Further Implications Of Say's Law Of Markets: Take #2

Today is the 130th birth anniversary of Ludwig von Mises. This post is written in his honour. He hated the Keynesians and he upheld Say's Law against their vicious attacks. It is Say's Law that proves the truth of Mises' words below, written for the benefit of the working classes who mistakenly support socialism, unionism and Keynesianism:

In the capitalist society there is a place and bread for all. Its ability to expand provides sustenance for every worker. Permanent unemployment is not a feature of free capitalism.

Murali's comment to my previous post - on Jean Baptiste Say's Law of Markets, and its implications on the current economic crisis, has prompted me to write another post on this vital law, this time explaining some of its other practical implications. In the world of classical liberal political economy, if you were not an adept at Say's Law, you were not considered a political economist worth your salt. It is therefore important to know all about this law of markets - a law that John Maynard Keynes thought he had disproved.


First, let me restate the law:

The sale of X gives rise to the demand for all non-X.

If X sells, it creates the demand for all non-competing goods.

Thus, if a bhel-puri wallah sells his stock, he will be possessed of the means to purchase all other, non-competing goods on the market, except bhel-puri, which of course he will not buy. This disproves the deliberately misleading Keynesian formulation of Say's Law as "supply creates its own demand." The supply of bhel-puri does not create the demand for bhel-puri. The supply and sale of all other, non-competing goods and services do.  


Now, the first objection the Keynesian will have to this formulation is that the market tends towards over-production, so without Keynesian monetary boosts, recessions are inevitable. But Say's Law says:

Markets Clear - If Prices Are Not Rigid Downwards 
(due to interventionism).

Thus, ANYTHING PRODUCED will finally be sold - even as junk, if prices are allowed to fall. There is NO OVERPRODUCTION. And there is NO CASE for any monetary boost to "stimulate consumption." 

Indeed, as the Austrian School of economists have proved with theory, and as history has proved today as well, it is this sort of monetary tinkering based on Keynesian "macroeconomics" that is the root cause of all boom-and-bust "business cycles."

Say's Law asserts the obvious: That SAVING and INVESTMENT and INCREASED PRODUCTION lead to INCREASED DEMAND for ALL GOODS AND SERVICES. This is the ONLY WAY to boost demand permanently. 


Keynesian inflationism destroys savings; erodes capital; and thereby reduces production. If at all it boosts consumption, this is during the temporary, heady and short period of the artificial boom, for inevitably the bust must follow, and this is invariably of longer duration than the boom. Further, there have been historical periods of "stagflation," when inflationism failed to boost consumption at all, and economic stagnation combined with high inflation.  

Second: Say's Law proves that all businessmen are best off if they DO NOT COMBINE in protectionist groups. Such groups, if successful, reduce the supply and sales of all non-competing goods - and this reduces demand for all businessmen who do NOT compete with these goods. Thus, whereas Amul Cheese may want protection, it makes no sense for Kingfisher Beer to support this claim, and vice versa. 


Recall that, in our protectionist heydays, there was precious little available in Indian shops - and all businesses suffered. Our markets had zero catallactic energy. 


Thus, Say's Law proves that the business interests of a particular class of traders called "importers" must be supported by all. 


Further, it makes a rock-solid case for "rugged individualism" on the part of all businessmen. It opposes mixing politics - particularly protectionist politics - with business.

The same is true with regard to immigration restrictions. These exist in the West because of a few very powerful trade unions, like the US Automobile Workers' Union. These unions demand visa restrictions because they fear that immigrants will "take away their jobs." 


But the fact remains that all immigrants are NOT competing with autoworkers. Some may come as doctors and nurses. Some may come as dishwashers and construction labourers, restaurant waiters and cooks. And some as software engineers. After all, labour is NOT a homogeneous entity. And there is therefore nothing called "unskilled labour." Further, the demand for labour is always the demand for a particular skill.

If immigration was free, Say's Law proves that overall demand would rise, because as the workers in the non-competing areas managed to sell their services, they would buy whatever they needed from that very same market. I daresay if the USSA had opened up to immigration two years ago, their crisis in the housing market would well nigh be over.

There is more: Because automobile workers' unions are so influential and powerful, the US automobile industry has collapsed. General Motors has been nationalised! Obviously, an important cause of this collapse is the high cost of domestic labour. 

So here is a third and final implication of Say's Law: That all non-competing businessmen gain the most if ALL goods and services are sold at their most competitive price, which is, of course, the LOWEST PRICE.

THIS INCLUDES LABOUR.

Thus, cheap and abundant labour is good for an economy, just as cheap and abundant coal or oil or natural gas or timber is. If labour is cheap, all businesses benefit. All costs are lowered. More goods and services are produced and there is more competition. Thus, workers in all industries gain as consumers - even though their individual wages may be lower. For example: If waiters and cooks can be hired cheap, restaurants will be cheap, there will be more of them - and more workers will be able to eat out.


Cheap labour is beneficial to other, non-competing businesses in another, vital way: consumers have more to spend on the other offerings of the market. Thus, if cars are cheap in the US, the US consumer has money left over to buy beer, jeans, CDs and books. 


This implies that free immigration and cheap labour are GOOD for all American businessmen. Further, there is NO REASON for all workers to join socialist trade unions. Karl Marx's slogan, "Workers of the world - Unite!" makes as little sense as "Businessmen of the World - Unite for Protectionism!"

So, just as Say's Law of Markets suggests RUGGED INDIVIDUALISM as the best policy for businessmen, so also does it suggest the same for workers. Trade unionism and labour market restrictions hurt all workers outside the combination - and thereby hurt all other businesses, and the workers employed in them, too. Workers must compete with each other - just as businessmen must, too. After all, workers in the same factory compete for the next promotion, don't they? As Mises put it: 

Under capitalism everybody is the architect of his own fortune.

Say's "Law of Markets" thus makes a water-tight case for free trade, for free immigration, and for laissez faire. It supports the logic of open borders and the free mobility of capital, goods and labour. It tells us what really boosts demand permanently - which is, increased production of goods and services, based on higher savings and investment. It totally explodes the Keynesian myth that monetary stimulation to boost consumption is good for an economy.

Jean Baptiste Say was known as the "Adam Smith of France." His Law of Markets is as unshakable as the Law of Gravity - despite all the efforts of the evil, lying Keynesians. Truth keeps on working, as Mises said, even if the textbooks contain lies. This law makes a logically indestructible case for free markets and free competition. It makes a solid case for rugged individualism. It opposes politics - which is what the Keynesians, Marxists, protectionists and union bosses have injected overdoses of into our lives, thereby damaging civilisation, even to the point of destroying it.

If you want to learn more about Say's Law, I suggest the late Professor WH Hutt's A Rehabilitation of Say's Law, available from the Mises Institute in PDF, as an e-book, and also as a proper book. Follow this link.


WH Hutt was an outstanding classical liberal; that too, despite being educated at the London School of Economics during the heydays of Fabian Socialism. Hulsmann reports that Hutt, while a student at the LSE, attended a guest lecture by Mises - and then he "broke on through to the other side."


Hutt was born into the British working class - which is why his works against trade unionism are all the more worth studying.


Part 2 of this post can be read here.

We Don't Get Fooled Again!

A Deutsche Bank report just reached me, warning of recession in the USSA. But their analysis is based on "consumer spending" - and this might suggest to many that another "stimulus" is required from the Fed.

This displays ignorance of Say's Law of Markets.

Last night, I watched a BBC programme called "The World Debate" on the current economic crisis, hosted by Nick Gowing. Of the four debaters, three were government people - Christine Lagarde, who heads the IMF; a guy from Obama's economic team; and a dude from the EU in Brussels.


Lagarde spoke of the need for the G-20 to get together and do what they did last time - and I could have cried out loud. That time the G-20 nations inflated their currencies along with the US Fed, which is what "central bank co-ordination" is all about, and which is why the crisis is so widespread today. Nick Gowing, on his part, asked for "more decisive political leadership."

This, too, displays ignorance of Say's Law of Markets.

Today, the Keynesians teach this law as follows:

Supply creates its own demand.

This incorrect formulation of this vital law makes their students believe that "monetary stimuli" create demand.


So, let us think things through: 


The supply of plasma TVs does not create the demand for plasma TVs. Yet, if cars sell, if jeans sell, if shoes sell, and if beer sells - then, and only then, will some people from these latter industries be tempted to buy a plasma TV. Thus, what Say's Law actually means is:

The sale of X gives rise to the demand for all non-X.

If X sells, it creates the demand for all non-competing goods.

So, if you want increased demand for your plasma TVs, don't go to The State asking for a monetary stimulus. Instead, make sure all those who do not compete with you are selling their stuff.


There is another reason for this: If you ask The State to inject a monetary stimulus, all that will happen is another boom-bust cycle - and inflation. The entire economy will be hurt, including yourself, and including all those who do not compete with you.


On the other hand, if you want those industries that do not compete with you to do well, you will NOT favour loose monetary policies based on the false idea of boosting consumption. Rather, you will realise the importance of SAVING and INVESTMENT. You will realise that these businessmen who do not compete with you will need to save and invest - in order to produce. You will favour "capital accumulation" and despise "capital consumption" - which is Keynesian-welfarism-inflationism. You will champion "sound money."  


That is, you will realise that production of goods and services boosts demand - not the production of money. Indeed, not even the production of gold boosts demand. All that happens then is that the price of gold falls - look at the history of Spain and Portugal when they brought gold and silver back to Europe from South America. Spain and Portugal never got rich. And there was inflation throughout Europe. Britain got rich not by digging for gold and silver - but by trading in nutmeg and pepper, and tea, and opium, and tobacco, and sugar, etc.

Increased production of "funny money" is a VERY BAD IDEA.

Thus, Nick Gowing is WRONG when he asks for "more decisive political leadership." The solution does NOT lie in politics. On the contrary. The solution lies in "private money" - and "free banking under law." 


That is: the size, scope, powers and resources of The State and the politicians must be drastically cut down. Money must be given back to the people - to save and invest, to produce. That is how demand can be permanently boosted and boom-bust cycles avoided forever.


Indeed, the current crisis is BECAUSE OF POLITICS. Central banks and their member banks are collapsing. Politics lies at the root of this crisis.


So, let us NOT GET FOOLED. 


Paper notes are just a "money substitute." This is what the "promise to pay the bearer" indicates. Something "hard" is (and always was) real money - GOLD.


So, as the song goes:

I tip my hat to the New Constitution,

Take a bow for the New Revolution,

Smile and grin at the change all around me,

Pick up my guitar and play,

Just like yesterday,

Then I get on my knees and pray:

WE DON'T GET FOOLED AGAIN!

While that covers widespread miseducation in the USSA, Britain and Germany, let us now turn to our own country.


Did you know that both Amartya Sen and chacha manmohan s gandhi were students of Professor Joan Robinson in Cambridge - who was Keynes' right-hand man, and who made it her "mission to destroy Say's Law"? It was Joan Robinson who cleverly coined the "supply creates its own demand" nonsense.


And, as I wrote the other day:

Without Sound Money - what is the State 

but a band of robbers?

That should take care of Kapil Sibal's "(mis)education."


Let us now turn to Palaniappan Chidambaram, the Central State Police Minister, whose name has cropped up in the 2G scam. There is a report written by the Political Editor of The Sunday Guardian that says that in the Nira Radia tapes, A Raja told Radia that "PC got a lot of money."


The Central State's Police Minister is corrupt?


And he has been police minister since the 1980s - and there have been no police reforms. Policing has just got worse. Now, road deaths total over 2,00,000 per annum - and the police don't even possess the "knowledge" to fix things.


We must ABOLISH THIS STATE. And replace it with honest civic corporations - one in each city and town.


A Second Republic!


A Republic WITHOUT any police - like the England of old, before Peel set up the Bobby. Like India of the Company, before the Crown passed the Indian Police Act in 1861.


TORTS - which are "crimes against the individual" and for which financial compensation must be paid by the tortfeasor to the victim: this will be better than any "criminal justice system." Anyway, ours doesn't work. And the minister is corrupt. Indeed, the Entire System is Corrupt.


So let us vow to throw the whole thing out, beginning with the Central Bank, and ending with the State Police.


Liberty! Property! Justice! The Pursuit of Happiness, Subjectively Defined!

WE DON'T GET FOOLED AGAIN!

(This turned out to be a 5-part series on Say's Law. The next post can be read here.)

On Anna Hazare... And Bangalore's Metro

I thought that this perceptive article on India and Anna Hazare from TheDailyBell.com titled "The Corruption of India's Economic Miracle" is well worth a read. It rips a Wall Street Journal article on the subject apart - and I place the concluding remarks below:

For another, the article assumes that the current Indian vitality is the result of inexorable cultural and entrepreneurial shift. We would argue this is entirely incorrect. India's resurgence is driven by central banking money printing and may not be seen as a natural expression of industry and society.

It is extremely important that the progress of the BRICS be placed in perspective. Brazil, China, India, even Russia, all have aggressive central banking policies. China and India, especially, have economies that are obviously being stimulated by excessive money printing. Both countries have a problem with price inflation as a result.

Progress built on printing money from nothing is ephemeral. In America and Europe, thanks to the debasement of money and the vast resources it grants (temporarily) to government, economies can seem quite healthy  one moment and then ill the next.

Money printing hollows out economies. It distorts business and job growth. It makes people feel wealthier than they are in reality. In both China and India, economic implosions will eventually take place. It cannot be otherwise, because central bank money stimulation inevitably leads to an exaggerated business cycle and subsequent busts.

For this fundamental reason in particular, the Wall Street Journal article is flawed. India has not necessarily experienced a resurgence of business and market creativity. It is simply going through the same cycle of monetary stimulation that the European PIGS and America went through recently.

As Ludwig von Mises cautioned in his great book Socialism, an ideology he abhorred and battled against all his long life:

There is no evidence that social evolution must move steadily upwards in a straight line. Social standstill and social retrogression are historical facts which we cannot ignore. World history is the graveyard of dead civilizations.

We can go backwards any time.


And the proof of that is the photo above of the Bangalore Metro on MG Road. They have DESTROYED MG Road, the prime property in this Fair City, with this ugly overhead train. If it had been underground, the properties on MG Road would have trebled in value. Now, the open space around this magnificent thoroughfare has been blocked. Property prices may not rise much in this ugliness.

Our Industrialists - And Industrialisation

The title of this news report reads: "India Inc. pleads for cheap money." A quote follows:

"What is required is greater credit availability and reduction in high interest rates to stimulate manufacturing, construction, electricity, mining and other core sectors," trade apex body FICCI said.

Note that under our current inflationary conditions, real interest rates are already negative - and if things proceed the way FICCI wants, then, apart from hurting poor people and savers with higher inflation, we would end up fueling an artificial boom, and with "malinvestments." A "bust" will surely follow. Disaster!

Thus, artificially low interest rates are extremely hazardous for economic health. They are the prime cause of business cycles - the boom-bust routines that plague the world. The painful depression that follows the euphoric boom occurs only because artificially low interest rates destroy rational economic calculation among businessmen. Whereas some businessmen are always to be found making errors, artificial booms result in "clusters of errors" - and these are unraveled when bubbles burst. Low capital cost makes projects seem profitable, just as inflation exaggerates expected returns - and these cause massive "malinvestments." Thus, what FICCI is demanding will not "stimulate industry," and certainly not in the long term.

In independent India, the goal of "rapid industrialisation" has been pursued relentlessly - but wrongly. Nehru's "heavy industrialisation" is now our "common loss." And as for the private sector, the policy of "import-substitution industrialisation" has only resulted in cronyism - and in huge losses for consumers. If we add to these wrong-headed policies the further ill of central banking and interest rate manipulation, we realise that laissez faire and "sound money" would have enabled our economy to fare much, much better. Let me begin with sound money - that is, the gold standard.

If the rupee is based on gold, redeemable on demand, then its value would always appreciate against the rest of the world's fiat paper currencies. This would make imports cheaper - and the consumption of even the poor would improve. Further, this means that imports of raw materials, components and technology would also become cheaper - and it is these factors that would give Indian exports their competitive advantage. There would be a "new industrialisation."

Surely this is far superior to the long-standing strategy of our The State - which is, to let the rupee continually depreciate in order to "promote exports" while at the same time halting all imports. Such a strategy not only impoverishes the Indian citizen-consumer; it also works to make the whole world poorer.

Free trade promotes industrialisation too. What happens then is that factories spring up to serve local demand that is being catered to by traders - in order to save on the costs of transportation. This is industrialisation based squarely on market conditions - and not on State intervention. Hence this is eminently "sustainable," because it is entirely "natural."

In the India of today, I can think of quite a few ways that free trade would promote domestic industries that are lying dormant now. For example, wine and cheese-making. If trade was free, a taste for wine would surely develop among Indian consumers. It is only then that Indian winemakers would flourish. Ditto for cheeses. It is only because of the popularity of pizzas that there are now many domestic manufacturers of mozarella. Yet, there are many hundreds of cheeses in the world, while Amul advertises itself as "The Taste of India."

India has remained a largely agricultural country - backward and poor - principally because our strategies for industrialisation have been wrong. Today, with a entire host of factors that give this nation the potential to become a "factory for the world" - like cheap, technically qualified labour, the English language and so on - we are being held back by our rotten infrastructure. Factories for the world require good roads, efficient ports, reliable electricity, livable cities and towns and so on. It is indeed pathetic that all these are areas of State failure. We should ask our The State to exit these areas too. Instead, our chambers of commerce continue to demand more interventionism.

Obama's Dangerous Nonsense

In yesterday's post, I had discussed the harmful consequences of the US Fed's "quantitative easing" policy - which in plain words means printing more paper dollars. I discussed how this will "export inflation" to India.

According to this report, this is what Obama said, while in India, when questioned on the Fed's latest move:

"I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said during a trip to India. "The worst thing that could happen to the world economy, not just ours, is if we end up being stuck with no growth or very limited growth."

But has the US economy been "growing"? After all, fiat paper US dollars have been around for many decades now.

According to this article, the US economy has gone down the tubes. These are some of the horrific effects that "unsound money" - fiat paper dollars - has created:

=> More than 42 million Americans were on food stamps during the month of August. That is a new all-time record, and that number is 17 percent higher than it was one year earlier. In fact, the number of Americans on food stamps is up more than 58 percent since August 2007.

=> The number of "persons not in the labor force" in the United States has set another new all-time record. The United States has not had such an extended bout of mass unemployment since the Great Depression. The "official" unemployment rate in the United States has been at nine and a half percent or above for 14 consecutive months.

=> More than 1000 people now live in the 200 miles of flood tunnels that exist under the city of Las Vegas. Once one of the most prosperous cities in the United States, Las Vegas is now little more than a shiny, glittering corpse that is rapidly decaying.

=> Poverty is absolutely exploding and it is hitting those who are the most vulnerable the hardest. According to one recent study, approximately 21 percent of all children in the United States are living below the poverty line in 2010.

=> One out of every six Americans is now enrolled in at least one anti-poverty program run by the federal government.

=> The American Bankruptcy Institute says that there will be about 1.6 million consumer bankruptcies in 2010. That would represent a huge increase over 2009.

Thus, Obama doesn't know the anything about the vital subject of Economics.

America needs Ron Paul.

What causes economic growth? Well, not The State - which taxes, prints, and spends, thereby "consuming capital." Economic growth occurs when private people save and invest, and there is Liberty and Property - as I argued in a recent post.

Ben Bernake... And Mainstream Economics

The US Fed under Ben Bernanke has just announced that it will buy an additional US$600 billion of Treasuries - another "stimulus" to tackle unemployment and avoid "deflation." In India, this announcement has already generated significant alarm, what with inflation already running so high.

But who is Ben Bernanke? And what are his credentials as an "economist"?

There is an excellent article today by Mark Thornton of the Mises Institute on this man and his career, titled "Bernanke's Solutions are the Problem." I recommend it highly to all. In this post, I will draw my reader's attention to his pre-eminence as a "mainstream economist." Thornton writes:

Ben Bernanke went to Harvard University, where he received his undergraduate degree in economics. He then went to graduate school at the Massachusetts Institute of Technology, MIT, where he received his PhD in economics. His thesis adviser was Stanley Fischer, and his committee consisted of Fischer, Rudiger Dornbusch, and Robert Solow, a Nobel Prize winner. (He also thanked Harvard University professors Dale Jorgenson and Peter Diamond [Nobel laureate 2010] in his dissertation.) It is safe to say that he had an elite education in mainstream economics.

Bernanke has taught at Stanford University, New York University, and Princeton University, where he served as chairman of the department from 1996 to 2002. Bernanke has authored major textbooks, has served as the National Bureau of Economic Research's director of monetary economics, and was an editor of the American Economic Review. He is still considered to be one of the top 20 authors of all time in academic economics journals despite having been out of academia for almost a decade.

Simultaneously, there is another article on Bernanke I found today on LewRockwell.com, referring to a speech given by the legendary investor Jim Rogers at Oxford. Speaking to students there, Rogers advised them to "scrap career plans for Wall Street or the City, London’s financial district, and to study agriculture and mining instead." Here is what Rogers said about Ben Bernanke:

...all he understands is printing money. Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance.

So, stay far away from "mainstream Economics."

The Corruption Of Economic Science

The Nobel Prize in Economic Science has finally got my goat - and a "tipping point" has been reached. This year's prize takes the entire cake shop and represents what I believe to be something extremely dangerous - the deliberate corruption of a vital science. I have been watching this prize for many years now, and seeing it go to complete clowns and dangerous demagogues - Paul Krugman being the best example. But this year...

Let's begin with the opening statement of the "information for the public" issued by the Academy. It begins:

According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services. Prices are determined so that supply equals demand; there are no supply or demand surpluses and all resources are fully utilized.

The document then goes on to say that the awardees have shown that this so-called "classical" view is false, that there are "search costs and frictions," and that their research has important practical applications in the labour and housing markets.

Anyone who has looked for a job or tried to rent a house knows that there is a long search process, and it has costs. This happens precisely because market participants do NOT possess "perfect information." They never can. There are therefore market solutions - like real estate agents for housing and newspapers that advertise job vacancies.

This is something everyone knows - and it is most evident in the area of advertising, which is such a huge industry simply because "perfect information" is a great big fiction. Advertisements tell the consumer "what he did not know that he did not know" - and this is a market solution to imperfect knowledge and information.

But what does the research of our awardees suggest? The Academy states:

In the classical model of competition, the unregulated market outcome is both unique and efficient. But in a world with search costs, there can sometimes be several possible market outcomes. This was shown by Peter Diamond, who also pointed out that only one of these outcomes can be the best. This, in turn, implies that there is reason for governments to try and find ways of inducing the economy to move towards the best outcome.

Thus, at a time when all the real economists on this planet are trying to roll back the State, these three blokes have discovered yet another reason to expand State interference in the market economy; another wretched form of interventionism. What is their research based on?

The answer: MATHEMATICS!

These blokes have developed a mathematical "model" to explain unemployment: the Diamond-Mortensen-Pissarides (DMP) model. The Nobel Academy tells the public that "today, the DMP model is the most frequently used tool for analyzing unemployment, wage formation and job vacancies." I find this portion of the text most significant:

It has been known for a long time that the labor market fluctuates between situations of either high unemployment and few vacancies or low unemployment and many vacancies. This empirical pattern, known as the Beveridge curve due to the British economist William Beveridge, is illustrated in figure 1, based on data on the U.S. economy in the 2000s. The DMP model provides a theoretical explanation for the Beveridge curve.

The DMP model can be used to explain the position of the Beveridge curve and the location of the economy on the curve. If unemployment and vacancies move in opposite directions, then changes can be regarded as reflecting variations in the demand for labor which occur over a business cycle.

Lord William Beveridge once headed the London School of Economics, the birthplace of "Fabian Socialism," and it is he who pushed that nation onto the disastrous path of the "welfare state."

But what of the business cycle itself? What causes all these booms and busts? No answer. No logical economics. Just loads of maths, and a frightful diagram. Is this "economic science"?

I found an independent assessment of this year's prize thanks to LewRockwell.com here. It is by Robertt Wenzel of EconomicPolicyJournal.com, and it is bitterly critical and extremely sarcastic - deservedly. On Peter Diamond, this report says:

Diamond, 70, is an economist at the Massachusetts Institute of Technology, and a specialist in Social Security. Bernie Madoff would have loved to have Diamond on his team, since Diamond completely ignores the Ponzi like aspects of Social Security and tinkers with "fixing" the scam. Going beyond Madoff, Diamond then ignores the coercion involved in Social Security. He focuses with tunnel-like narrow vision beyond the coercive aspects, and Ponzi like aspects, to pontificate in numerous journal articles and books about how to "save" Social Security, including recommendations to cut "benefits" and aggressively increase Social Security taxes.

He adds that Diamond was "elected a fellow and has served as President of the Econometric Society." In my opinion, econometrics is a proven failure. The Nobel prize also went to the founders of Long Term Capital Management, which crashed. Forgotten already? Econometrics has nothing to do with the true science of Economics. It is a corruption of science.

The author of this report adds, on the other awardees:

Mortensen, 71, is an economics professor at Northwestern University in Evanston, Illinois. He studies frictional unemployment. This is like studying half time in a basketball game. Yeah, it exists, but it is a pretty simple concept that doesn't tell you much about the game. Frictional unemployment simply means that if someone loses a job, it takes them time to find another job.

Mortensen along with Pissarides (who is 62, and a professor at the London School of Economics) and, to some degree, Diamond have taken the simple concept of frictional unemployment and put it in mathematical form to create search and matching theory. There appear to be no successful practical applications for the Alice in Wonderland equations created. Their only valuable input is one we have been pointing out here regularly: "that more generous unemployment benefits give rise to higher unemployment and longer search times."

Read the full report.

Let us now turn to the true interests of the working classes, especially those who are unemployed. Booms and busts - the "business cycle" - are caused by central banks, that is, by governments, and the only way to ensure steady economic growth is sound money, the gold standard, and free banking under Law.

Further, ALL State interventions in the labour market - beginning with "minimum wage legislation" - cause unemployment. Labour unionism causes unemployment. And it is in the completely unhampered market that all workers can find work and survive.

What I have written above is according to the established science of Economics of the Austrian School. You can find these views scientifically explained and established logically in the works of Ludwig von Mises and Friedrich Hayek. There are innumerable scholars belonging to this school whose work needs public recognition - simply because the public must be made aware of where their true interests lie. The Nobel prize has gone, once again, to peddlers of nonsense, and propagandists for misgovernment. This is against the general public interest. It is also a corruption of science. This should be widely condemned.

[This post is continued in Part 2, available here.]

Bad News

Industrial production data for April has just been released, surprising analysts with the index rising by 17.4 per cent over the last one year. However, a multinational bank which has done its number crunching sent me a private report that says that "the key driver was capital goods, production of which rose by a record 72.8 per cent." The bank adds that this is "not sustainable." Thus, this is bad news, although at first glance it seems good, for the index has risen substantially. To understand why the news is bad we need Austrian Business Cycle Theory (ABCT). Note that without sound theory, statistics (which is "history") cannot be correctly interpreted.

ABCT tells us what goes wrong when business cycles of "boom and bust" occur. It tells us that the real damage occurs in the "boom" period, when all business calculations are torn asunder by cheap money at artificially low interest rates. Thus, projects which would not have been deemed profitable under normal circumstances are entered into, loans are taken, and investments made in capital goods. When the bust hits, it is this false optimism of the boom that causes widespread losses. This is the bust - the "correction" of the boom.

What the Index for Industrial Production tells us therefore is that Indian businessmen have made huge "malinvestments" in capital goods - and that a "bust" is forthcoming, when losses will have to be booked. Bad news, indeed.

The lesson: Keynesianism - or should we call it Chachaism? - and central banking CAUSE business cycles. If we are to be rid of them forever, we must adopt the gold standard. Under a gold standard too businessmen will make losses when their optimism over the future proves unfounded, but they will be few. What is happening today is that these errors are widespread. Why is everyone making the same error?

The reason for that is that the boom is accompanied by inflation - and this makes "economic calculation" impossible. Businessmen will overestimate profits under inflation and further overestimate demand. This is another way by which inflation leads to "capital consumption." And that, as we all know, is the very opposite of progress.

Note that it is government management of the economy that is causing all this. With gold, no politician can meddle with money. That is the only cure.

Between Lawrence White And Me

Lawrence H White, FA Hayek Professor of Economic History, University of Missouri, St. Louis, has responded to my post of this morning in these words:

Sauvik, why in the case of banking do you uncharacteristicly want to prohibit peaceful voluntary practices? I fear that you don't understand them. The premises on which you found your prohibitionism are false. In fact, (1) Free banks CANNOT issue fiduciary media at will. They have to be prepared to redeem them, which is costly. Read up on Mises' theory of what limits the extent of note-issue under gold redeemability. (2) Under a gold standard, fiduciary media (banknotes, checking accounts) ARE backed by gold. Banks do hold gold reserves to redeem them. They don't hold 100% reserves of gold, but any solvent back does hold sufficient other assets in addition to gold to buy all its liabilities back.

I think he should respond to Joseph T Salerno’s article that I citied in my post of this morning.

However, even on this point of his, I am fortunate to have Doug French, President of the Mises Institute with me today, in an interview to the Daily Bell. I quote:

Daily Bell: We have an interest in free banking here at the Daily Bell. We think any kind of financial system is allowable in a free market and that competition will sort them all out so long as government is not involved — and we do think in a free market that a gold and silver private market standard would evolve as it has historically. Do you think this is an intellectually defensible position?

Doug French: Certainly freely competitive banking is far better than the state-regulated, fractional-reserve, fiat-currency, central-bank-cartelized banking system we have now. However, in practice, in a free market, I don't believe that the market would accept fractional reserves. It would be regarded as embezzlement at best and fraud at worst. Fractional-reserve systems have fallen apart since the ancient goldsmiths issued more gold receipts than they had gold for. I can appreciate the theorizing, but when the rubber meets the road, the sternest task master — the market — would just not allow it.

Fractional-reserve banking depends upon hope and prayer: hope that not everyone shows up for their money all at once and pray that the borrowers pay their loans back. That's not a sound basis for a banking system and requires the force of government to keep it propped up.

Daily Bell: Do you think Mises's position might have evolved toward free banking if he was alive currently? Was Rothbard's position evolving toward free banking before his untimely death?

Doug French: Murray wrote in an article that now is the appendix to his book The Mystery of Banking "Ludwig von Mises was one of those believing that free banking in practice would approximate a 100 percent gold or silver money." Mises believed "that demand deposits, like bank notes beyond 100 percent reserves, are illicit, fraudulent, and inflationary as well as being generators of the business cycle." I believe this was also Murray's view when he passed away.

Daily Bell: Is there anything wrong with fractional-reserve/fiat money in a free-market environment?

Doug French: You couldn't have fractional reserves and fiat money in a free market. It would not last one day. Fractional reserves require a central bank to cartelize the banking system. In a free market, demands on deposits would instantly shut down banks who engaged in fractionalized banking by lending out their customers' deposits.

No one would accept paper money with no backing but for the power of government to require people to accept it through legal-tender laws.

I rest my case.

The USSA - Heading For Doom

Harvard professor of financial history, Niall Ferguson, has an article titled “America, The Fragile Empire” that says Uncle Sam is headed for doom. He ends with the words: “Washington, you have been warned.” The article is from the LA Times, and is worth reading in full.

After reading this, you might wonder why.

After all, Uncle Sam has been injecting a trillion dollar “stimulus” into the economy. To understand why such Keynesian strategies are worse than the disease, I advise you read Robert Higgs' piece in The Beacon, titled “Anatomy of the Current Recession.” He shows how the most important indicator of recovery, private investment, is falling – not despite, but because of, the great government stimulus. I quote:

If real investment spending has taken a huge hit, however, federal government spending has raced ahead in high gear. Between 2007 and 2009, federal purchases of newly produced final goods and services—the federal government’s “contribution” to GDP—increased by more than 13 percent in constant dollars. Unfortunately, whereas private investment is the engine of economic growth, government spending (despite what generations of Keynesian economists have asserted) is the brake. Although increased government purchases by definition increase the measured national product, their substantive effect on the process of sustained economic growth is decidedly detrimental.

In other words, Uncle Sam is engaged in “capital consumption” and the USSA is therefore heading towards “de-civilization.”

Who is their only hope? Of course, Ron Paul. Here is this principled politician and Austro-libertarian writing on what he would do as President if he took over. Note how much trouble he will have dismantling “welfare.” Note how he will put an end to “warfare.” Note how he will kick the shits out of the federal bureaucracy. And note how he will put an end to federal control over education. He also says he will end federal control over the police – who should always be “local.” So there’s the only good politician in America, who swears to stand by the ideals of the US Constitution.

However, the last article I recommend today is by someone who argues, quite tellingly, that the US Constitution was designed to rob the citizens of their property. The author is Tom Mullen, and this is a post from his blog. I got the link from LewRockwell.com. It is well worth a read.

Then think: What do we do about our very own Uncle Sham?

Dubai's Disaster... And Ours

There are two important documents to which I would like to draw my reader’s attention to today: first, a Mises Institute article on the Austrian perspective to the collapse of the real estate bubble in Dubai; and second, some Deutsche Bank reports on the deficit, growth and inflation in India. There are many important ideas contained in these two, and these are related.

First, Dubai: The article by Fernando Ulrich tells the story very well, beginning with the peculiar economic conditions of the “boom,” when there are more and more buyers in line for everything on sale, from houses, to cars, to even jobs. Read this portion carefully, for it reveals the key Austrian insight: that whereas businessmen may occasionally err, easy money, credit and artificially low interest rates make ALL businessmen err. All the signs are wrong, and they are all read wrong. On the monetary policies followed in Dubai, the following is telling:

With a currency pegged to the dollar, the United Arab Emirates' Central Bank pursued the same harmful monetary policies as its American counterpart, the Federal Reserve.

Interest rates in the United Arab Emirates were kept artificially low for too long, following the Fed in every move. Reckless lending standards obviously helped to give a boost to the damaging credit expansion.

In addition to the aggressive lending by international institutions to Dubai's enterprises, the UAE Central Bank and the banks operating in the country also played a crucial role in fueling the construction bubble.

The Central Bank balance sheet spiked in 2007, reaching a staggering 177% increase over the previous year.

Although the monetary authority trimmed down the money pumping in 2008, decreasing its balance sheet 32% at the end of that year (still double its size in December 2006), the damage had already been done.

Money supply measured by M3 had an annual growth rate of 29.4% in the period from 2006 to 2008.

So there we have it. The same old story. Central banking is to blame. For steady economic growth, credit must be based on real savings.

Let us now move to India – and the Deutsche Bank reports and forecasts that I was privileged to read. The first thing to note is that this major bank is extremely worried about Chacha’s fiscal deficit. The key worry is that if the deficit increases further, and there is inflation, which leads to higher interest rates, growth will suffer. And if growth suffers, the government will not obtain the revenues necessary to fix the deficit. Things could spin out of control, into a nosedive.

The Lesson: The same as from Dubai – we need to fix our fundamentals. The deficit must be eliminated and the Chacha State returned to sound finances. The huge amount of State consumption expenditure (mainly salaries) must be trimmed, and more capital investments undertaken (mainly roads). Privatization must be carried out in full swing, so that the accounts of our The Chacha State are finally in balance. No “stimulus” is required for pumping up of the economy through deficits and artificially low interest rates. Such measures are contra-indicated.

Of course, the only ultimate solution is sound money. It is governments printing paper and creating credit out of thin air that must be done away with.

If India wants to avoid what happened in the US, what happened then in Dubai, the key lies in sound money and legitimate free banking. We have a lot of potential. But foolish policies (like the ballooning deficit) are holding us back. Chacha Manmohan S Gandhi has truly messed up State finances. It is this State that we need to fix.

A Bigger IMF? Or Sound Money?

The International Monetary Fund (IMF) is in the news: first, advising Asian nations to “continue with their stimulus packages”; and second, for seeking a bigger role for itself in world affairs, and the funds required for the purpose.

And this raises the question: Should the world economy be run by unaccountable IMF banksters and their partner central banksters? Or should money and banking be governed under Law? Which of these two options should be considered Capitalism?

Note that the IMF is tendering wrong advice – and completely evading the “sound money” debate. The global recession occurred only because central banksters – in particular, the US Fed – created a bubble. The mischief was the “boom.” Continuing with the same medicine – cheap money and credit – will only make things worse at a future date.

I have just read an India-specific economic forecast prepared by a major multinational bank – and the outlook is not good. The combined fiscal deficit of the centre and the states, if we include off-budget items like oil and fertilizer bonds, is worrying. There are asset bubbles here and there – particularly in real estate – and food price inflation has emerged. Gold has become a refuge. Should our Chacha State inflate further? Or should we at least begin to talk about sound money and legitimate banking? The rule of law instead of the rule of central banksters.

I think it would be a great thing if the financial press treated the IMF and its cousin the World Bank with scorn. These two were created by Keynes – and the man was a self-confessed “amoralist.” In Keynes’ time, the US dollar was still anchored to gold; but the banksters and The State they funded broke free of that limitation and now the entire world is on purely fiat paper masquerading as money. This is a scandal of enormous proportions. It has corrupted governments worldwide and debased democracy. It has caused permanent inflation – with all its evil de-civilizing consequences.

Finally, it must be noted that our Chacha State is very much a bankster state – a pirate ship. Chacha Manmohan S Gandhi headed the central bank once. And his chhota ustad, Montek, the central planner, is an IMF man. Their real racket is the funny money and the creation of credit. This is happening because of the amoral ideas of their guru, John Maynard, Lord Keynes, founder of the IMF.

This evil racket must be ended.

Get Real On the Dollar, Chacha

Chacha Manmohan S Gandhi has asked G-20 leaders not to withdraw their stimulus packages; he has also asked for more funds for the World Bank.

I wonder where Chacha gets his “market intelligence” from. Does he, indeed, get such information at all?

This morning, I found this little gem on a major multinational bank:

HSBC bids farewell to dollar supremacy

The report goes on to say:

"The dollar looks awfully like sterling after the First World War," said David Bloom, the [HSBC] bank's currency chief. "The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP," he said.

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's "mercantilist mindset" of recent decades is about to be broken by the spectre of an inflation spiral.

In the meantime, in the USSA, the pressure is on to audit the Fed – and then shut it down. LRC today has this series of videos of a Congressional hearing on the Fed. Watch Ron Paul in action, and Tom Woods too. Incidentally, Woods studied under Murray Rothbard.

Further, Ron Paul’s new book, End The Fed, is topping the charts. In the final analysis, the real battle is over public opinion. And public opinion is veering towards sound money. People are seeing that central banking is fraud. A change is in the air.

We are winning!

What should libertarian strategy be for the future? The great philosopher Hans-Hermann Hoppe offers this excellent advice in an interview available here:

First of all, they [libertarians] must develop a clear class consciousness, not in the Marxian sense, but in the sense of recognizing that there exists a clear distinction between taxpayers (the exploited) and tax consumers (the exploiters). Politicians as agents of the state live parasitically off the labor of taxpayers. Accordingly, instead of admiring them or seeking their association, politicians (and the more so the higher their rank) should be treated with contempt and as the butt of all jokes, as emperors without clothes. The political class and their intellectual bodyguards, teachers and professors, must be delegitimized as self-serving frauds, and democracy in particular must be attacked as an immoral system in which the have-nots vote themselves the property of the haves. Political activities, if they are to take place at all, should be restricted to the local level and be motivated by decentralist or better still secessionist objectives.

Chew on that.

Rebalancing The USSA

500 street hawkers were “evicted” from Chennai – while the entire focus is on the G-20 meet in Pittsburg. However, I will not recommend the editorial in the Economic Times, which reads like propaganda and not informed analysis. Indeed, the pivot of their argument is a patently false proposition:

“Boom and bust are an integral part of free-market capitalism.”

This is what Keynesians, who idolize The Total State and its Funny Money, believe. Economists of the Austrian School oppose this view, and hold that governments create bubbles and booms with easy money and cheap credit. This causes “malinvestments.” Hence the inevitable bust. The solution is real capitalism and sound money: Gold. Private money.

The Mint editorial on the G-20 is a far better analysis. It begins by presenting the USSA’s core concern at the G-20 meet: “Rebalancing.” This is the Obama Agenda:

“The US emphasis is on what it calls the “rebalancing” of the global economy: It wants to reorder global consumption and savings in a way that it saves more and China consumes more.”

This is plain nonsense. Even if US households save, the deficits and borrowings of Uncle Sam will render these savings meaningless. Peter Schiff discusses this in a recent vlog. Do watch it, and note the sincerity and moral fervour in his voice.

Smart Americans are getting wise to Uncle Sam’s hypocrisy. Here is what one smart college student and his professor accomplished, to win a "generational theft contest" sponsored by Pajama TV to determine how much Obama’s deficit and stimulus packages would cost each college graduate in the future:

Gavin and Ed…. tallied the cost of 2008 and 2009 government programs like TALF, TARP, FHA mortgage relief, assorted corporate bailouts and various stimulus packages, to name a few. That spending spree came to a whopping $10,825,400,000,000. Then, they crunched the numbers to determine what each college graduate will be taxed to help repay this deficit. Their calculation -- $148,035 each!

Read the report and watch the video here.

Methinks the USSA should “rebalance” itself.

What should the rest of the world do? As Peter Schiff says in the vlog cited above, the rest of the world should tell Obama that they will no longer lend money to the USSA, and will therefore no longer subscribe to US Treasury bills.

This will force Uncle Sam to end his profligate ways, and the whole world will be better off as a result.

Uncle Sam, Rebalanced.

Much Nonsense, On Very Big Stilts

There is a news report from Guwahati today that tells of government coercion on medical doctors in order to force them to serve in rural areas. I have written on this in an earlier post, which I find quite satisfactory for the current occasion, so I will refer my reader to that.

Today, I will focus on another piece of news: a report on the Stiglitz Commission appointed by President Sarkozy of France to find out a way to measure happiness and well-being, so as to replace the standard measure of GDP. Amartya Sen is also a member of this commission.

To begin with, such statistical measures are only required by central economic planners. Sarkozy, Stiglitz and Sen all talk this language of statism; they are opposed to free markets. In the report cited, Sarkozy is quoted as saying:

In the speech presenting the findings of a committee headed by Nobel Prize-winning economist Joseph Stiglitz, the president said new measures are needed in the wake of the financial crisis, which was triggered by an over-reliance on free-market principles. "If the market was the solution to all problems and was never wrong, then why are we in such a situation?" asked Mr. Sarkozy. "We need to change criteria."

Stiglitz and Sen must have influenced the French president to think along these totally erroneous lines. And I wonder how much these two Nobel laureates in economics received from the French taxpayers for their wrong-headed opinions.

First: The financial crisis did not occur because of “over-reliance on free market principles.” There is a worldwide recession today only because governments interfere with money and credit, thereby creating bubbles that invariably burst. The real mischief is not the bust; rather, it is the boom – a government creation. Sound money and legitimate free banking are the only solutions to this.

Real Capitalism.

With real capitalism, The State has no role to play in the market; there is a Market-State divide; and The State has only one role in society, which is to bring outlaws to book. This requires judges, policemen and magistrates. No economists are required. No economic statistics either.

The classic example of such a policy is colonial Hong Kong, where Sir John Cowptherwaite refused to set up a bureau to collect statistics fearing that these may fall into the hands of some evil economic planner some day. And see how the little island flourished.

Further, as far as the utility of statistics is concerned, there are unbridgeable differences between economists of the Austrian School and the rest, who subscribe to “positivism” – by imitating the method of physics, which is measurement. As an adherent of the Austrian School myself, I can only laugh at the attempt by economists to “measure happiness.” And surely “per capita happiness” must be a meaningful average!

Much nonsense, on very big stilts.

On Idiots... And My Smile

“Cops Call The People ‘Idiots’; Their Deaths 'Collateral Damage'"



This should have been the headline of this elaborate report on Chattisgarh, where Naxalism is rife, from the Hindustan Times this morning. Here is an extract:

A senior police officer in the district had little idea how his men might distinguish between a militant and an innocent villager on the ground. In a conversation in his office, interrupted every minute by calls as he deployed troops in the forests, he said: “Most tribals are uncivilised savages. They are all idiots.”



Chhattisgarh’s police chief, Vishwa Ranjan, shrugs: “In any war, there is bound to be collateral damage.”

The report tells of how tribal property is insecure – entire villages are wiped out routinely; and there is an interesting bit on how land is being “acquired” by our The State to hand over to the Tatas for setting up a steel plant.



Actually, I do believe that it is the Chattisgarh administration who are a bunch of idiots. They have disregarded all the basic principles of civil government – which is why the situation on the ground is described by their police chief as “war.”



The opposite of war is Peace – which means The Market, voluntary exchanges, and cities and modernization: as in the story of Shillong and British rule over the north-east, which commenced only in the 1850s. The country’s only Bob Dylan fest is held in Shillong, and it has been held there annually for decades now. Dylan is not headbanger stuff; his lyrics have great cerebral appeal.



Uncivilised savages, indeed.



Scene 2: The Roads of India, built by our The State and policed by their The Cops.



A WHO report says that India tops the world in road deaths – 13 every hour. 1,25,000 die every year, over 350 a day. An expert says the figure could be considerably higher, for many deaths go unreported; also, many people die days or even weeks after the accident and are not counted. Of this total, 24,000 deaths are of truckers. Next come people on two-wheelers.



The expert, Rohit Baluja, says:



>"We don't have scientific traffic engineering which forms the basis of road safety improvement practised in US and UK since 1930s. This still remains a matter of consultancy in India as we are yet to have our own traffic engineering wings," Baluja adds.



Idiots?



Scene 3: Government-issued fiat paper currency



Mint has stuck its neck out today and in an editorial which says that the recession is not over yet, goes further in congratulating governments and central bankers the world over for vastly increasing the money supply since the recession hit. The editors await the boost in consumer and corporate spending that Keynesian theory predicts. They say it is yet to happen.



Of course, in a paper, different editors are thinking different things – and so it was heartening to read a column in Mint's inner pages explaining the basic tenets of Austrian economics for the lay reader. The explanation leaves much to be desired – but, that said, it was heartening to see that more and more people are getting interested in Austrian ideas. In this column, the manner in which Austrians look at inflation is shown to be totally different from mainstream teachings – and this means that their theories of business cycles must differ as well.



Looking only at the data of money supply increases and the surge in government deficits, Austrians would say that the worst is yet to come. If it was so easy to create prosperity by printing money, poverty would have been wiped out in India ages ago.



To conclude: The 3 scenes presented today – all from the morning papers – show contrasting views of the Role of The State. In Chattisgarh we found it clueless. On road safety we found them equally clueless. Finally, we looked at their idea of money – equally clueless.



Anyway, I have for long been wanting to do some “body art.” In Goa, I much admired other people’s tattoos. I have now decided on what I will do. I am going to wear a gold front tooth.



Seeing me smile, I hope everyone will get my drift.