The Brothers Austrian

David Adolf Axelrod

Senior White House advisor David Axelrod apparently thinks that some manifestations of the first amendment are healthy and others are not.  On the recent Tea Party Protests Axelrod said, “I think any time you have severe economic conditions there is always an element of disaffection that can mutate into something that’s unhealthy.”

Wow, this sounds incredibly familiar.  In 1919, Attorney General A. Michell Palmer, using J Edgar Hoover as a proxy, employed similar sentiments to enact a series of raids on political dissidents.  “There could be no nice distinctions drawn between the theoretical ideals of the radicals and their actual violations of our national laws,” Palmer claimed in 1920.

In the ‘Palmer Raids’, Hoover targeted mostly communists and anarchists.  In 1919, they rounded up 249 citizens, including Emma Goldman and Alexander Berkman, and sent them ‘home’ (to Russia) aboard the Soviet Arc. The next year over 6,000 were arrested in a raid against the radical IWW workers union.

Now in all fairness, some of these raids were in response to a series of bombings (not simply ‘severe economic conditions’ – though government inflation was causing a severe recession after World War I).  Perhaps Axelrod does not believe in instituting the Holder Raids, but his statement does indicate a generally dismissive and arrogant tone toward dissenting voices.

High ranking government officials, simply through veiled statements, can influence how ordinary Americans interact.  Axelrod’s ‘unhealthy’ could be translated by some boob into shunning the tea party protester.  Get a few boobs together, all fearful of ‘unhealthy’ dissent, and you have a de facto suppression of speech.

Teacherman Liberty 1919, alexander berkman, attorney general, david axelrod, emma goldman, j edgar hoover, palmer raids, soviet arc

It is estimated that the paper industry will receive around $6 billion in funds designated to foster development in alternative fuels.  That’s around $20 from every Americans (including children).  Congress designed the original bill to encourage the paper industry to use biofuels to fuel their paper plants.  The companies realized, however, that they could also use a loophole in the legislation to use a diesel blend to fuel the plants.  International Paper has already received $71 million and could receive over a billion dollars thanks to this legislation.  In fact, the legislation has benefited the paper companies so much, that it is being seen as an industry saving bail out.  With Americans being bled to death with social security, income, state, and property taxes, this is a shameful unintended consequence of interventionism… yet another sad example of failed economic planning.

Teacherman Government Spending, Interventionism biofuels, congress, diesel, economic planning, international paper, Interventionism

On April 9, President Barack Obama requested an extra $83.4 billion for the wars in Iraq and Afghanistan.  The president does not use the term ‘war on terror’, but that is just another semantic ruse that he has perfected.  This misallocation of additional funds, while not surprising, marks another sad day for peace and liberty.

Along these lines, I am amazed still to hear people discuss war spending as some sort of economic perquisite.  As most Austrians know, Frederic Bastiat’s broken window parable in That Which Is Seen and That Which Is Unseen (popularized by Henry Hazlitt) demonstrates this fallacy.  War spending represents money that cannot be allocated to other resources (food, shelter, technology, whatever).  While certain sectors of the economy benefit (my friend at Lockheed Martin perhaps), those immediate benefits are scored at the expense of the rest of the economic agents down the line.

Teacherman Government Spending afghanistan, bastiat, Hazlitt, iraq, obama, president, war

As I prepared for my lesson on the Great Depression this semester, I turned to our textbook and read the following (this is not a joke):

“Why did the country sink further into depression [after the stock market crash]?  Farmers and coal workers had suffered all through the 1920s from low prices, and the farmers were the first group in the 1930s to plunge into depression.  But other economic sectors also lurched out of balance.  Two percent of the population received about 28 percent of the national income, but the lower 60 percent got only 24 percent.  Businesses increased profits while holding down wages and the prices of raw materials.  This pattern depressed purchasing power.  Workers, like farmers, did not have the money to buy the goods they helped to produce.”

Hmmm.  After dismissing plans to systemically remove this section from the textbook of every student, I put together a very brief overview of the Austrian business cycle and presented this version to the students as my lecture on the subject.

As juniors in high school, most of my students are economic novices.  That is to say, both explanations were drawn onto a tabula rasa.  The overwhelming comment from my classes centered on two stark realities: 1) “we’ve already discussed similar economic downturns previously and this one sounded very similar” (ergo why didn’t we learn); 2) “this sounds a lot like toda” (ergo why didn’t we learn).  Ironically, Mises had a daily article yesterday about the economic downturn in 1819, following a similar theme.

Generally, the Austrian theory appealed to most students.  As we move into the New Deal, most students will struggle with the idea that the government cannot be a savior.  As our textbook will trump the various New Deal program up, I will balance it with Hazlitt’s first chapter (the lesson).

Teacherman History austrian theory, business cycle, great depression, Hazlitt, new deal

The Forgotten Man, a popular essay by William Graham Sumner.  The idea of which was used by Hazlitt and even by Amity Shlaes in her recent book on the Great Depression.  Sumner’s work, penned in 1883, is all too relevant today:

In hard times, insolvent debtors are a large class.  They constitute an interest and are able to attract public attention, so that social philosophers discuss their troubles and legislatures plan measures of relief.  Insolvent debtors, however, are an insignificant body when compared with the victims of commonplace misfortune, or accident, who are isolated, scattered, ungrouped and ungeneralized, so are never made the object of discussion or relief.  In seasons of ordinary prosperity, persons who become insolvent have to get out of their troubles as they can.  They have no hope of relief from the legislature.  The number of insolvents during a series of years of general prosperity, and their losses, greatly exceed the number and losses during a special period of distress.

Indeed these are the forgotten men, of as Sumner corrects, the man who is never thought of.

Who are the forgotten men of 2009?

Teacherman Interventionism, Politics great depression, Hazlitt, william graham sumner

My brother has posted a few times lambasting the higher education system, especially at the elite level, for propagating a broken economic system.  Worse, their temerity leads them to believe that they can diagnose and fix macroeconomic systems.

The seminal work underpinning my brother’s revulsion is The Pretense of Knowledge, by Friedrich A. Hayek.  This is the name given to a speech by Hayek in 1974 in a lecture to the memory of Alfred Nobel.  In it, Hayek explains the limits of human knowledge, especially in relation to the infinite variables of a macroeconomic system.  As he says, “Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.”  Nevertheless, political economists tend to use rigid formulas, in a manner like the physical sciences, to analyze highly fluid macroeconomic settings.  Hayek notes, “Yet the confidence in the unlimited power of science is only too often based on a false belief that the scientific method consists in the application of a ready-made technique, or in imitating the form rather than the substance of scientific procedure, as if one needed only to follow some cooking recipes to solve all social problems.”

The inane pretense of the Federal Reserve and the Obama (and Bush, etc) administration that they have the knowledge to manipulate the monetary system without consequence is absurd. 

But when it doesn’t work, we can just blame the ‘free market’ — right?  Talk about moral hazard…

Teacherman Federal Reserve, Interventionism, Politics Federal Reserve, hayek, macroeconomic, monetary system, pretense of knowledge, sciece

I posted last week about the growing unease of the Chinese Central Bank toward its US investments.  Now China (along with Russia) has manifested its unease with a call for a new global currency, led by the International Monetary Fund.  As scary as this notion is, I wanted to highlight the growing unease with the US dollar.  While it appears unlikely that China is willing to take an investment hit in order the skewer the US, it is clearly setting up for a dramatic shift away from supporting the issuance of dollar debt.

How China Sees the World (Economist.com)

China understands that the only way for the US to service its debt is through monetization.  It’s unlikely that they ever imagined a US recession would lead to this type of monetary expansion:

As the US dollar currency in circulation approaches $1 trillion, China is finally trying to find a new safe haven for cash.

Is it likely that we will see another Bretton Woods soon?  I don’t think as it stands now.  But maybe, just maybe, China is setting the framework for a future day when it dumps its treasuries and punishes the US.  This certainly would be painful for Beijing, but what is this investment actually worth anyway?  It may be the perfect catalyst for a Shanghai version of Bretton Woods in 2010.  Could a new currency order with China leading the way be worth its investment loss?

Teacherman Federal Reserve, Inflation bretton woods, china, debt, dollar, global currency

Mises has a post today that is somewhat tangential to an article that my brother wrote on the blog a few weeks ago.  This gist of the article about a anti-free market conference recently held at Harvard.  The goal of the conference, as Woods appropriately puts it, “Why do people still think the interaction of free individuals is a superior economic system to one directed by Harvard Ph.D.s like us?”

I’d really like to know from all of these free market bashers, what free market they are talking about?  The one where government facilitate subprime mortgages, pushed interest rates artificially low, regultes so-called ratings agencies, and monopolizes currency production?

Teacherman General free market, harvard, mises

The Obama administration took steps over the weekend to reassure the Chinese government that its investment in US treasuries was sound.  The Chinese primier Wen Jiabao had shared his trepidation over the potential decline in the US dollar.  A former Chinese central bank advisor complained the administration’s reckless policies are eroding China’s investment in US treasuries.

We really have to stop and note the irony here.  We have a communist country chiding what is supposedly the world’s great bastion of capitalism on government spending.  Even more indicative of the situation is the clear power the Chinese government over this country, as the administration rushed to reassure the Chinese that all is well.  I doubt that China will dump its US treasuries en masse, but I think that this does signal that the credit gravy train for the US government may be coming to an end, let’s hope so anyway.  Admittedly, all signs up until now have pointed to the contrary as China has continued to gobble up treasuries in recent months.  There perhaps is some false hope that China’s reluctance to purchase US debt will keep government spending in check.  Ok, fine, keyword false.

Teacherman Government Spending, Inflation, Politics capitalism, china, communist, obama, treasuries

On the Borderline, notes the sick twisted irony of President Barack Obama’s stem cell message earlier this week.

“Promoting science is about letting scientists like those here today do their jobs, free from manipulation or coercion, and listening to what they tell us, even when it’s inconvenient – especially when it’s inconvenient.”

Right, now clearly every Austrian is jumping up and down saying, “that’s it you buffoon … How can someone so intelligent be so incredibly obtuse!”

Of course, the Austrian point wouldn’t be to dump federal money into research institutions, but to allow the market to sort out our current economic troubles, even when it’s inconvenient.

As Hazlitt demonstrates, it is rather ‘inconvenient’ for the politician to perform economics appropriately.  For to do that, he must look not just at the immediate effects of his policy, but also the long term effects.  He must review not just how this policy will affect one group, but he must look at its effects on all groups.

If politicians were to do this, the answer would likely be quite ‘inconvenient.’  Much as it is, apparently, terribly inconvenient to apply one principle to multiple situations.

Teacherman Politics Hazlitt, obama, politicians, stem cell