An Introduction to Austrian Economics with Israel Kirzner

Israel Kirzner is an Austrian economist and one of the world's foremost experts on Ludwig von Mises's methodology and thought.
Here he speaks at a Future of Freedom Foundation event on December 21, 1996 and provides a good general overview of Austrian Economics, touching on the concepts of imperfect knowledge, the origin of entrepreneurial motive, spontaneous order, and the "fatal conceit" of attempting to centrally plan economic orders.

Von Mises on The Gold Standard

This article is excerpted from chapter 17 of Human Action: The Scholar's Edition , by Ludwig Von Mises, and is read by Jeff Riggenbach.

Men have chosen the precious metals gold and silver for the money service on account of their mineralogical, physical, and chemical features. The use of money in a market economy is a praxeologically necessary fact. That gold — and not something else — is used as money is merely a historical fact and as such cannot be conceived by catallactics. In monetary history too, as in all other branches of history, one must resort to historical understanding. If one takes pleasure in calling the gold standard a "barbarous relic,"[1] one cannot object to the application of the same term to every historically determined institution. Then the fact that the British speak English — and not Danish, German, or French — is a barbarous relic too, and every Briton who opposes the substitution of Esperanto for English is no less dogmatic and orthodox than those who do not wax rapturous about the plans for a managed currency.

The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It is pointless to raise the question concerning what would have happened in the absence of these policies. But it must not be forgotten that it was not the intention of the governments to establish the gold standard. What the governments aimed at was the double standard. They wanted to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratios between the independently coexistent gold and silver coins. The monetary doctrines underlying these endeavors misconstrued the market phenomena in that complete way in which only bureaucrats can misconstrue them. The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.

In the 17th century, the rates at which the English government tariffed the coins overvalued the guinea with regard to silver and thus made the silver coins disappear. Only those silver coins that were much worn by usage or in any other way defaced or reduced in weight remained in current use; it did not pay to export and to sell them on the bullion market. Thus England got the gold standard against the intention of its government. Only much later the laws made the de facto gold standard a de jurestandard. The government abandoned further fruitless attempts to pump silver standard coins into the market and minted silver only as subsidiary coins with a limited legal tender power. These subsidiary coins were not money, but money-substitutes. Their exchange value depended not on their silver content, but on the fact that they could be exchanged at every instant, without delay and without cost, at their full face value against gold. They were de facto silver printed notes, claims against a definite amount of gold.

Later in the course of the 19th century, the double standard resulted in a similar way in France and in the other countries of the Latin Monetary Union in the emergence ofde facto gold monometallism. When the drop in the price of silver in the later 1870s would automatically have effected the replacement of the de facto gold standard by the de facto silver standard, these governments suspended the coinage of silver in order to preserve the gold standard. In the United States, the price structure on the bullion market had already, before the outbreak of the Civil War, transformed the legal bimetallism into de facto gold monometallism.

"If one takes pleasure in calling the gold standard a 'barbarous relic,' one cannot object to the application of the same term to every historically determined institution."

After the greenback period, there ensued a struggle between the friends of the gold standard on the one hand and those of silver on the other hand. The result was a victory for the gold standard. Once the economically most advanced nations had adopted the gold standard, all other nations followed suit. After the great inflationary adventures of the First World War, most countries hastened to return to the gold standard or the gold-exchange standard.

The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market.[2] It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth's surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another.

It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes. All those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum, the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard, much more was at stake than commodity prices and foreign-exchange rates.

The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them, credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget — in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid "orthodox" economists, prevents mankind from attaining everlasting prosperity.

The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world there cannot be any such thing as stability of purchasing power. In the imaginary construction of an evenly rotating economy there is no room left for a medium of exchange. It is an essential feature of money that its purchasing power is changing. In fact, the adversaries of the gold standard do not want to make money's purchasing power stable. They want rather to give to the governments the power to manipulate purchasing power without being hindered by an "external" factor, namely, the money relation of the gold standard.

The main objection raised against the gold standard is that it makes operative in the determination of prices a factor that no government can control — the vicissitudes of gold production. Thus an "external" or "automatic" force restrains a national government's power to make its subjects as prosperous as it would like to make them. The international capitalists dictate and the nation's sovereignty becomes a sham.

However, the futility of interventionist policies has nothing at all to do with monetary matters. It will be shown later why all isolated measures of government interference with market phenomena must fail to attain the ends sought. If the interventionist government wants to remedy the shortcomings of its first interferences by going further and further, it finally converts its country's economic system into socialism of the German pattern. Then it abolishes the domestic market altogether, and with it money and all monetary problems, even though it may retain some of the terms and labels of the market economy.[3] In both cases it is not the gold standard that frustrates the good intentions of the benevolent authority.

The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government's power to resort to inflation. The gold standard makes the determination of money's purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and "scientific" yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be "measured." The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper.

"People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty."

It has been asserted that the gold standard too is a manipulated standard. The governments may influence the height of gold's purchasing power either by credit expansion — even if it is kept within the limits drawn by considerations of preserving the redeemability of the money-substitutes — or indirectly by furthering measures that induce people to restrict the size of their cash holdings. This is true. It cannot be denied that the rise in commodity prices that occurred between 1896 and 1914 was to a great extent provoked by such government policies. But the main thing is that the gold standard keeps all such endeavors toward lowering money's purchasing power within narrow limits. The inflationists are fighting the gold standard precisely because they consider these limits a serious obstacle to the realization of their plans.

What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness. It checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of "improving" the balance of trade.

No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which nationalistic governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market. If a government wants to sever its domestic price structure from that of the world market, it must resort to other measures, such as prohibitive import and export duties and embargoes. Nationalization of foreign trade, whether effected openly or directly by foreign exchange control, does not eliminate gold. The governments qua traders are trading by the use of gold as a medium of exchange.

The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction that is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.

It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made.

***

Ludwig von Mises was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. Mises's writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. His contributions to economic theory include important clarifications on the quantity theory of money, the theory of the trade cycle, the integration of monetary theory with economic theory in general, and a demonstration that socialism must fail because it cannot solve the problem of economic calculation. Mises was the first scholar to recognize that economics is part of a larger science in human action, a science that Mises called "praxeology." 

See Ludwig von Mises's article archives.

This article is excerpted from chapter 17 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.

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Notes

[1] Lord Keynes in the speech delivered before the House of Lords, May 23. 1944.
[2] T.E. Gregory, The Gold Standard and Its Future (3d ed. London, 1934), pp. 22 ff.
[3] Cf. Human Action, chapters XXVII–XXXI.

Should People Just Ignore Economists?

The following is an article by Mark Brandly posted on Mises Daily:


"What Good Are Economists Anyway?" asks BusinessWeek's April 27, 2009 cover story.

The article makes the important point that, since most economists failed to predict the current crisis, the worst economic collapse in nearly 80 years, we need to consider whether or not their work has any value.

Unfortunately, after bringing this failure to our attention, the article, written by economics editor Peter Coy, concludes that it's important to accept advice from the same economists who demonstrated their incompetence by not seeing this financial collapse in advance.

Peter Coy begins by quoting some noneconomists critical of the economics profession. Fans of Mises.org, I suspect, would tend to applaud these observations. Coy appears to be unaware of the Austrian School of thought and his assessment applies to the mainstream of the economics profession.

First, a blogger is quoted as saying,

"If you are an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables."

He's right.

Few economists saw this crisis coming, and many economists openly argued that there would be no recession. Such economists should question the investment they have made in their education. Society would be better off if these economists accepted work outside of the economics profession where they could produce something of value, and, more importantly, they could stop harming society with their destructive economic views.

Nassim Nicholas Taleb, author of The Black Swan, says, "We have to build a society that doesn't depend on the forecasts by idiotic economists."

Taleb is also right.

Some economists — those versed in Austrian business-cycle theory — did predict this crisis.
Those who didn't see it coming might be considered "idiotic."

Next, finance expert Paul Wilmott asserts that "Economists' models are just awful. They completely forget how important the human element is."

Right again. Mainstream economists depend on mathematical models for understanding economic relationships. The false precision of the models may give them intellectual comfort, but the models provide a mechanical view of economic decision making. While Austrian theorists are focused on human action (Austrians call this analysis "praxeology"), the modelers overlook the purposeful behavior of decision making. Models fail to incorporate the full spectrum of human decisions, giving us, at best, an incomplete view of economic relationships (for an explanation of the limitations of economic modeling, see Gene Callahan's "Models: What Are They Good For?"). Recent events show that models can show us trends in economic variables, but have difficulty predicting changes in these trends.

The BusinessWeek article also takes a swipe at the last two chairmen of the Federal Reserve. Coy notes that before the collapse, Alan Greenspan argued that there was no housing bubble, and admitted in his Senate testimony last year that his earlier pronouncements regarding the soundness of our economy were flawed.

Coy also quotes current Fed chairman Ben Bernanke. In a 2002 speech commemorating Milton Friedman's 90th birthday, Bernanke noted the Fed's role in the Great Depression, addressing Friedman: "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

That was a false promise. Under the leadership of Greenspan and Bernanke, they have done it again. In fact, they were doing it, pumping up the economy just as they did in the 1920s, at the time of Bernanke's quote. Given the events of the last year, that statement alone shows that Bernanke does not understand what caused or what will solve this crisis.

Because of economists' demonstrated incompetence, Coy is tempted "to ignore the whole profession." But, according to Coy, "that won't do." He concludes that in order to recover from this crisis, we must listen to the best economists, and by that he means the top mainstream economists.

To make his case that economists have made important contributions to society, Coy points to research from the 1970s that shows "the importance of having a strong, independent central bank" in order to eliminate chronic high inflation. Coy's brief defense of central banking indicates that he does not link the current financial collapses to Federal Reserve policy. The Federal Reserve pumped large amounts of newly created money into credit markets, much of which went into the housing and stock markets. The artificially low interest rates generated by these policies caused malinvestments; the downturn occurs when investors realize their mistakes.

A strong central bank is the creator of, not the cure for, inflation and the business cycle (for more on the Austrian view of the financial crisis, see the Mises.org Bailout Reader).

Coy wants us to follow the "very best thinking of a generation." While he doesn't specifically say who the best thinkers are, Coy's article mentions several top mainstream economists, including recent Nobel Prize winner and hyper-Keynesian Paul Krugman.
While these economists do not escape criticism, Coy argues that the profession (apparently meaning these economists) needs to come to an understanding about the cause of this crisis and lead us out of the recession. The "next agenda for macroeconomists will be to help make the economy far more robust — enough to survive the blunders of politicians, bankers, and economists of the future."

First of all, making the economy robust falls outside the job description of any economist; second, we cannot construct an economy that will withstand future attacks from political operatives and central bankers.

On the plus side, Coy leaves us with a story that should make us skeptical about Obama's Keynesian stimulus program:

"As World War II ended, many economists worried that growth would lapse as military spending fell. Sewell Avery, the CEO of Montgomery Ward, was so anxious about a postwar depression that he refused to open new stores. Economists still aren't sure why he was wrong, so they can't say reliably whether fiscal stimulus will end this recession or just interrupt it."

The post–World War II economy tells us why the government's current program to stimulate the economy by spending trillions of dollars of revenues generated by borrowing and creating new money will fail. As Robert Higgs has shown, when the federal government drastically cut spending after World War II, the economy boomed. The recovery from the Great Depression was due to the reduction of government spending after the war.

Reducing the amount of government predations (Murray Rothbard's term for the government burdens on the economy) improves productive economic activity just as the massive increases in predations today will harm our economy. The economists who worried at that time that spending cuts would lead to a recession were wrong, just as the economists who are now in positions of political leadership are wrong about the causes and cure for the current panic.

BusinessWeek has done us a favor by pointing out that most economists continue to accept the very theories that prevented them from anticipating the financial collapse. However, the magazine errs in concluding that we should now listen to those same economists. It would make more sense to ignore those economists that not only failed to predict but also had a hand in creating the crisis.

BusinessWeek would have done their readers a favor if they had pointed out that one school of thought, the Austrian School, foresaw this downturn and understands how markets will correct the errors of the central bankers.

The magazine should have advised their readers to listen to Congressman Ron Paul and financial advisor Peter Schiff, and pointed their readers to the writings of Ludwig von Mises (The Theory of Money and Credit), F.A. Hayek (Prices and Production), Murray Rothbard (America's Great Depression), Jesus Huerta de Soto (Money, Bank Credit, and Economic Cycles), and Tom Woods (Meltdown).

Mark Brandly is an associate professor of economics at Ferris State University.

The Great Depression: What We Can Learn From It Today

The Mises Circle in Colorado; sponsored by Limited Government Forum of Colorado Springs and hosted by the Ludwig von Mises Institute. Recorded Saturday, 4 April 2009.
You can watch all 5 videos HERE.

Mises Institute: Is Gold Money?

From today's Daily Article posted by Robert Blumen at Mises Institute web site:

"... What qualities have made gold (and silver) the winners of the monetary competition in centuries past? The qualities most often cited by monetary historians are durability, divisibility, recognizability, portability, scarcity (the difficulty of producing more of it), and a value-to-weight ratio that is neither too high nor too low. Too low a ratio would make it hard to carry enough for spending, while too high a ratio would make small transactions difficult and prevent the commodity from being sufficiently widely owned in the prior barter economy. Gold still has these qualities today. While fiat money has some of them, it fails the scarcity test: it is too easy to create more of it.

The result of market competition is not necessarily permanent. Market competition is an ongoing process. Even when one commodity emerged as money, there continued to be competition from other nonmonetary commodities. Once the world's money, even gold could have lost its place had a superior alternative emerged. But that is not the reason we no longer use it. Political money did not prove its superiority through a market process. What happened instead was a politically imposed change from a better system to a worse system.

Although the central bankers have used political means to replace gold with paper, they do not have the power to end the competition between their money and commodity money. The "demonetization" of gold by central banks has rigged the competition — but not ended it.

Gold as money may not be over for all time. As the monetary system melts down, gold functions as "shadow money," an alternative that competes with the political money. It remains a store of value because of its potential to become money again. There is continuing demand for gold as a hedge against the breakdown of the fiat system.

Governments cannot force people to use their money beyond a point. The market will only continue to accept fiat money as long as it works well enough (or even, not too badly). If governments debase its currency beyond a point where it maintains some value over time, people will stop using government currency and switch to something else."

Please click HERE for this fascinating article.

Mises Institute: The Great Gold Robbery of 1933

The Great Gold Robbery of 1933

Daily Article by Thomas E. Woods, Jr. | Posted on 8/13/2008

It's been 75 years since the federal government, on the spurious grounds of fighting the Great Depression, ordered the confiscation of all monetary gold from Americans, permitting trivial amounts for ornamental or industrial use. This happens to be one of the episodes Kevin Gutzman and I describe in detail in our new book, Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush. From the point of view of the typical American classroom, on the other hand, the incident may as well not have occurred.

A key piece of legislation in this story is the Emergency Banking Act of 1933, which Congress passed on March 9 without having read it and after only the most trivial debate. House Minority Leader Bertrand H. Snell (R-NY) generously conceded that it was "entirely out of the ordinary" to pass legislation that "is not even in print at the time it is offered." He urged his colleagues to pass it all the same: "The house is burning down, and the President of the United States says this is the way to put out the fire. [Applause.] And to me at this time there is only one answer to this question, and that is to give the President what he demands and says is necessary to meet the situation."...

Please click HERE to read entire article.

Austrian Economics vs. Bernanke's Economics

"What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation." (Mises, Planning for Freedom, 79)

A recent exchange between Congressman Ron Paul and Ben Bernanke took place during Bernanke's testimony before the Congressional Joint Economic Committee on November 8, 2007. Congressman Paul, instead of referring to either the PPI or CPI, referred to the MZM money aggregate:
Currently, of course, we can't follow the money supply with M3 but we can follow one of your statistics, which is the MZM — the ready cash available — and we see that inflation is alive and well. That money supply figure is going up about 20 percent per annualized.

To read the rest of the article please click HERE

Mises: The Last Knight of Liberalism

The author Jorg Guido Hulsmann, professor of economics at the University of Paris (Angers), reads excerpts from his monumental treatise on the life and work of Ludwig von Mises:

Socialism can't Calculate...

Economic Calculation In The Socialist Commonwealth
By Ludwig von Mises

(translated from the German by S. Adler)

Download the monograph in PDF

Ludwig von Mises's seminal essay, originally published in 1920 *, appears here in the 1990 edition published by the Ludwig von Mises Institute. "Economic Calculation in the Socialist Commonwealth" advances a devastating critique against economic calculation in a socialist economy, inspiring a decades-long debate. For more information, sources, and materials concerning the calculation debate, visit The Calculation Debate in the Austrian Study Guide.

*[This article appeared originally under the title "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen" in the Archiv für Sozialwissenschaften, vol. 47 (1920). The present translation was first published in F.A. Hayek, ed.,Collectivist Economic Planning (London: George Routledge & Sons, 1935; reprint, Clifton, N.J.: Augustus M. Kelley, 1975), pp. 87-130. Some annotations appear in this edition and they are set aside in brackets.]