course, when you’ve cut your largest cost – labour – big time, it’s going to do wonders for margins and profitability.
And with analysts expecting these fat margins to last into perpetuity, no wonder US stocks are on a tear.
But with the global economy ‘recovering’ (or juiced up on stimulus, more to the point) won’t US firms need to start hiring again? And when they do, won’t this start to chip away at profit margins?
We think yes.
But on the other side of that coin, you will obviously have more wages and purchasing power floating through the economy. This will be the initial bullish interpretation of better employment numbers.
The market hangs on the non-farm payrolls number every month. We’re in a situation now where the market considers any number to be good news. Weak employment data (which is the post-credit-crisis reality) means lower interest rates for longer and more stimulus measures. Better numbers mean higher wages and more spending. It’s all good!
But won’t this mean the stock market will have to wean itself from artificial support? After all, Bernanke is buying government bonds with money that wasn’t there in the hope that this will boost employment.
If jobs are somehow created from this hare-brained scheme, he will have to turn the monetary taps off. The market will have to learn to operate without constant injections of ‘liquidity’.
How will it cope?
Anyway, the whole discussion may be fruitless. The US labour market is in a deep ditch because the US economy is structurally flawed. Years of excess credit has created mal-investment on a grand scale.
Dumb investment decisions create high unemployment. Dumb stimulus programs wont solve the problem.
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About the Author
Greg Canavan is the editor of Sound Money, Sound Investments, a financial report devoted to unearthing great value investments amid today's "money illusion" of fiat currency. For a free trial of Greg's service, go to Sound Money, Sound Investments.
Comment by Troy Lynch on 13 January 2011:
Do not even think of doing Austrian economics in Australia if you want an academic job at the end of it. Even Frank Shostak concurs. What you need is graduate advanced micro- macro-economics and econometrics, as well as a decent thesis. I completed a PhD in Austrian capital and interest theory, focusing on Menger, Böhm-Bawerk, Mises and Hayek - real intellectual champions. You can't beat the subjective theory of value; wins hands down on the labour theory of value.
However, the whole econometric approach seems to be just glorified statistics to me, though it seems to have its use. Multivariate models try and explain the past and predict the future. Forecasting, proper, appears to be more honest, and really has nothing to do with economic analysis, but makes an effort to use the past to predict the future by minimising error terms. And it is pretty useful - at least in the short run. But call a spade a spade: forecasting is forecasting - statistics; econometrics uses statistics as the vehicle and bolts economic notions onto the explanatory variables (but it is still empirical, as against the bulk of Austrian concepts, which are rationalist).
The only thing Australian universities care about now is individuals who can publish in A and A* journals. It is a funding thing. Economics departments are now focusing on hiring North American economics graduates; and, if want a job as a finance academic, you simply need to be on top of quantitative analysis.
Comment by TPL001 on 15 January 2011:
The deafening silence from the many responses (!) to my post, to me at least, indicates a couple of things: (1) how unaware the public is of what passes for mainstream academic economics in Australia (or elsewhere) (though some of the microeconomics can be useful, as can some of the forecasting tools, applied commercially); and (2) how utterly detached the academic profession is from the general public. The whole thing passes as a black box.
I recall that Ron Manners of http://www.mannkal.org does sponsor a couple of undergraduate Austrian units at The University of Notre Dame (WA), taught by a history of thought specialist, Assoc Prof Greg Moore.
The mainstream have control of the black box, policy and the reigns of government. Austrian and other heterodox schools (e.g. Minsky and the post-Keynesians) are making a gallant effort, but it will take a while.
No wonder that anyone who challenges the mainstream is left without a place in an economics department.
(What I find bizarre is how Glenn Stevens can call himself a Christian and sit atop the RBA, which controls the time price of money and credit, and not make any statement about the judicial nature of that activity. After all, though it is legislated, the notion of controlling the overnight cash rate is tantamount to distorting the time-price of money. It is nothing different to theft, because it causes harm to the holders of Australian RBA dollars by distorting their value. But this is the very nature of fiat money! I suppose Glenn needs to eat as well. Good luck on judgement day with that one, Glenn! And to all fiat money protagonists.)
The curious and certain thing about what you know, is that you are going to produce more of what you know. The outcome of a certain worldview -- knowledge, reality and ethics -- is a deduction of those committed principles. Nothing will budge mainstream economics unless their presuppositions are seriously -- rationally and empirically -- challenged. There are not many brave souls who can fight on in a university economics department and do this; one needs to eat. Those that do specialise in their own area of research and get on with teaching.
I recall one classical economist argue for Say's Law ("goods that are produced and paid for with money become the source of the demand for other goods"); he was met with fierce and determined opposition by a neoclassical mainstream macroeconomist. The latter could not understand the former, because he was speaking in classical economics' terms; whereas the latter, though adamant that he is not a Keynesian, and a committed neoclassical macroeconomist, would not accept the notion of Say's Law (which, by the way, was the focus of Keynes' attack in his General Theory (which is really a special theory).
Refer to my article on Say's Law:
http://wileyeconomicsfocus.wordpress.com/2010/08/23/production-of-goods-is-the-demand-for-goods/
I would not call the neoclassical economist an economist; they are more glorified mathematical statisticians, who use economic data (in GSGE models) as the subject matter.
What is needed is some serious methodological debate; but that is so involved and detailed that it loses itself, and participants return to their corners to fight on. I gave a seminar once on the ontology and epistemology of the Austrian School; it was met with blank looks. As I noted, one will only understand and produce what accords with one's worldview. Anything outside of that is akin to listening to an alien language.
In the meantime, it is commercial -- Port Philip publishing -- and think tank apparatchiks -- CIS, Mises Institute -- that are making headway with this, but it takes deep pockets, sacrifice and commitment.
Comment by John Haney on 16 January 2011:
Appreciate the article. Check out mises.org, lewrockwell.com.
Austrian economics professors located at two US universities, and growing:
George Mason University, Fairfax, Virginia
Auburn University, Auburn, Alabama
Comment by CS on 17 January 2011:
Well done on promoting Mises. A true intellectual giant.
I recently began 'Human Action'. The incites in the first chapter alone are fantastic.
Keep it up as the ground swell will occur. Truth has an advantage.
Comment by Troy Lynch on 18 January 2011:
I reckon one should begin with Rothbard's Man, Economy and State before Mises's Human Action. Mises, you see, continued on with the great philosophical debates (in the first few hundred pages of Human Action, and in his Theory and History). I recall an article by Shostak, who also noted that he understood Mises better after reading Rothbard.
If you want to avoid methodology, read Rothbard's Man, Economy and State, which has more economic analysis than method (though he still has a great deal of the latter). If you want a broad spectrum of economics, it is Mises's Human Action. If you wish to understand capital and interest theory, read Böhm-Bawerk's Positive Theory of Capital (then Mises). Hayek is also good on capital and the trade cycle and for fleshing out a lot of Mises (similar to Rothbard). And if you want to read the Austrian founder, read Menger's Principles, a real delight. Menger was a real intellectual innovator, as were they all, as each built on the common edifice of the subjective theory of value.
The Austrians buried the labour theory of value, so Marx is dead; but Keynes is still kicking. There is still some good in mainstream micro- but macro-economics (at least in mathematical form) presupposes a relationship between aggregates; but it misses out on the causal links. They should be more honest and simply state that CGE and DSGE models are glorified statistics or macroeconometrics, because there does not need to be any real economic analysis in macroeconomics. The tools are largely mathematical and statistical. It is an empirical matter.
I argued, in my research, that the Austrian position was personified by Mises, and therefore it was rationalist. He was one of the last rationalists still standing. But Mises is largely ignored or simply side-stepped.
Empiricism is the new god; however, there is one and small overriding problem with the empirical method: that is, it cannot verify itself as a method. In other words, when many economists want empirical proof concerning any proposition, they want evidence, so they turn to econometrics and look for the evidence. This cannot be true, by definition, because the empirical method implies the use of raw data without guiding rational propositions; the latter are included and sometimes implied, as the tools by which the raw data is interpreted. Even these rational propositions cannot be verified, because they are abstract and evidence cannot be mounted to confirm or deny them.
This is why the subjective theory of value is ignored, though implied, by mainstream micro- and macro-economists. And it is why the Austrians continue to push it - the notion of a universal, referred to as the subjective theory of value, in which individuals ordinally rank their needs and wants on an internal value scale, in order of importance, with each want to be fulfilled to such a degree, and then the next and so on. As these needs stand in opposition to the available supply on the market, a marginal price is struck, which represents the marginal value of the last unit the individual is willing to give up in order to satisfy the extant want. And then, as noted, the individual moves onto the next want.
Hence the reason which Mises and the others can talk about credit expansion that occurs beyond the bounds of available savings, and the ensuing boom [and bust]; that the time-price of money on the market can be distorted by deflation or (usually) inflation, or by control over the quantity of media inflated onto the market, which again distorts the time-price of money (interest rates). But it is worse: the whole physical capital structure of the market economy is time dependent; and this, too, is distorted when interventions, in the form of the central bank, enters the market to impose its own order - the order of the state.
It all began with Menger, and was developed by his disciples: methodological subjectivism and methodological individualism. They simply refer to the individual (or corporate entity) as the final authority on all matters of value in the market; and that the method by understanding this is one of subjective value - that the individual's scale of values determines this value. (Not an economist, nor a textbook, nor the state).