The recent death of Alasdair MacIntyre reminded me of the extreme contempt philosophers and theologians have for the science of economics. MacIntyre was a philosopher and convert to Catholicism who wrote several books that have influenced theologians and pastors to embrace socialism. Yet, MacIntyre, like Karl Barth and most theologians and pastors, never read a book on economics. He accepted the lies of the drunken atheist Marx as economic gospel.
There are several reasons Christians should be familiar with the science of economics. Christian theologians gave birth to the science. I wrote about that here, so I won't go into the details in this post.
Whole Foods grocery store worker Adam Pacheco (L) stacks vegetables while customers shop in the produce section at the Whole Foods grocery story in Ann Arbor, Michigan, March 8, 2012. | REUTERS/Rebecca Cook
Some children will not get the Christmas presents they wanted this year because trucking companies can’t find drivers to deliver them from the ports on the coasts. A lack of people willing to work has forced restaurants to cut hours or close. The labor force participation rate for men has fallen to 89% prior to the pandemic from more than 97% in 1955. What’s going on?
Democrats claim that wages are so low that people would rather stay home, but that doesn’t explain how the unemployed make enough money to live. Who is paying for their food, clothing, and rent? A new report from the Social Capital Project, Reconnecting Americans to the Benefits of Work explains:
“Why are fewer prime-age Americans in the workforce? Many popular explanations attribute Americans’ declining labor force participation to declining wages, technological change, and international trade. A new report from Joint Economic Committee Republicans’ Social Capital Project finds that these forces cannot fully explain increasing inactivity among able-bodied prime-age Americans.
“Instead, many would-be workers are voluntarily disconnected from work, and government programs and policies have likely made work less attractive for these Americans. Beyond a paycheck, employment is also an important source of social capital that provides material and immaterial benefits to personal well-being. By evaluating the incentives workers face, the report recommends a number of policy reforms to lift barriers, remove disincentives, and increase the attractiveness of work.”
Christians saw this coming centuries ago. The great French economist Frederick Bastiat wrote in the 1850s, “The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”
Marvin Olasky gives the history of Christian charity in the U.S. from the early 1800s to the present in his classic The Tragedy of American Compassion. Olasky shows that for most of that history Christians worried about giving the poor too much, rather than too little, because they witnessed many men who happily lived in poverty from the generosity of others rather than work, even when they had wives and children to support. So churches provided food and cloth to the wives of such men for them to make clothes for the children. They offered the men work, usually chopping firewood.
Horace Greeley, who wrote “Go West, young man!” was the first to promote indiscriminate giving to the poor in his newspapers. Greeley had imbibed socialism from the French and wanted all Americans to swallow their bad wine. Socialists taught that society makes people poor through no fault of their own and so society owes them a living. But most Americans valued self-reliance and often refused to take handouts, which kept the poverty rate low. FDR created the Works Progress Administration to provide jobs instead of handouts because most Americans were too proud to take charity from the government.
But Christianity had been declining in the U.S. and by 1968 when Johnson launched his Great Society war on poverty, many Americans had adopted the socialist view of poverty. In 1959, the U.S. poverty rate was 22.4% according to the Census Bureau. It fell to 12.1% in 1969 then rose to 15% in the years 2010 – 2012 in spite of greater spending on the poor than any other time in human history. Johnson claimed his policies would eliminate poverty. Instead, poverty increased.
Socialists teach that people are born good and turn bad only because of oppression. No one would rather live from handouts than work. However, Christianity explains that people are born with a tendency to evil that only God can change, and many people will mooch off others rather than work if they can. The Apostle Paul addressed that problem in the early church:
“In the name of the Lord Jesus Christ, we command you, brothers and sisters, to keep away from every believer who is idle and disruptive and does not live according to the teaching you received from us. For you yourselves know how you ought to follow our example. We were not idle when we were with you, nor did we eat anyone’s food without paying for it. On the contrary, we worked night and day, laboring and toiling so that we would not be a burden to any of you. We did this, not because we do not have the right to such help, but in order to offer ourselves as a model for you to imitate. For even when we were with you, we gave you this rule: ‘The one who is unwilling to work shall not eat.'"
Pope Francis as he leads the Christmas night Mass in Saint Peter's Basilica in 2017. | Reuters/ Tony Gentile
Many people are confused about how the West can be so rich and much of the rest of the world so poor. On World Food Day, Pope Francis blamed markets and capitalism.
“The fight against hunger demands we overcome the cold logic of the market, which is greedily focused on mere economic profit and the reduction of food to a commodity, and strengthening the logic of solidarity.
We must adapt our socio-economic models so they have a human face, because many models have lost it. Thinking about these situations, in God’s name I want to ask… The big food corporations to stop imposing monopolistic production and distribution structures that inflate prices and end up withholding bread from the hungry.”
Dr. Thomas Woods, also a Catholic, argues in his book The Church and the Market: A Catholic Defense of the Free Economy that the Pope enjoys infallibility in matters of theology and morality, but not science, according to Catholic doctrine. If he did, we wouldn’t need scientists. We could just ask the Pope to solve all scientific problems. Since economics is a science, the Pope has no more insight into it than does any layman. Catholics still must study economics in order to understand how the world works, just like Protestants.
If the Pope understood economic history, he would know that the world was poorer than Haiti from prehistory until the advent of capitalism in the 17th century when standards of living began to rise for the first time in human history, but only in the Dutch Republic, a Protestant country. Later, England and its colonies followed.
How did the Dutch break the Malthusian cycles of famine and mass starvation that had plagued mankind for millennia? They implemented the economic doctrines distilled from the Bible by the Catholic theologians at the University of Salamanca, Spain, in the 16th century. As a result, the Dutch outlawed the former “honorable” ways to gain wealth through looting in war and kidnapping for ransom. They prevented the nobility from using the courts to steal from the common people. And they created free markets and limited government. In other words, they instantiated capitalism.
The Pope should know that the Catholic church at the time of the Industrial Revolution owned a third of all land in Europe, because wealthy people had given land to the church to help the poor for centuries. Yet, the charity of the Catholic church did not lift people out of poverty. Europeans were as poor at the launch of the Industrial Revolution as they had been 10,000 years earlier.
The Dutch launched the Industrial Revolution by using peat and wind power to mass manufacture goods for the masses. They became rich and powerful because they produced more of the things that people wanted to buy at cheaper prices.
People are poor because they produce very little of what anyone wants to buy. They produce so little because they have poor tools, knowledge and skills. For example, women farm most of the land in the world using a short-handled hoe. They can farm at most an acre or two and will use most of the produce to feed their families and have nothing left over to sell in the market for other goods.
Advancing to the cutting-edge technology of 5000 B.C., a team of oxen, would allow farmers to work 20 acres of land and produce far more food with a surplus to sell in the market so they can buy other necessities, such as clothing. Deploying mules would empower farmers to work 40 acres. Small tractors would enable them to farm 100 acres with less effort than is required for a team of oxen. So why don’t they?
Envy is the main problem. Around the turn of the century, the United Nations tried to give oxen to farmers in Uganda to improve their productivity, but the farmers refused. The farmers said that others in the community would envy them for having oxen and would steal, butcher and eat them. Also, many Africans fear that envious people will use magic to cast spells on them and possibly kill them.
Before 1900, this planet could not feed more than one billion people. Starvation from famines was common and kept the world population below that level. Today, the earth’s population is almost eight billion and famines are rare. How can we feed eight times as many people as we did a little more than a century ago? Capitalism and markets, the things Pope Francis despises, are the reason.
So clearly, the poor need more charity, right? They do, but it will not lift them out of poverty as the Catholic Church proved throughout its history. Also, the poorest nations on the planet, such as Haiti and Tanzania, have received enough charity in the past 50 years to make every citizen a millionaire. Yet they’re still poor.
The Pope needs to learn from the many nations that leaped from starvation to wealth since World War II, such as Taiwan, South Korea, Hong Kong, Singapore, Chile and most recently, China and India. According to the World Bank, China and India have lifted over 500 million people from starvation to relative riches in the past generation, not through charity, but through freer markets.
Freer markets encourage businesspeople to invest in new and better ways of making things that others want to buy and enrich the sellers and the buyers. In that way, they serve their neighbors. And doesn’t the Pope want to encourage serving others, which lifts people out of poverty?
Divided by Faith: Evangelical Religion and the Problem of Race in America by Michael Emerson and Christian Smith rocked the white evangelical world when it came out in 2000. It appealed to the evangelical’s love of wool shirts and launched a new genre of books and articles promoting white evangelical guilt over racism. In 2013, Christians and the Color Line: Race and Religion after Divided by Faith was the booster rocket to keep the movement in orbit.
Structural racism in the US in spite of the Civil Rights movement horrified the authors of Divided by Faith. By structural racism they mean free markets. They wanted to tax the rich at higher rates and redistribute it to poor. That such taxation would hurt rich blacks and that most of the poor are white (though the poverty rate among blacks is higher) didn't enter their calculations.
Frustrated by the white evangelical insistence on individual responsibility and personal evangelism, they determined to move white evangelicals away from their fixation on the individual and toward solving structural issues through the government. Their solution was for white evangelicals to get to know blacks personally by having them to dinner and integrating churches. They reasoned that if whites could know black people well enough they would become as socialist as the authors.
Baptists form the largest Protestant group of Christians in the US and so could have a large impact on how US voters understand political economy. But do Baptists have anything unique contributions to offer on economics? Chad Brand, professor of Christian theology at The Southern Baptist Theological Seminary in Louisville, KY, answers that in his 2012 book Flourishing Faith: A Baptist Primer on Work, Economics, and Civic Stewardship.
The most important contribution Baptists make is their history of distrust of government resulting from centuries of persecution. Lutheran, Reformed and Anglican Protestants all formed close ties with the state from their births. They were supported by taxes and used the brutal power of the state to enforce their particular views, often against Baptists, whereas Baptists generally insisted on a separation of the two spheres.
Readers today might be confused about that historical antipathy toward the state because since the rise of the Moral Majority in the 1980s Baptists seem to have decided to take a shortcut to building the Kingdom of God by using the power of the state. Dr. Brand reminds us, “Scripture teaches that all humans are sinners. A PhD from Harvard does not diminish that, and might even make it worse if those elites believe that their education makes them morally better people.” Brand echoes the public choice political economy of James Buchanan that economists and politicians are not saints or angels and usually have some goal in mind besides the public good:
The ongoing fight about min wage in Seattle magnifies some of the things wrong with mainstream economics. In 2014 the city council voted to phase in a $15 wage over the next few years and in 2015 increased the wage floor from $11 to $13 per hour. Recently, the University of Washington conducted a study that showed the increase caused low-wage workers’ annual pay to go down and overall low-wage jobs to also shrink.
Keep in mind that mainstream economists cling to their gods, guns and economic models because, as they insist, math makes economics a science like physics. Yet with all of the veneration of the math and statistics, I have seen no econometric study such as this one change anyone’s mind or change mainstream economics in my 40 years of watching the game. The usual suspects in economics greeted the study in the same old way they have met with similar studies for the past half century: the right (free market) celebrated and the left (socialists) poo-pooed it.
No one sees such behavior in the truly math oriented sciences such as physics. There aren’t five schools of physics that dispute gravity or the speed of light as there are five different schools of macroeconomics. But why aren’t the econometric analyses of economic data more convincing? The problem lies with the subject matter. Physics is child’s play compared to economics because gravity and light and electrons always act the same way under similar circumstances. Humans, the subject of economics, don’t. And the number of relevant variables in a physics problem is small compared to those in economics, not to mention the complex interactions.
June 6, 1945, Allied forces invaded the Nazi fortress of Europe. Not everyone cheered. General Douglass MacArthur said of the invasion that he would court martial the SOB who had planned it. Of course, he knew well the planner. He had worked as MacArthur’s aid for several years: General Dwight Eisenhower. The mass slaughter of Allied troops in the invasion horrified MacArthur. His philosophy had been to land where the enemy wasn’t and then attack. In dozens of amphibious landings MacArthur lost fewer men than the Allies lost at Anzio alone. Churchill had lobbied for the main landing in the south of France where the German presence was much thinner. Instead, Eisenhower and the Allied command chose to jump right into the the teeth of German troops in Western Europe.
The D-Day invasion succeeded in spite of being a very poor military strategy. But why? The Germans held a significant advantage and were very confident. The answer lies mostly in the field of organizational behavior, specifically, the issue of centralized versus decentralized decision making. In organizational theory, the larger and more complex the situation, the more decentralized decision making must become. Centralized decision making works best with routine and simple operations.
It seems that the Bank of England has been feeling the heat from its forecast that Brexit would plunge the UK into a depression. Added to the failure of mainstream economists to predict the Great Recession, the public is losing confidence in its gurus, according to a story in the Guardian,
Haldane described the collapse of Lehman Brothers as the economics profession’s “Michael Fish moment” (a reference to when the BBC weather forecaster predicted in 1987 that the UK would avoid a hurricane that went on to devastate large parts of southern England). Speaking at the Institute for Government in central London, Haldane [Bank of England Chief Economist] said meteorological forecasting had improved markedly following that embarrassing mistake and that the economics profession could follow in its footsteps.
The bank has come under intense criticism for predicting a dramatic slowdown in the UK’s fortunes in the event of a vote for Brexit only for the economy to bounce back strongly and remain one of the best performing in the developed world.
Before the referendum on divorcing the EU, Bank of England governor Mark Carney had warned that that the split would cause a recession in the second half of 2016. Instead, the UK economy grew at an annual rate of 2.4% in the third quarter with no signs of a slowdown in the fourth.
President Trump is clearly a good businessman. His wealth proves it. And it was partly his success in business that encouraged many adults to vote for him. The logic seemed sound: if the problem with the US is the economy then surely a successful businessman can fix it. But the fact that he is a successful businessman is Mr. Trump’s weakness as well.
Mises used to say that businessmen are better at predicting the short run than are economists so economists should not try to compete with them in their area of comparative advantage. The job of the good economist is to force business people to look up once in a while and acknowledge the long run. They can spurn the long run and court the short run, but the long run always shows up and the longer she has been ignored the uglier she is. The field of economics was born out of that insight, Mises wrote:
In order to discover the immediate-the short-run-effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman. (Mises, Human Action, 649)
Washington Irving is best known for his short stories "The Legend of Sleepy Hollow" and "Rip Van Winkle," but he also wrote many essays. Before he lived by the pen he was a business man and one essay proves that he was a good economist as well. He wrote about the Mississippi Bubble in France of the 1720’s which he published as part of the “Crayon Papers” essays.
At the time Irving wrote this essay, in the 1820’s, there were no good business cycle theories. The most common ideas blamed a shortage of money (gold or silver) or a general overproduction. Say, the French economist, distilled his famous law as part of an effort to debunk the overproduction theory. The Manchester school in England didn’t attempt its explanation until the middle of the nineteenth century and of course Mises didn’t put it all together until early in the twentieth century. Somehow, Washington Irving figured out the essence of the Austrian business cycle theory long before.
After the onset of the Great Depression, many economists radically changed their views and adopted Keynes’ “revolution,” which was not a revolution but merely a resurrection of mercantile economics. Mainstream economists don’t understand that because they don’t take economic history in school. Keynesian economics dominated until the stagflation of the 1970’s.
Responding to their mistakes of the 70s, mainstream abandoned paleo-Keynesian economics and the profession split into the New Keynesian, monetarist and neo-classical schools of macroeconomics, though hard-to-kill paleo-Keynesian econ lives on in the writings of Nobel Laureate Paul Krugman. The three new schools rejected Keynes’ idea of having the state micromanage the economy through fiscal policy because they recognized it suffered from the three lags, cogitation, formulation and implementation. In other words, the state always shows up late to the economic “accident” because it’s slow to recognize the problem, slower to formulate policy and tardy in implementing the policy. As a result, fiscal policy tended to make things worse.
Here is my latest forecast of the S&P 500 quarterly averages. The market is quite a bit above what profits would justify, which means the PE ratio is expanding, or to put it another way, people are so desperate for earnings that they're willing to take higher risks. The market is above the forecast as it was in the late 1990's bubble.
Earlier this year Doug French, a senior writer at Agora Financial wrote a nice review of my book, Financial Bull Riding. In case you haven't read the book, this might persuade you to take the ride:
How Austrians Ride the Financial Bull
By Doug French
The single most asked question I get at investment conferences is, “Do you have a list of money managers who invest guided by the Austrian School of economics?” The question is a good one. After all, the Austrian School stands alone in predicting the fall of the Soviet Union and the housing and financial crash.
Anyone with a retirement account has been whipsawed by the stock market over the past few decades. Fidelity’s Peter Lynch told everyone to buy stocks and hold. Everything would work out great. Diligent savers would even end up millionaires, courtesy of an ever-expanding stock market. The efficient-market hypothesis (EMH) provided intellectual support for the idea. The market reflects all information, so there’s no way to beat it, said the economists.
The latest revision of GDP for the first quarter of this year caught most economists by surprise. A decline of 2.9% is the worst since the latest recession. Surprising most economists shouldn’t surprise anyone. The Laissez Faire newsletter alerted me to studies by the IMF economists Hites Ahir and Prakash Loungani on the abilities of private and public sector economists to forecast recessions. In short, their records are almost perfect, failure that is.
The photo of the Queen with the comment “Why did no one see this coming?” comes from a presentation at George Washington University on forecasting by the two economists. In a second photo, a London School of Economics representative responds, “Ma’am, to see this one coming would have ruined our perfect record of failure to see it coming.”
I recently finished Mark Spitznagel’s book The Dao of Capital: Austrian Investing in a Distorted World and highly recommend it. Spitznagel is the founder and President of Universa Investments, which specialized in equity tail-hedging, or as the book jacket says, “profiting from extreme stock market losses.”
The author began his career trading in the futures bond pits at the Chicago Board of Trade and works closely with the Black Swan, Nassim Talib. At one point he was head of proprietary trading at Morgan Stanley.
Nuts and bolts trading advice doesn't begin until chapter nine of ten. I recommend reading those chapters first so that the reader won’t hurry through the very interesting preceding eight chapters trying to get to the caramel nugget at the center.
He begins with the Chinese philosophy of Dao because Murray Rothbard once wrote that the Daoists were the first Austrian style thinkers. That may be so, but in a forthcoming book I show that Moses created the first libertarian society and laissez-faire economy, which makes him very Austrian.
Spitznagel divides his Austrian investing into sections I & II. Investing I is about timing the market. In Financial Bull Riding I recommended that investors pay attention to reports of historically high profits as precursors to a crash. Investors should abandon the stock market before profits collapse and then re-enter in the depths of a recession. Spitznagel offers another tool that he calls the Misesian Stationarity (MS) index.
“...the MS index is very well represented by what is known as the (Tobin’s) Equity Q ratio – Total U.S. corporate equity divided by total U.S. corporate net worth – which is readily available online through numerous sources...”
The basic idea behind the MS index is that Fed monetary policy distorts the economy and thereby the prices of stocks until the distortion can continue no longer, at which point the market collapses. The author tested what might have happened to an investor who sold when the index rose above 1.6 and bought when it fell below 0.7. He bought treasury bills each time he sold out of the market. His hypothetical portfolio outperformed the S&P 500 by more than 2% per year from 1900 through 2012.
Over say 30 years, even such a small outperformance would mean a huge increase in total dollars returns, but keep in mind that by avoiding the major collapses in the market, hedge funds that underperform the S&P 500 still can almost double actual dollar returns to investors. I go into more detail in Financial Bull Riding about this seeming contradiction.
Next, Spitznagel performs a hypothetical “tail hedge strategy” on the same portfolio. Instead of selling out at high MS index values, he bought 2-month ahead out-of-the-money puts as insurance against a stock market collapse. As before, he divided returns according the level of the MS index at the start of each one year period. The resulting increase in returns was even more impressive:
“When the MS index is in the upper quartile (as it is as I write), there has been an approximate 4 percentage-point outperformance of the Austrian Investing I strategy (or a tail hedged index portfolio) over only owning the index (an outperformance that fades as the starting MS index level falls).”
At the time Spitznagel wrote the book the MS Index was above the sell signal and has only gone higher since. Spitznagel’s strategy doesn’t end with timing the market. The Austrian school suggests advice for picking individual companies instead of owning an index and Spitznagel employs that in Austrian Investing II, which also has two parts:
1.Pick stocks of companies with high returns on invested capital (ROIC), “...best calculated by dividing a company’s EBIT (operating earnings before interest and tax expenses are deducted) by its invested capital (the operating capital required to generate that EBIT).
2.Buy stocks of companies with low Faustmann ratios, “...meaning a low market capitalization (of common equity) over net worth (or invested capital plus cash minus debt and preferred equity) ratio.”
The author explains the rationale behind part 1:
“On theoretical grounds, we expect a firm with high ROIC to remain in such standing, as its managers will continue to reinvest in the firm (why wouldn’t they?), and this will only further solidify their positions of competitive advantage.”
“The data match up with our theoretical deduction. It turns out that high ROICs have been sustainable... we see that the Siegfrieds...- defined as firms realizing 75 percent or higher ROIC at the start of each 10-year period – have tended to persist as Siegfrieds – or have retained their elevated ROIC by the end of each 10-year period.”
From 1978 to 2012 the Siegfrieds returned avg 25% annually while the S&P returned 11%.
Investors who grasps the main principles of Austrian economics and especially the Austrian business-cycle theory will not only earn much higher returns on their investments, they will be able to sleep better because they understand how the stock market works and know they are not taking large risks with their funds. Of course, I’m using “risk” in the Austrian sense of uncertainty and not the mainstream economics definition of just volatility.
PS: That the MS Index shows that investors should have exited the market in 2012 shows that investors need to be willing to be wrong for a couple of years and be OK with that. Spitznagel proves that in the long run investors will make more money by following the Index and being wrong for a few years. But that takes a special kind of personality.
Spontaneous Finance has a good post on why negative interest rates on bank deposits at the European Central bank will not encourage bank lending to businesses, especially lending to small businesses that represent greater risks. As Julien shows, the move by the ECB does little more than squeeze bank profits at a time when low interest rates have already reduced profits. The analysis covers Europe, but the same principles apply to the US because the European Basel accords regulate banking on both banks of the pond.
Thomas Picketty’s book Capital in the Twenty-First Century is on the best seller lists, so although it’s not about investing, it’s about economics, I felt I should add my comment to those of many others.
1. Piketty makes a grave statistical error: when comparing groups, those groups should be as homogeneous as possible in all areas except the one being investigated. In other words, don't compare apples and oranges. Piketty assumes that the economic regimes in place over the past three hundred years were all the same. They weren’t. The West veered sharply from laissez-faire policies in the late 18th and early 19th centuries to various flavors of socialism in the late 19th century. Germany implemented socialist policies in the 1870’s. The UK and US followed later, with the US having become almost pure democratic socialist under FDR with tax rates on the rich higher than Piketty recommends in his book as a cure for inequality. Piketty ignores those changes in regimes and classifies the entire period under his investigation as capitalist. In fact, the growing inequality since 1970 that he complains about has happened because of increased socialism.
2. Piketty assumes that increasing inequality is a feature of capitalism, ignoring the fact that inequality was never higher than that which existed in the old USSR and communist Eastern Europe. His assumption is pure Marx with no supporting evidence. In fact, the Nobel-prize winning economist Robert Fogel in his Escape from Hunger and Premature Death demonstrated that laissez-faire regimes cut inequality in half in the UK and US by 1900. But Piketty doesn't like the Gini coefficient that Fogel and most economists use; it contradicts Piketty's thesis. So he invented his own metrics.
3. Piketty pimps for a tax of 80% on the wealthy. But as most bad economists and Marxists, he assumes that the wealth of the rich is idle, consisting of dusty old gold coins sitting in a warehouse. In reality, which completely escapes Piketty, all wealth held by the rich today is working hard at businesses to create jobs. The economist Thomas Stanley, famous for his The Millionaire Next Door demonstrated that 85% of the wealthy in the US earned their wealth by growing businesses. Only 3% inherited it.
So what happens when governments take 85% as Piketty demands? The money dedicated to investment gets turned into greater consumption when the government distributes it to the rest of the nation. Investment declines and consumption increases. Any freshman taking intro to economics knows that will cause the production possibility frontier to collapse, which means in laymen’s terms that we all get poorer together. 4. Piketty ignores the fact brought out by McCloskey in her Bourgeois Dignity that the wealth of even the poorest in the West is roughly 30 times, not 30%, but a factor of 30, greater today than in 1900. Inequality is rising, but from a point at which even the poor today are amazingly wealthier than a century ago.
Piketty’s book appears to be microwaved Marx with a dump truck load of data designed to smother the reader and prevent him from thinking. Like a magician, Piketty uses data to distract the reader from what he is really doing.
It doesn't help that many conservative economists defend the status quo. It's hard to deny that in at least some ways a lot of Americans are worse off. For example, Vern Gowdie, an Australian financial planner, wrote recently in "How the Fed Creatively Tortures the Data:"
"Michael Greenstone and Adam Looney of the Hamilton Project went deeper into the median income numbers and discovered this rather depressing finding:
"[M]edian earnings for men in 2009 were lower than they were in the early 1970s. And it gets worse… Between 1960 and 2009, the share of men working full-time fell from 83% to 66%, and the share not making formal wages tripled from 6% to 18%. When you take all men, not just those working full-time, [you see] a plummet of 28% in median real wages from 1969 to 2009."
Conservative economists need to quit defending the US as a capitalist economy. It hasn't been even close to capitalist since 1929. We need to place the blame for rising inequality where it belongs - on socialist policies. These include the Fed's inflationary policies that benefit the rich at the expense of the poor and regulations that reduce competition and enrich established corporations.
Some of the best reviews of the book I have read can be found at these links:
In an email newsletter sent out by the Wall Street Journal
called Macro Horizons, Michael J.
Casey appears to grasp a point about monetary policy that few other mainstream economists can get a grip on, while Austrian economists
have taught it for decades: inflationary monetary policy benefits the rich. He
wrote,
Easy money translates
into gains for those who are rich in assets, especially financial assets, and
that excludes a large swath of the population [italics in the original].
I assume Casey is a mainstream economist because the main
point of his post was the need for central banks to maintain monetary
“stimulus.” The quote above follows this:
The subject of disinflation is the focal point of
Wednesday’s data, where we are being reminded of its nonexistence in the
industrialized world and of the risk that it could morph into outright
deflation. This is most evident in Wednesday’s CPI data out of Europe, which is
why the notoriously stimulus-shy Deutsche Bundesbank insiders even came around
to telling the Journal Tuesday that they were considering backing actions at
the European Central Bank’s June meeting to attack the disinflationary trend.
But we’re likely to see the same later in the U.S. producer price data and in
the U.K., whose economy is otherwise growing strongly, the Bank of England
indicated that it still sees no great impetus for inflation to breakout. There
was a time when this scenario of growth, coupled with low inflation, was seen
as a “Goldilocks” scenario, a perfect not-to-hot, not-too-cold combination
where policy would stay accommodative but gains could be had in the economy and
markets. But the longer we flirt with deflation – which translates most
directly into near-zero wage growth – the more that the adoption of
hyper-accommodative policies tends to exacerbate the other great scourge of our
age: inequality.
Can a recession, and the simultaneous meltdown of the stock market, happen without the Fed raising rates? Hayek wrote Prices, Interest and Investment to show that it could and he used Ricardo Effect as the principle to demonstrate it.
When I decided to teach an intro
class in economics at a small private college, I worried about delivering
mainstream economics when I had become convinced of the Austrian approach after
earning an MA in managerial economics at the University of Oklahoma.
But as I taught I realized that mainstream economics textbooks teach a lot of
Austrian economics; mainstream economists just don’t know it.
Mainstream economics textbooks
present economics as a series of unrelated topics. Even mainstream macro
economists have recognized the animosity between micro and macro. I found that
the Austrian aspects come out when I stitch together those disjointed topics.
Here is an example of how I teach the Austrian business-cycle theory and Hayek’s
Ricardo Effect using nothing but the tools presented in standard intro textbooks.
Resurrecting Hayek’s Ricardo Effect
will disappoint a few Austrian followers who, having done a quick search of the
internet on the topic, have decided that critics demolished Hayek’s theory
decades ago. Hayek introduced the effect in his Prices, Interest and Investment and amplified it in The Pure Theory of Capital. The only
contemporary author that I’m aware of who takes it seriously is Jesus Huerta de Soto in his book, Money, Bank Credit and Economic Cycles. I
include it in my book, Financial Bull
Riding.
Hayek didn’t respond to many of his
critics so some assume that Hayek had given up on the Ricardo Effect, but he
hadn’t. Hayek recognized that his critics didn’t understand the effect because
they had a poor grasp of capital theory. In fact, anyone who has read the three
descriptions of the effect mentioned above will immediately grasp that Hayek’s
critics attacked straw men, but never Hayek’s Ricardo Effect. Hayek answered
his critics with Pure Theory of Capital.
L. Albert Hahn, a great economist in the
decades after WWII wrote Common Sense Economics because
he thought that most mainstream economics had drifted into fantasy land as a result of the rise of Keynesian economics. I like the cover picture that shows a
piggy bank sinking under water, which is what conventional investment wisdom
will cause.
In section five on the stock
market, Hahn wrote this:
“As every experienced market operator knows, success on the
stock market depends decisively on the ability to go against the prevailing
tendency, i.e., against mass opinion, at the very moment when its correctness
is least in doubt. The ability to go against the prevailing tendency, however,
presupposes in the first instance that the individual remains conscious of the
persuasive influence of mass opinion on his own opinion. This, in turn,
presupposes a correct assessment of its force. Everyday observation shows the
strength of mass opinion to be very great indeed. It engulfs not only those who
easily succumb to foreign influences but even those with normally detached
views and sober judgment. An almost superhuman effort is needed to evade the
influence of mass opinion-particularly in the United States, where price
movements and thus the opinions of others are continuously reported to the
farthest corners of the country by the ticker. The ticker assembles, as it
were, all the buyers and sellers in one room. The ticker influences speculation
as the flag influences troops. As long as the flag is carried forward, every
single man knows that the others still have the courage and strength to go on,
and this knowledge sustains his own courage and strength. Once the flag
retreats, every man concludes that the others' courage and strength is waning.
As he knows that he cannot advance alone, he, too, retreats, even though he
would not himself be forced to.
“There is, of course, no general rule on how to counteract
the influence of foreign opinion on one's own opinion. One of the most
important aids for emancipation from mass opinion and its influence is to bear
in mind that all prices are almost always necessarily wrong. It is further
important to remember that mass suggestion wields its strongest influence when
only one
opinion is stated and
discussion is prohibited. An experienced stock market operator will always
listen with special attention to any arguments in opposition to the prevailing
opinion.”
It’s old, but still good advice for investors. The time to follow the crowd is the period after the bull market starts until just before it ends. The crowd won't get out of the market until long after they have lost close to half their nest egg. Most individual investors don't get into the market until it has reached close to its top. The market is near its top today so successful investors will start rebalancing into cash or gold, but those who do will get a lot of criticism from most other investors. Being a good investor means learning to enjoy solitude.
From Common
Sense Economics by L. Albert Hahn, London:
Abelard-Schumann Ltd., 1956, 213-214.
