I, Pencil: The Movie

Our friends at the Competitive Entreprise Institute has just put "I, Pencil: The Movie" up on YouTube.  I invite everyone to take a look.

Problems and Prices on FEE TV

Hollywood is known for making "magic," likewise the staff at FEE TV should also be congratulated for making me look presentable. Thank you guys.

FEE--Introduction to Austrian Economics Summer Seminar 2012

For the week of June 4^th – 9^th, the Foundation for Economic Education (FEE) held the first seminar for the summer in Atlanta.  This is the 50^th anniversary for FEE to host a summer seminar.  I am honored that this has been my 10^th year to lecture to students for FEE.

This past week was an introduction to Austrian Economics.  Steve Horwitz and I suggested a schedule for this year and we are grateful that it was accepted without revision.  I am really pleased with how well the lectures were integrated.  I can’t really think of any particularly unique issue that we didn’t at least mention.  The lectures were videoed and FEE will be posting them later this summer.  When they come out, I will link to them on the left-side of this blog. (You can see some earlier lectures posted there now.)

I gave four lectures for FEE and participated in a roundtable discussion on the controversy between fractional reserve free banking and 100% reserve banking. 

My first lecture was “Menger and the Early Austrians.”  In it, I talk about four major contributions Menger made.  Since I covered issues of capital and interest in a later lecture, I focused on Böhm-Bawerk’s approach to value theory and his refutation of Marx.  Then, I walked through the books that Wieser wrote, with (of course) some analysis of each.  And I finished by covering some of the insights made by David Green, Philip Wicksteed, and William Smart.  The PowerPoint to the “Menger and the Early Austrians” lecture is found here.

The second lecture was “Praxeology, Supply and Demand.”  Here I began by comparing the methodology of the Austrians with the mainstream.  I presented the mainstream’s approach to methodology and critique it.  In contrast, I presented the Austrian methodology and build up the Laws of Demand and Supply from first principles.  We then built a model of the market.  I finished the lecture by comparing the manner in which the mainstream derives demand curves using indifference curve analysis.  The mainstream’s approach suggests that there is an income effect and a substitution effect for each price change.  The Austrians tend to think that policies that are derived from this thinking are equivalent to hocus-pocus.  The bottom-line is that when the mainstream derives demand curves in this fashion, they are comparing two levels of total utility and looking at the marginal rate of substitution.  When the Austrians derive demand curves, we are looking at the marginal utility derived from the next unit.  While both approaches use marginal analysis, they are not the same.  The PowerPoint to the “Praxeology, Supply and Demand" lecture is found here.

The third and fourth lectures really build upon each other.  The third was “Capital and Interest” and the fourth was “Business Cycles.”  In “Capital and Interest,” I criticize the mainstream’s approach of allowing objective factors to control the interest rate and also the notion that capital can be represented by a homogeneous pool.  In contrast, the Austrians hold that interest rates are determined by subjective time preference for both the supply of loanable funds (savings) and the demand for loanable funds (borrowing).  Furthermore, Austrians hold that capital is mostly complementary.  As a result, capital has a structure that cannot be ignored.  If we do so, we miss some significant aspects to economic theorizing.  The PowerPoint to the “Capital and Interest” lecture is found here.

The last lecture was on “Business Cycles.”  I began by developing Garrison’s three interlocking graph model.  It contains the Loanable Funds Market, the Production Possibilities Frontier Curve, and the Structure of Production.  We then walked through how the model works for various macroeconomic fluctuations and finished with working through the stages of the Austrian Theory of the Business Cycle.  The lecture finished with examining how the other modern macroeconomic theories explain the boom and bust of a business cycle.  The PowerPoint to the “Business Cycle” lecture is found here.

The last activity was a roundtable on 100% reserve banking vs. fractional reserve free market banking.  All four of the faculty participated in this discussion.  We started by first explaining why the current system of fiat banking with a Central Bank was a terrible system.  Then we explained how 100% reserve banking would work and then how fractional reserve free banking (with competitive note issuance) would work.  We then voiced our concerns about each system and then took questions from the students.  Since this was the last time we were talking before the group, we opened the last 15 minutes up to any question the students had on Austrian Economics.  There are no PowerPoint slides associated with this so I cannot link to anything right now.  However, when FEE posts it on the web, I’ll be sure to link to it.

I want to thank FEE for hosting another very good summer seminar.  The students asked some of the best quality questions we have heard for quite some time.  And the FEE staff did a marvelous job.  I appreciate the fact that the supporters of FEE have been able to keep this program going and also to be able to do it at such a high quality level.  Thanks!

Introduction to Austrian Economics Lecture

I have been gone for quite some time (hence the lack of new posts), but I am back now.  For a week this summer I lectured at FEE's summer seminar--Introduction to Austrian Economics.  I presented three lectures: Praxeology, Supply and Demand; Capital and Interest; and Austrian Business Cycle Theory.  The last of these lectures is now up on Fee.tv and is found here: http://youtu.be/49rMeA1gyO0.

I don't know how to post the PowerPoints that correspond with the lecture.  As soon as I learn how to do that, I will get them up.  For now, you can just e-mail me at PCwik@moc.edu and I will send you a copy.

***Update***  I think I have learned how to link to the PowerPoint.  Please click HERE.

Or watch it here:

Economic Distress Index--Is the Economy Worsening?

On the right side of this page, you will see the Economic Distress Index that I have created.  It was suggested by my friends at FEE to create an updated version of the famous Misery Index of the late 1970s.  I update it as the data comes in. 

As I have been tracking it, I have noticed that the economy tends to be in distress whenever the index is above 46.  This has not been scientifically determined.  If anyone would like to work on this data set, I am willing to work with you.  Just e-mail me at: PCwik@moc.edu.

The point of this post is that the index has been falling from its high of 62.8 in June 2009 to the recent low of 48.0 in December 2010.  Since the new year, the Distress Index has been climbing.  We are now at 49.6.  While this may be an aberration, it may also be the start of the next trend.

Is the economy headed toward another recession?  Is the economy worsening?

My training tells me that before an economy can make a solid recovery, we need to liquidate the malinvestments that have been built up in our economy.  So far I see little evidence that we have cleaned out much malinvestment.  In fact, I think that we have quite a bit more that needs to be liquidated.

While I tend to be optimistic, I don't see the evidence of anything more than a lumbering economy that is burdened down by these malinvestments.  The translation is that we cannot have healthy growth until we clear these out.  With stimulus bills and government programs designed to prop them up, I think that this anemic growth will be around for a few more years.

Adding to the Blog

As I learn more about the capabilities of this tool, I will add to this site.  You may have noticed a few additions.  On the left-side, I have added links to the lectures I presented at FEE this past summer.  Clicking on a link will take you to the page with the audio and PowerPoint presentations.  Below that are links to the popular posts and down further is a listing of subjects that the posts cover.

On the right-side, I have added two pages.  The first is the Economic Distress Index.  If one clicks on it, you can either look at the entire graph from 1967 or just the last 14 years.  There are also links to the data.  There is also a link to an explanation of the index.

The second is a graph of yield curve inversions.  Again, you can look at the entire graph from 1953 or just look at the last 10 years.  Yield curve inversions are one of the best predictors of an on-coming recession.

My goal is to continue to improve this blog and post articles that tend to examine economic problems from an Austrian perspective. 

You are, as always, very welcome to post comments as you wish.

Mises' "Latest" Book

Bettina Bien Greaves is a living treasure.  She has worked for decades at the Foundation for Economic Education (FEE) and attended just about every lecture that Mises gave at FEE and at NYU.  She would take shorthand notes of all that he said.  Today she is converting those notes back into text.  She has recently come out with a synthesis of several Mises lectures.  It is called: Ludwig von Mises on Money and Inflation: A Synthesis of Several Lectures.  You can find the book here and for sale here.

I am so excited about this that I am posting a short chapter below.  It is called, "The Constitutional Side of Inflation."  Enjoy...

When we talk about these things we must not forget that they do not have only an economic side; they also have a constitutional side. You may say that government is the most important institution. The government is very important in many regards. Perhaps one overrates the importance of the government, but one does not overrate the importance of good government.

Modern constitutions, the political systems of all nations that are not ruled by barbarian despots, are based upon the fact that the government depends financially upon the people, indirectly upon the men that the voters have elected for the constitutional assembly. And this system means that the government has no power to spend anything that has not been given it by the people, through the constitutional procedures which make it possible for the government to collect taxes. This is the fundamental political institution. And it is a fundamental political problem if the government can inflate. If the government has the power to print its own money, then this constitutional procedure becomes absolutely useless.

Our whole political system is based upon the fact that the voters are sovereign, that the voters are electing Congress and other such institutions in the various states that rule the country. We call the United States a democracy because the rule of the country is in the hands of the voters. The voters determine everything. And this distinguishes the system, not only from the despotic systems of other countries, but also from the conditions as they prevailed in earlier days, in countries that already had parliamentary institutions and parliamentary government, at that time. However, there has developed, especially in the last decade, a problem of  constitutional law, that is whether the government must get the approval of the people through Congress when it wants to spend, or whether the government, because it is established and has at its disposal a number of armed men, is free to spend as it wishes, simply by increasing the quantity of money. People must realize that the question is “Who should be supreme? The parliaments elected by the voters, who can restrict government spending by refusing to grant the power to tax? Or institutions that want to override the interests of the people by increasing the quantity of money to expand government spending and so do away with the prerogative and independence of the individual voter?”

If we do not succeed in restoring the monetary system that makes the individual independent to some extent of the interference of government institutions, government banks, government monetary authorities, government price ceilings, and so on, we will lose all the achievements of the free market and of the free initiative of the individuals, whatever methods of constitutional law we follow. If the government can inflate whenever it wants to spend, it can take away from the people without their agreement everything, their purchasing power, their savings, and so on. From this point of view there disappears even the fundamental principle which everybody sees as the difference between a Communist government and a government based on the idea of individual freedom, the preservation of free markets and the ability of the people to control the government.

If you look at the constitutional history of England in the 17th century, you learn that the Stuarts had problems with the British Parliament. The conflict consisted precisely in the fact that the Parliament was not prepared to give to the King of England the money he needed for purposes of which the Parliament didn’t approve. The people disapproved of a great part of the government expenditures and Parliament was not anxious to impose taxes. The Stuart kings wanted to spend more than Parliament was prepared to give them. If the King at that time, in 1630 let us say, had asked one of those who are considered experts today in government finance, “What can I do? I don’t have the money!” the “expert” would have said, “Unfortunately, your family, the Stuarts, came too early to their position as rulers. Two hundred years, three hundred years later, it would be much easier for such a government as you want to rule the country. A printing press would have been sufficient to make it possible for your government to spend all the money it needed to have an army and the other things needed to protect the King against the people.” But the poor Stuarts were living in an age in which the technique of producing paper money had not been developed to a considerable extent. Charles I couldn’t inflate, you know. There was no solution for him; he could not engage in deficit spending. This was the undoing of the Stuart family and the Stuart regime. And in the conflict which originated out of this, one member of the Stuart family lost his life in a very disagreeable way—Charles I lost his head. (fn1) And the Stuart family as such lost the crown of England. What the poor Stuarts didn’t have was the facility of the printing press as it exists today.

The monetary problem we have to struggle with today is the problem of paying for government expenditures which are not accepted or, let us say, not approved, by the people. The conduct of government affairs, public affairs, is not different from the conduct of the financial and monetary conduct of private affairs. If the government wants to spend, it has to collect the money; it must tax the people. If it doesn’t tax, but increases the quantity of money in order to spend more, then it brings about an inflation. The difference between the conditions in 18th century England and the conditions in other countries, let us say for instance in Russia, consisted of the fact that the Russian government was free to take away from its subjects what it wanted while the British government was not. The British government had to comply with the provisions of a set of laws that limited the amount of money the government had the right to collect from its citizens. And it had to spend this money precisely according to the wishes of the people.

All our constitutional laws and our system of government are based upon the fact the government is not permitted to do anything that violates this system of laws representing the moral and actual ideas and philosophies of our people. But if the government is in a position to increase the quantity of money, all these provisions become absolutely meaningless and useless. If it is said that the government has to spend, is entitled to spend, a definite amount of money for keeping people in prisons, this means something. There is a definite reason for its spending. All our legal provisions are influenced to some extent by the fact that this is the amount of money which is given to the government for this purpose. But if the government is in a position to increase the quantity of money to use for its own purposes, then all these things become merely a theoretical expression of something which has practically no meaning at all. We must not forget that all the protection given to individuals through constitutions and laws disappears if the government is in a position to  destroy the meaning of every inter-human relation by undermining the system of indirect exchange and money which is called the market. And this is much more importantthan any other problems we talk about today. It is the interference of the government with violence that has spoiled money, that has destroyed money in the past, and that is perhaps destroying it again today.

Some years ago you could frequently read quotations saying that Lenin said that the best method to destroy the free enterprise system would be to destroy the monetary system. Now a professor in Germany has demonstrated that Lenin never said this. But if Lenin had said this, it would have been the only correct thing that he ever said.

The monetary problem which we have in this country, which you have in every country today, is the same—to keep the budget in equilibrium, to balance income and outgo, revenue and expenditure without printing an additional quantity of banknotes, without increasing the quantity of the monetary units. This is not only a problem of economics. It is also the fundamental problem of constitutional government, you know.  Constitutional government is based upon the fact that the government can only spend what it has collected in taxes. And it can only tax the people if the people accept it by the vote of their representatives in parliament. And in this way the voters are the sovereigns. The problem of monetary management in a modern country cannot, therefore, be separated from the constitutional problem, from the doctrine that says that all problems of government, all governmental matters are decided ultimately by the vote of the people. Whether you call this democracy or popular government doesn’t make any difference. But there is no monetary or budgetary problem that can be separated from the constitutional problem of who rules the country, who determines ultimately what has to be done in the country.

Fn 1 Charles I was beheaded on January 30, 1649.

Introduction to Austrian Economics is Posted (Now Complete!!!)

FEE has now posted all four of my lectures on Austrian Economics. Here are the updated links.

Introduction to Austrian Economics
Lecture #1: Menger and the Early Austrians

This lecture covers the thoughts and ideas that found the Austrian School of Economics. It includes the work of Carl Menger [1840-1921], Eugen von Böhm-Bawerk [1851-1914], Friedrich von Wieser [1851-1926], David I. Green [1864 - 1925], Philip Wicksteed [1844-1927], and William Smart [1853-1915].
The link for the audio page is here.
You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #2: Methodology
To my delighted surprise, this lecture received the most attention by the students. It starts with a brief discussion of the Methödenstreit. It then critics Modern Positivism/Empiricism. Finally, it presents the Misesian Praxeological view and the relation between theory and history.
The link for the audio page is here.
You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #3: Capital and Interest
This lecture begins with the questions posed by Böhm-Bawerk. It then provides an introduction into Austrian Capital Theory and the Structure of Production. It then presents the traditional Austrian theory of interest. And then draws comparisons between the Austrian view and the Neo-Classical view of capital and interest. A proper understanding of capital and interest theories is critical to understanding business cycle theory.
The link for the audio page is here.
You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #4: Business Cycles
This lecture is a more advanced presentation of the Austrian Business Cycle Theory. In the tradition of Roger Garrison, extensive use of graphs is made. The lecture then demonstrates how that simply adjusting the money supply, adjusting prices, or spending money to boost aggregate demand are all inadequate to create an economic recovery. The key to an economic recovery is liquidation of malinvested capital and creation of new and proper capital structures.
The link for the audio page is here.
You will also find the link for the PowerPoint on the same page or you can directly access it here.

Cwik Lectures at FEE in 2010

This summer I had the opportunity to give eight lectures at two of FEE's Summer Seminars. The first seminar was called "Freedom University" and the second was "Introduction to Austrian Economics."

FEE is in the process of posting the lectures in both audio and video forms. (As they become available, I will update this post.)

The lectures are either new or very much reworked from last year's presentations. There is significantly more content in the lectures.

In addition to the lectures, I have also provided FEE with the PowerPoint Presentations that I used.

I hope you like them. Please give me feedback one way or the other.

So here is the lineup with the appropriate links:

Freedom University
Lecture #1: Praxeology, Supply and Demand
This lecture starts with the foundational building blocks of economics: the Human Action Axiom and derives Supply and Demand curves, a model of the market and finishes with a comparison between the mainstream's derivation of demand curves with that of the Austrians.
The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #2: Competition and Entrepreneurship
This lecture looks at how markets are able to solve the problems of how we transform raw materials into goods and services, but not just randomly. We need to create useful goods and services, but again, not just randomly useful goods and services. We want to create goods and services that satisfies the most intense wants and desires of the consumers without wasting resources. The lecture concludes with a comparison of the Austrian view of competition with that of the mainstream.
The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #3: Business Cycles
This lecture is at an introductory level and is not very technical. The lecture focuses on the causes of the business cycle as well as the cures.
The link for the audio page is here. There was no corresponding PowerPoint with this lecture.

Lecture #4: Current Economic Events
This lecture was opened up so that, during the week, students could request topics that interested them. The first part of the lecture deals with the Economic Crisis in Greece. The second part focuses on the economic situation in the US. And the third part centers on the Yasuni National Forest in Ecuador.
The link for the audio is page here. There was no corresponding PowerPoint with this lecture.

Introduction to Austrian Economics
Lecture #1: Menger and the Early Austrians
This lecture covers the thoughts and ideas that found the Austrian School of Economics. It includes the work of Carl Menger [1840-1921], Eugen von Böhm-Bawerk [1851-1914], Friedrich von Wieser [1851-1926], David I. Green [1864 - 1925], Philip Wicksteed [1844-1927], and William Smart [1853-1915].
The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #2: Methodology
To my delighted surprise, this lecture received the most attention by the students. It starts with a brief discussion of the Methödenstreit. It then critics Modern Positivism/Empiricism. Finally, it presents the Misesian Praxeological view and the relation between theory and history.
The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #3: Capital and Interest
This lecture begins with the questions posed by Böhm-Bawerk. It then provides an introduction into Austrian Capital Theory and the Structure of Production. It then presents the traditional Austrian theory of interest. And then draws comparisons between the Austrian view and the Neo-Classical view of capital and interest. A proper understanding of capital and interest theories is critical to understanding business cycle theory.
The link for the audio page is here. You will also find the link for the PowerPoint on the same page or you can directly access it here.

Lecture #4: Business Cycles
This lecture is a more advanced presentation of the Austrian Business Cycle Theory. In the tradition of Roger Garrison, extensive use of graphs is made. The lecture then demonstrates how that simply adjusting the money supply, adjusting prices, or spending money to boost aggregate demand are all inadequate to create an economic recovery. The key to an economic recovery is liquidation of malinvested capital and creation of new and proper capital structures.
The link for the audio page is not yet posted. The PowerPoint for this lecture is forthcoming.

Are We Still in a Recession?

If you ask an economist for a technical definition of a recession, you’ll probably get an answer that limits the experience to a decline in output. In fact, once the economy hits bottom, then every small increase thereafter is called “the recovery.” Here is what a business cycle and a recession look like:

The recession is the shaded area that begins at the top of the business cycle and ends at the bottom of the trough. If one asks a non-economist about this definition, they’d tell you that there was something clearly wrong here. A non-economist is most likely to describe a recession as not being over until at least the time when we recover to the trend line. Anything before that, we have a “depressed” economy.

(It’s funny to see how dogmatic the economics profession is on this point, especially when we mix politics in with these definitions.)

If you ask an economist how long the Great Depression lasted, you will get the answer that it started in 1929 (Spring 1929, if it’s a good economist) and that it ended around 1939/1940. However, if we truly look at the data, we see the following ups and downs over this period.


As indicated in the graph, the shaded areas indicate recessions. What we see is that, technically, there was no such thing as “the Great Depression,” but rather a steep, prolonged recession, a slow recovery, followed by another recession.

Does this graph seem similar to what we are currently experiencing?

Will there be a second recession? Will this be called the Second Great Depression by future economists? Only time will tell.

It was for these reasons that I have helped to create the Distress Index and update it monthly. You can see it on the left hand side of this blog. It helps us to see where we are in the greater schema of the economy. Any number above a 47.0 seems to indicate that there is a fair amount of distress in the economy.

So check back frequently to see the updates.

Leonard Read and the Love of Liberty - Jeff Riggenbach - Mises Media(Audio File)

For the past two weeks, I have had the priveledge to lecture at the Foundation for Economic Education (FEE).

Coming soon, there will be the posts of my eight lectures and the accompanying PowerPoints.

In the mean time, please listen to this less than 20 minute overview of FEE.

Leonard Read and the Love of Liberty - Jeff Riggenbach - Mises Media(Audio File)

Distress Index

The Foundation for Economic Education has asked me to put together a Distress Index. So I quickly threw together five variables to create the index.

There is more detail at the FEE webpage (and a better picture too).

Methodology:
The idea was to keep the index simple, so that no more than a handful of statistics are used, and it was also important that those statistics be relatively uncontroversial. So we relied solely on numbers provided by the Federal Government.

Included Statistics:

Unemployment: Clearly, no “misery” index would be very relevant without considering unemployment. This is pretty self evident.

Consumer Price Index: Like the original “misery” index, we included inflation, even though we are actually in a deflationary period at the moment.

Gross Domestic Product: GDP is the market value of all final goods and services in a particular geographic area over a period of time. It is the most widely recognized measure of the "health" of economy.

Total Capacity Utilization (TCU): This is a measure of the utilization of the all available capital goods. We use the inverse of this number, since higher utilization is generally a good thing. So for instance, if TCU is at 70 percent, we would add 30 percent to our index as a measure of the idle capacity.

Household Financial Obligations as a percent of Disposable Personal Income (HFO/DPI): This measure is intended to gauge the ability of individuals to participate in the consumer economy.

It is important to emphasize that no statistic will ever fully articulate what is happening in the real economy. The real economy is made up of living, breathing, planning, acting individuals. Statistics are simply an abstraction and, as such, imperfect. Nevertheless, we feel this index has substantial value for two reasons.

First, it gives us a tool to help interpret what the media and government are telling us about the economy. Second, we hope it will give voice to the taxpayer and the frustrating conditions he or she is enduring these days. We hope the index will keep pressure on policy makers and opinion leaders to make decisions that improve the economy rather than distressing it further.

After a cursory historical analysis on the index, we can see that the results were pretty impressive. The chart below shows the Distress Index since 1967 with economic recession periods highlighted. There seems to be at least a superficial correlation between the index breaking 45.0 and the economy falling into recession. (Note we have not tested the strength of this correlation). In most cases the index appears to lead the recession’s beginning and end, which would seem to indicate that the index is actually useful in telling us where we are headed, not just where we’ve been.

THE CURRENT DISTRESS INDEX IS 61.0.

Unemployment: 9.7%

CPI: -1.5%

Real GDP: 3.897% (as a % change y-t-y × -1)

TCU: 30.4% (100% - TCU = an Idleness Index)

HFO/DPI: 18.5%

Please feel free to comment and improve this index.