Bryan Caplan  

EconLog Book Club: For a New Liberty, Chapter 9

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Summary
In 1973, when the first edition of For a New Liberty was published, Keynesians were still sitting pretty.  Five years later, the Keynesians had so much egg on their faces that Rothbard was inspired to add this entirely new chapter on "Inflation and the Business Cycle: The Collapse of the Keynesian Paradigm" to his revised edition.  Rothbard begins by pointing to the rise of stagflation, and the three big questions that it raises:
(1) Why the chronic and accelerating inflation? (2) Why an inflation even during deep depressions? And while we are at it, it would be important to explain, if we could, (3) Why the business cycle at all? Why the seemingly unending round of boom and bust?
He then assures readers that Keynesianism can't explain answer these questions, but the neglected the Austrian theory of the business cycle (henceforth ABC) can.

Rothbard begins with a lucid analysis of inflation:
The favorite explanation of inflation is that greedy businessmen persist in putting up prices in order to increase their profits. But surely the quotient of business "greed" has not suddenly taken a great leap forward since World War II. Weren't businesses equally "greedy" in the nine teenth century and up to 1941? So why was there no inflation trend then? Moreover, if businessmen are so avaricious as to jack up prices 10% per year, why do they stop there? Why do they wait; why don't they raise prices by 50%, or double or triple them immediately? What holds them back?
After considering some flawed explanations, he leads the witness to the right answer:  The crucial factor is consumer demand; consumer demand keeps rising because the money supply keeps rising; and the money supply keeps rising because government keeps printing more money.  Its motive, according to Rothbard, is seigniorage:
Consider what would happen if the government should approach one group of people--say the Jones family--and say to them: "Here we give you the absolute and unlimited power to print dollars, to determine the number of dollars in circulation. And you will have an absolute monopoly power: anyone else who presumes to use such power will be jailed for a long, long time as an evil and subversive counterfeiter. We hope you use this power wisely." We can pretty well predict what the Jones family will do with this newfound power. At first, it will use the power slowly and carefully, to pay off its debts, perhaps buy itself a few particularly desired items; but then, habituated to the heady wine of being able to print their own currency, they will begin to use the power to the hilt, to buy luxuries, reward their friends, etc. The result will be continuing and even accelerated increases in the money supply, and therefore continuing and accelerated inflation.

But this is precisely what governments--all governments--have done.  Except that instead of granting the monopoly power to counterfeit to the Jones or other families, government has "granted" the power to itself.
After explaining the mechanics of fractional reserves and central banking, Rothbard finally presents the uniquely Austrian part of his story:  Expansionary monetary temporarily reduces interest rates, and business responds by making investments that, due to the reduced interest rates, now appear profitable:
For businessmen, seeing the rate of interest fall, will react as they always must to such a change of market signals: they will invest more in capital goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable, now seem profitable because of the fall in the interest charge. In short, businessmen react as they would have if savings had genuinely increased: they move to invest those supposed savings.
Unfortunately, businessmen are the victim of an economic illusion.  The interest rate cut is only temporary; when rates return to their natural level, businessmen will suddenly see that they've made a terrible mistake.  Why then do booms last for years?  Because central banks keep printing more and more money to hold interest rates down:
Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation,that retribution finally catches up with the boom.
The solution for inflation and business cycles alike, naturally, is for central banks to stop printing money.

Critical Comments
This chapter is a strange blend of smoke, mirrors, and elegant economic pedagogy.  Rothbard's analysis of inflation blows every textbook account away.  The one flaw: He fails to point out (or didn't realize) that seigniorage is a trivial source of revenue for Western democracies.

On the subject of stagflation, he completely neglects the mainstream supply-shock and expectational stories.  Since the book was published in 1978, though, these omissions are forgivable.

When he gets to the uniquely Austrian part of his story, his eloquence remains, but his story is still full of holes.  His implicit assumption is that businessmen believe that short-term interest rates cuts will last forever.  That's a really stupid thing for businessmen to believe.   And if businessmen are really that stupid, it's pretty unfair to blame government for the whole business cycle.  The ABC boils down to what Tyler Cowen calls a "banana subsidy story":*
Let's say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof.
Furthermore, if you're willing to entertain banana subsidy stories like the ABC, it's absurd to think businessmen are rational about everything except monetary policy.  Idiots will see false price signals everywhere. 

For example, if the price of pumpkins of goes up by 20% in September, lots of people might conclude that it will keep going up by 20% a month - and start growing pumpkins by the truckload.  Then suddenly on November 1, demand dries up, and we've got a Halloween-driven "business cycle."  If you think businessmen are suckers for temporarily low interest rates, why not temporarily high pumpkin prices?

I admit, of course, that big economy-wide business mistakes occasionally happen.  We're living through a once-in-a-century "cluster of errors" as I write.  But the mistake that Rothbard rests his whole theory upon is exceptionally bone-headed.  If businessmen were that stupid, the modern economy would never have arisen.

P.S. For more on the ABC, see section 3.4 of "Why I Am Not an Austrian Economist."

* Walter Block (2001) almost literally embraces the "banana subsidy story," except he switches from fruits to vegetables:
Let us consider an analogy, far removed from the ABC. Suppose that the proportion of peas to carrots that will satisfy consumer demand is 1:1. The government, however, decrees that the appropriate proportion is 2:1, and begins to subsidize pea production. Third premise of the syllogism: Sophisticated (but not all) investors know that this policy cannot last, that there will be political or other repercussions, and eventually the government will have to pull in its horns and cease its mischievous attempt to reallocate resources.  The question is, will this suffice to set up a peas-and-carrots cycle, given an tendency of government to pursue such policies whenever politically feasible?
And concludes:
Obviously, even far-seeing economic actors would indeed willingly invest in excessive pea production under these conditions, secure in the knowledge that they could better predict the turning point. That is, right before the government stopped its pea subsidy program, while pea resources were still at a high, the far-seeing economic actors would unload peas upon less sophisticated investors. [footnotes omitted]

Comments and Sharing


CATEGORIES: Book Club
Twitter: Bryan Caplan @bryan_caplan



COMMENTS (24 to date)
Ed Hanson writes:

Bryan

It is true that as governments and economies grew, and all commodity standards for money ended, seigniorage became a trivial source of revenue for Western democracies. However, as pointed out by Robert Mundell, Art Laffer and others, what was loss in significance of seigniorage, was more than made up by accelerating tax receipts due to the progressive tax rate system. As inflation increased, more tax payers were moved into higher tax brackets, resulting in higher flows of money to government. Rothbard may have missed this link to government increase government revenue, but so did you, at least in this article.

But other supply side economist and advocates did not miss the significance inflation's relationship to increase tax receipts due to bracket creep. It was a major accomplishment of Ronald Reagan and his Administration to index the tax brackets to remove this source of 'profit' from government.

Ed

Greg Ransom writes:

I remain convinced that most libertarian leaning "critics" of the ABC theory are former Rothbard fanboys who've really never read Hayek, and also who don't understanding the microeconomics logic of micro theory of the capital structure, mostly because they've never thought about it, and never even conceived of it.

The ABC story IS a market failure story in Hayek. And the distortion is ACROSS ALL MARKETS, all relative prices, and through the time structure of every non-permanent productive process.

Think about it.

ALL prices are SYSTEMATICALLY distorted across a dimension inherent in the physical constitution of all produced that doesn't reveal itself in any single market, and doesn't reveal itself until after the passage of a significant period of time.

Again, I think what we have is a failure of imagination here. One might even say, a failure of intellectual imagination and intellect itself -- a sort of mental blindness.

And part of that blindness is due to people who read Rothbard as very young fanboys, and never read the real deal in Hayek.

Adam writes:

Ok, so business managers don't respond to Fed money/interest rate policy? Why is it that I just closed on a $417,000, 30 year mortgage at 4.85%? 4.85% seems like a steal to me. It's a lower rate than I have ever seen in my lifetime. Am I wrong, is the mortgage backer wrong, or is the 4.85%, 30 year rate just right?

There seems to be a Bayesian adjustment model that's consistent with Rothbard's story and helps explain my 4.85% rate as just about right. It seems simple: easy money reduces nominal interest rates, providing factual evidence that real interest rates are low. Bayesian managers adjust their beliefs in the direction of lower interest rates. Beliefs about rates don't fall as much as nominal rates, but they do fall, leading managers to increase their investments in capital goods. Hence, it isn't so much that managers are completely fooled by lower nominal rates, but they do respond rationally to the additional evidence provided by lower nominal rates--evidence induced by Fed policy.

In my mortgage case, I was able to obtain a 30 year loan at 4.85%. If mortgage managers were fools and responded myopically to Fed policy, mortgage rates would be 2.5 or 3%--the essentially 0% Fed rate plus a risk premium on mortgages. Instead, mortgage managers aren't fools, just Bayesians responding to evidence. I got the 4.85%--a good rate, but not a steal, all things considered.

Best,

Adam

Yes. Keynes and those who followed in his footsteps were very wrong about business cycles. But, Rothbard was also blinded by his own ideological perspectives. He joined with the Keynesians in the neoclassical assertion that locations were subject to the same price clearing dynamics as applied to labor and capital goods. Thus, he failed to see that credit provides an accelerant to the core driver of the boom-to-bust nature of the business cycle -- speculation in property (and, more specifically, in locations) -- rather than itself being the core driver.

There is a little known paper titled "Full Employment Without Inflation" written in the mid-1970s by an economics professor named Arthur Becker. I found a copy a few years after it was written and made it available online soon after I set up the School of Cooperative Individualism project. I highly recommend it to anyone who is still searching for answers with an open mind. http://www.cooperativeindividualism.org

KF writes:

Adam,
A 30yr mortgage can be thought of as a geometric average of forward interest rates. For example, for a two year loan, I could think of the interest rate as the geometric average of the 1 year interest rate today and the 1 year rate one year from now. The reason why your mortgage rate is 4.85% instead of 2.5% is because the market doesn't anticipate quantitative easing lasting forever. The higher future forward rates compensate the lower forward rates on lending in the short-term.

Also, in the early years of a mortgage, the borrower pays more in interest and in the later years, they pay more in principle. This gives mortgage securities a negative convexity when yields fall since borrowers prepay. Refinancings/prepayments increase as interest rates fall and the government expanded the eligibility for refinancings. Since mortgage brokers aren't seeing that many sales, they likely lowered rates to facilitate refinancings (excluding the QE measures which also pushed down rates).

I guess I don't really understand where you're going with the bayesian argument. There are plenty of reasons why mortgage rates fell.

Blackadder writes:

Greg Ransom,

If someone wanted to get a good grasp on Hayek's views on the ABCT, what would you recommend reading?

ramsey writes:

I must say, I am not convinced at all by your critique of the ABC.

For me, this sounds exactly like blindfolding a driver, giving him drugs, forcing him to drive, and then blaming him when he gets into accident. It's not his fault, and no matter what mistakes he made, you cannot absolve the blindfolds and drugs.

What you (and Tyler) seem to be suggesting is that it is the fault of the market because people seem to be believing the price signals conveyed by the market and cannot tell that they are distorted by government. By this logic, you would only absolve "the market" if every person went about their daily lives thinking for every second of the credit expansion, recalculating all prices all across the economy, and making decisions based on the price signals that would've emerged had there been no government distortion.

This seems to me to fail to understand the basic idea of the price system. No one individual has all knowledge to know what's going on in the economy. That's why we need prices. Prices are the indispensable signal individuals use when making all their decisions. If the price is mest-up, then this entire informational mechanism of prices breaks-down, and it will therefore inevitably lead to decisions by individuals that are skewed and distorted in ways that would not have happened had there been no monetary expansion.

There is absolutely no way that anyone could calculate all prices and figure out that monetary expansion is taking place, how it is taking place, and what it will lead to. That is the whole point of the price system: it calculates because we can't.

When the government expands credit, it distorts prices all across the economy in ways that not even trained economists can see or predict. Normal people want to get on with their lives and the price system should exist for them to rely on. They see prices and make decisions. You can't blame them for failing to see the distortions behind these prices that even the Fed can't foresee or understand. People see cheap houses and buy them, thinking they're cheap because their cheap. They can't possibly be expected to understand that they are only cheap because of the monetary expansion, and to then decide not to buy them--especially when you remember that the government is also guaranteeing and subsidizing housing in countless ways.

You suggest that as long as all citizens cannot see, understand, and completely calculate the effects of the monetary expansion, and then successfully and collectively act in order to counter-act its negative effects out of the economy entirely, then it is the fault of the market.

It is obviously far more plausible to blame the monetary expansion itself.

Devin Finbarr writes:

He fails to point out (or didn't realize) that seigniorage is a trivial source of revenue for Western democracies.

I would count the effectively count the government subsidized lending to politically powerful groups as seinorage. Also, the deficit also counts as seinorage. Treasuries are not really debt, since they are backed with the full faith and credit of the US government, and denominated in Federal Reserve Notes, treasuries are really dollars with a "not-valid date". Thus treasury bills should be considered seinorage at the point of issuance.

That said, Rothbard misses the complexity of inflation in the modern financial system. The problem is as bad as he believes, but the mechanism is much more complicated than the government outright printing money to fund its operations.

On the subject of stagflation, he completely neglects the mainstream supply-shock and expectational stories.

Those explanations are poppycock. How can a rise in oil prices trigger a rise in nominal wages and corporate profits? High oil prices would have the opposite effect, yet in the 70's nominal wages and corporate profits were rising fast. And how can workers just expecting inflation cause it? Workers can get higher wages only if they have bargaining power.

It is true that decreased demand for money causes inflation. This happens when people believe that inflation will happen, so they start trading their dollars for gold, stocks, real estate, oil futures, etc. But every historical case of decreased demand for money has also been associated with large increases in the money supply.

Between 1975 and 1980, the M3 measure of money supply grew at 11% a year! This is a ridiculously high rate of inflation. It blows my mind that academic economists still even mention supply shock, when the actual data from the Fed is one google search away.

His implicit assumption is that businessmen believe that short-term interest rates cuts will last forever. That's a really stupid thing for businessmen to believe.

The last boom lasted for about 25 years ( 1983 - 2008, with only two very mild recessions). During the last ten years of it, growth in the money supply exceeded the interest rate on CD's every year. When you see all your fellow businessmen get rich by taking advantage of cheap credit, it's pretty hard to stay away from the party. Twenty five years is plenty of time for lots of people to get rich before the music stops. Eventually, the Fed is forced to put on the brakes to avoid hyperinflation, and then many businesses fail. But the Fed will try and soften the landing, so not as many businesses will fail as should. Overall, the businessmen are following a strategy that wins two times out of three.

That said, Rothbard totally misses the major cause of unemployment in a depression: the collapse in fractional reserve, and the ensuing deflation, causes a dramatic drop in spending on luxuries and consumer durables. This drop in spending wrecks entire industries leaving millions unemployed.

Swimmy writes:

ramsey: Blindfolding him, giving him drugs, and forcing him to drive? Really?

To me it seems more like spraypainting over a road sign. It could cause some trouble to an inattentive driver, yes, but many are going to be more wary, knowing there is something to look out for but not knowing what.

Inflation rates, at least in the U.S., are widely available to every businessman in the country. They are announced, there are monthly reports, the targeted federal funds rate is announced widely in newspapers every single session the Fed gets together, but all of this activity is still equivalent to blindfolding people, giving them drugs, and forcing them to drive? The ecstatic euphoria they experience from price changes is so dizzying and debilitating that they are rendered unable to open the Financial Times?

Really?

Greg Ransom writes:

Blackadder writes:

"If someone wanted to get a good grasp on Hayek's views on the ABCT, what would you recommend reading?"

First thing I'd recommend is that folks browse around economist Roger Garrison's excellent web site:

http://www.auburn.edu/~garriro/

E.g. read his article on Hayek with Israel Kirzner, watch the Power Point presentation on Hayek vs. Keynes, etc.

Next thing I'd recommend is Roger Garrison's _Time and Money_ which is about $30 from Amazon.

Then, I'd read Hayek's _Monetary Theory and the Trade Cycle_ and _The Pure Theory of Capital_. These are not easy books, but they have stuff you won't find anywhere else, not in Garrison or any of the secondary literature.

Finally, read Hayek's "popular" draft of an early version of his trade cycle work, _Prices and Production_. This book is misleading if it's the only Hayek you know, but if you've already read Hayek's earlier and later books on capital and trade cycle theory, you won't be as easily misled as those economists are only familiar with _Prices and Production_ (which describes most of those who have written on Hayek).

ramsey writes:

Swimmy,

When the government increases the monetary supply, this leads to a temporary boom in a certain sector (or sectors) of the economy. These are very hard things to spot. Sure, Peter Schiff and Roubini may have had a clue about it, but thousands of economists had no clue and thought everything was dandy.

A normal person cannot be expected to know what all economists seem to have missed. But not only are you asking that people know that, you are asking that they know it all, act upon it, and act in a way that counteracts the harmful effects of monetary expansion.

Such coordinated action is not possible without the price system. But the price system is itself screwed by the monetary expansion which distorts all prices for people.

The problem with monetary expansion is that it destroys prices as efficient signals of coordination of economic activity. The last few years saw the monetary expansion cause a boom in housing, it was rational, given those signals for many people to invest in housing, but only because of these signals.

Once this artificial bubble burst, people realized all their life-savings have been transformed to worthless houses. This isn't because these people are stupid, it is because they thought that they could believe price signals.

The point is that they SHOULD believe price signals, and the Fed shout stop messing with them.

I find it mind-boggling that Caplan and Cowen seem to be saying that tinkering with the price system is ok, and it is rather the fault of the people who could not foresee, calculate and offset all the impacts of this tinkering.

Even before reading what Greg Ransom suggested on the ABCT, people really need to read Hayek's The Use of Knowledge in Society to understand something about prices.

There's a reason central planning doesn't work; it isn't because those who are planned are not smart enough to figure out and counter-act the planning.

Francis writes:

Perhaps there is a way to reconcile Rothbard with Mr. Caplan by considering the following:

- Rational Expectations (advocated by Mr. Caplan) does not mean that you can never fool businessmen: it just says that you can't do it all of the time.
- Before 1978, when Rothbard wrote, businessmen had little experience with inflation and attributed low interest rates to good economic conditions.
- But they eventually faced reality: prices instead of investment finally rose in response to increased money supply.
- So, Rothbard was perhaps correct in his own days.
- But now, businessmen have learned better and they cannot get fooled so easily again by easy money. In fact, at one point in the recovery of 1992, the unemployment rate fell so dramatically in a single month that stocks plunged and (to be confirmed) long-term rates ROSE in response to easy money!

So perhaps Rothbard was right in 1978, but perhaps he would not be right with the same explanation nowadays.

The Snob writes:

I think a good argument for the cheap-money-sends-false-price-signals theory could be made by looking at the history of corporate M&A activity.

As a business owner, I'd also make a behavioral argument that employees and managers usually get much larger rewards for being optimistic and occasionally wrong than pessimistic and occasionally right. Performance measurement cycles are short, 12 months or less, compared to the length of macroeconomic cycles.

Equity investors ought to be much more discerning as they bear the risk of total loss, but in practice I've found their preference for optimism is just as bad. They will not invest in a company that isn't run by smarter, better-looking, and harder-working people than the competition, so the worst that can happen in a recession is that we'll have to scale back.

Revenue is like grain production in Soviet five-year plans--it only goes up. When it goes down, we shrug and say it was a great idea with bad timing, and next time we'll get it right.

Troy Camplin writes:

"We're living through a once-in-a-century "cluster of errors" as I write."

Except that every bust in a business cycle is precisely "a once-in-a-century "cluster of errors"." Indeed, it is always a different set of errors which accumulate. These errors accumulate for several reasons: new government regulations, new technologies, supply shifts, demand shifts, ignorance, etc. With each bust, governments tend to react by creating a new regulatory environment, which businessmen have to adjust to, make errors in, learn how to navigate through (and cheat in, for some), resulting in a new boom and bust cycle. But even if the government were my ideal (doing almost nothing), we would still have a business cycle for the other reasons listed. This makes sense if we understand the economy to be what it is: a complex, dynamic system. A punctuated equilibrium on speed is what the economy actually is. That being the case, we have to expect adjustments. Unfortunately, government keep reacting to downturns with panic, and make things worse, both during and after.

Mr. Econotarian writes:

"Why is it that I just closed on a $417,000, 30 year mortgage at 4.85%? 4.85% seems like a steal to me. "

I am wondering, how the heck are banks going to make money on a 4.85% 30-year mortgage when M2 just doubled and time is ticking away on a potentially large inflation once the economy perks up a bit?

It'll be like the S&L crisis all over again.

243798 writes:

I think maybe the world needs a new school of public choice theory, the study of economic thought from the position of self-interested economists. Suppose for the sake of argument that Mises was correct, and the economy is too complicated to be represented by simple mathematical models, and that those models will often be "more or less" correct a reasonable fraction of the time, but spectacularly wrong occasionally.

Now suppose we have potential economist Bob. If Bob accepts this, he has thought himself into a corner both intellectually and commercially. Without mathematics, his work becomes almost philosophical, with little relation to the real world. And because he can advise neither the government on manipulating the economy nor banks on asset risk, he won't have much income unless he is lucky enough to land a faculty job, after 15 years of arduous graduate school.

On the other hand, Bob can be an optimist. Sure, the models we have had so far don't work, but that doesn't mean we can't find ones that do. If Bob takes this position, he can get lucrative work. And when he is wrong, the economy is always complicated enough that there are plenty of excuses available, and his competition no better. Besides, if he is in banking he will have retired to a Caribbean island. It seems like not much of a choice.

J Cortez writes:

I remain unconvinced by your arguments. Hayek, Mises and Rothbard weren't perfect, but they have the single best explanation I've heard concerning booms and busts.

Troy Camplin writes:

Mathematics grossly oversimplifies things. If you are going to deal with the economy in its full complexity, there comes a point where one must abandon mathematics. Biologists don't use a lot of math, except for statistics. An economy is more complex than a living cell. That doesn't mean we can't understand the economy, or how it works -- it just means we will need more powerful, complex modeling than mathematics can ever provide.

johnleemk writes:

I don't have trouble believing that Hayek correctly described one of the causes of booms and busts, but I find it hard to believe the seemingly comically exaggerated and overstated claims I often hear that this explains all booms and busts.

I think Bryan hits the nail on the head when it comes to why most economists have trouble taking ABCT very seriously: the whole point of having the Fed control the money supply is so that decisionmakers will not be confronted by highly variable shocks to the money supply; that was the key logic behind monetarism. The idea behind modern monetary policy is that decisionmakers have rational expectations, and that it's the job of the Fed to avoid confounding these expectations.

This is why I am very unamenable to the notion that we should switch to a gold or any other commodity-based standard; decisionmakers have no good way to anticipate how the money supply (relative to the volume of transactions) will change. I am more amenable to the idea of free banking, but I am doubtful of its practicality in the real world. None of the three main options when it comes to monetary policy are perfectly desirable, but it seems to me that an independent central bank is probably the best solution we know of right now.

James writes:

Bryan,

The "entrepreneurs should see through it" criticism assumes that it is at least in principle possible to distinguish signal (the natural interest rate) from noise (the difference between the natural and nominal rate created by monetary policy).

Your awareness of statistical estimation is far greater than that of a typical businessman, so this question should be trivial for you:

An investor had considered a business venture which would require an initial outlay of $10,000 and would generate revenues of $10,600 after one year. His bank offered to loan him $10,000 at 8%. The investor, realizing that he cannot earn even a nominal profit on this investment decides not to go forward with the project.

Since that time, the central bank has increased the money supply by 10% and lowered the fed funds target by 4%.

Now the investor's banker is offering the same loan at 3%. The required initial outlay has not changed but the nominal revenues generated after a year have increased to $10,700.

For full credit: State whether the investor's project will generate a real profit and give the formula you used to arrive at your answer. I don't think you can do it, although you seem to expect businessmen to solve this problem costlessly in order to avoid making the malinvestments that Austrians describe.

daryl writes:

One of Bryan's main criticism of ABCT seems to be this:

His implicit assumption is that businessmen believe that short-term interest rates cuts will last forever. That's a really stupid thing for businessmen to believe. And if businessmen are really that stupid, it's pretty unfair to blame government for the whole business cycle.

From what I can tell, it's not so much that they're stupid as it's easy for people, even experienced businessmen, to be blinded by greed and what they want to be true. The left uses greed to explain these bubbles, but they are only getting part of it. It seems to me that this greed is fueled by the central bank's policies. All that extra credit they create has to go somewhere. It's made worse when everyone is taught in public school that we need the Fed to reign in inflation, when they're the ones who are actually creating it in the first place.

TDL writes:

So let me understand this correctly. As a business man/entrepreneur I am fool for undertaking a project that seems profitable b/c the hurdle rate for success is artificially lower (b/c of the Fed's actions)? Or am I a fool for allowing my competitors to take market share away and allowing my revenues to disappear b/c I, rightfully, believe these artificially lower rates to be false signals?

Professor Caplan, you make it sound as though there is no competition that will take my revenues away from me b/c I refused to act. Artificially lower rates are certainly false signals, but I can be right and poor or I can act to preserve my position (i.e. revenues & if I'm lucky profits) in the marketplace.

Regards,
TDL

Dan born on the 4th of July writes:

Keynesian philosophy is predicated on centralized power with control over the issuance of fiat. It is simply supply driven. The economies of the western world will always be supply driven as long as the issue of currency is supply driven. In a word, the paradigm is unbalanced in regards to power.

We have been supply driven since "the apple" was shoved in our faces.

The age of information supports a "new wineskin" for "new wine". I can now buy a single stick of gum from Timbuktu and completely close out the transaction with a debt free, unencumbered currency and I can do so in an instant with a click of the mouse. Adding to that, it matters not how the gum is priced. The centralized money is commodity based where the currency-commodity relationship is in real time.

Store of value and debt free monetary characteristics have now been married to instant liquidity on a global basis.

We DO NOT have a system design problem in regards to solving the monetary issues of the day. We simply have a marketing challenge.

Gold was never a monetary problem in systems of days gone by. It was only the pegged relationship which required more gold for the sake of more liquidity under the pegged rules. The peg was the problem. In other words, the underlying distribution system for gold was the issue. Enter the information age and "voila", the problem is solved by way of the digital ability to split gold weight whose relationship with currency is free floating. Market law rules.

Never forget the gifts of the magi, gentlemen. If you don't get the beginning, God help you in understanding the end.

Jeremy, Alabama writes:

I am not sure if this thread is a critique of Rothbard, Libertarianism, or ABC.

I think Bryan is saying Rothbard puts forward qualitative explanations that are an interesting but imperfect twist on standard Austrian theory.

It is no disgrace on Rothbard that he cannot exceed Hayek's arguments. Hayek's "Serfdom" is 60 and more years old. But it is as fresh and compelling now - more so, in fact - as the day it was written. Surely, this is the essence of conservatism, i.e. timeless principles, articulated with perfection by Hayek, Acton, Bastiat, and so on. Rothbard clearly does not reach this level.

People with leftist sympathies are usually more persuaded by "new principles". There are no "timeless principles" more powerful than science, no problem that cannot be fixed by direct action, and it would be immoral not to act if action is possible.

All theories are of course some simplification of reality, and contain inconsistencies. So you have to choose your poison. Most leftist theories, sooner or later, appeal to "new socialist man" or other modification of human nature. Conservative and libertarian theories are imperfect but do not require changing human nature, documented as utterly fixed since at least the invention of the written word.

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