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Category: Economic Theory

The analysis published under this category are as follows.

Interest-Rates

Sunday, March 22, 2015

The "Natural Interest Rate" Is Always Positive and Cannot Be Negative / Interest-Rates / Economic Theory

By: Thorsten_Polleit

Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”1

The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.2

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Interest-Rates

Thursday, March 12, 2015

Sub-Zero Interest Rates as an Endless Daylight Saving Time / Interest-Rates / Economic Theory

By: MISES

Brendan Brown writes: We all know about Milton Friedman’s money helicopter idiom and how President Obama’s architect in chief of Quantitative Easing used it to justify his “Great Monetary Experiment.” Less well known is Friedman’s idiom about daylight saving time, how he used this to illustrate the case for flexible exchange rates, and how it is now apparently justifying the plunge of money market rates in Europe to sub-zero levels.

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Economics

Wednesday, February 25, 2015

From London to China - Where is Today's Skyscraper Curse? / Economics / Economic Theory

By: Mark_Thornton

Super tall buildings, or skyscrapers, are being built at an astonishing rate. Ninety-seven buildings that exceed 200 meters (656 feet) high were constructed in 2014, setting a new record. The previous record was eighty-one buildings completed in 2011. The total number of skyscrapers in existence now is 935, a whopping 350 percent increase since the year 2000.

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Economics

Friday, February 20, 2015

Employment Does Not Drive Economic Growth / Economics / Economic Theory

By: Frank_Shostak

For the head of the Federal Reserve Board Janet Yellen — and most economists — the key to economic growth is a strengthening in the labor market. The strength of the labor market is the key behind the strength of the economy. Or so it is held. If this is the case then it is valid to conclude that changes in unemployment are an important causative factor of real economic growth.

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Economics

Wednesday, February 18, 2015

Why the Austrian Understanding of Money and Banks Is So Important / Economics / Economic Theory

By: MISES

Jörg Guido Hülsmann writes: The classical economists had rejected the notion that overall monetary spending — in current jargon: aggregate demand — is a driving force of economic growth. The true causes of the wealth of nations are non-monetary factors such as the division of labor and the accumulation of capital through savings. Money comes into play as an intermediary of exchange and as a store of value. Money prices are also fundamental for business accounting and economic calculation. But money delivers all these benefits irrespective of its quantity. A small money stock provides them just as well as a bigger one. It is therefore not possible to pull a society out of poverty, or to make it more affluent, by increasing the money stock. By contrast, such objectives can be achieved through technological progress, through increased frugality, and through a greater division of labor. They can be achieved through the liberalization of trade and the encouragement of savings.

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Economics

Sunday, February 15, 2015

How Truly Free Markets Help the Poor / Economics / Economic Theory

By: MISES

Ryan McMaken writes: Discussing poverty as an advocate of free markets is tricky business in today’s world. If one takes poverty seriously and points out the very real plight of the impoverished, it is often assumed that one must therefore be advocating for government “solutions” to the problem. The knee-jerk reaction of many defenders of free markets is to simply deny that poverty exists much at all, or that if the poor just try a little harder, or aren’t so lazy, they won’t be poor anymore.

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Economics

Friday, February 13, 2015

Bad Economic Idea of Devaluing Currency to Help Exporters / Economics / Economic Theory

By: Frank_Hollenbeck

Frank Hollenbeck writes: The European Central Bank's (ECB) decision to shortly print over 1 trillion euros has reignited concerns over currency wars. The euro has dropped almost 20 percent over the last six months after endless hints from the ECB.

We are in a currency war, and have been since 2008. Our current global monetary system is deeply flawed in spite of the International Monetary Fund (IMF), which was supposedly created to foster monetary cooperation and financial stability. Yet, the IMF has been eerily silent lately, which has not gone unnoticed by those who butter the IMF’s bread.

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Economics

Tuesday, February 03, 2015

Why the Government Hasn’t Yet Managed to Destroy the Economy / Economics / Economic Theory

By: MISES

John P. Cochran writes: Pierre Lemieux wrote an indispensible book (Somebody in Charge: A Solution to Recession) for anyone who wishes to understand the before, during, and immediate aftermath of the “Great Recession.”

The book’s importance is greater than just his analysis of the crisis. He thoroughly exposes the underlying weaknesses and fallacies of the whole Keynesian policy-activism agenda driven by the “animal spirits,” the irresistible urge to action of those who wrongly deem themselves in charge.

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Economics

Tuesday, January 27, 2015

Austrians and the Mainstream Economists / Economics / Economic Theory

By: MISES

John Cochran writes: Mises Institute: You recently retired after a long time at Metropolitan State University of Denver, where you were both an economics professor and the dean of the Business School. How did you end up there, and end up as dean?

John Cochran: I had a good guardian angel who helped me come to Metro State. I’m not sure about that on becoming dean, though. I received my undergraduate degree in economics from Metro State. Gerald Stone, then chair of the econ department, and Ralph Byrns were two of my professors there. As I worked on my graduate degrees at University of Colorado-Boulder, I would occasionally stop by Metro just to touch base. In spring 1981, I was just completing teaching my first principles course at UC-Boulder and had just completed the requirements for an MA in economics. The first edition of the Byrns and Stone principles book would be available for fall 2001. Metro had an open visiting position and had offered the job to a recent CU PhD. He had told them he would take their job, but wouldn’t use their book. Ralph and Jerry were talking it over and Ralph said to Jerry, “We can’t hire him.” Jerry said, “We can’t not hire him just because he said he won’t use our book.” Ralph replied, “But he is telling us he will be a ‘lunch tax’.” Jerry said, “Yes, but who else can we get?” [A “lunch tax” is a high-maintenance employee. — Ed.]

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Economics

Monday, January 26, 2015

Why Private-Sector Services Seem to Be More Expensive / Economics / Economic Theory

By: MISES

Predrag Rajsic writes: Imagine you are a promising car mechanic who wants to open a new car repair shop. You would like to provide basic services to low-income citizens at affordable prices. You would charge a bare minimum for your labor, and you would buy used (but decent) replacement parts. This service would be great for people who just want to keep their cars running for a couple more years — nothing fancy, just bare functionality.

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Economics

Sunday, January 25, 2015

The Private Equity Boom, Easy Money, and Crony Capitalism / Economics / Economic Theory

By: MISES

Brendan Brown writes: Amongst the big winners from the Obama Fed’s Great Monetary Experiment has been the private equity industry. Indeed this went through a near-death experience in the Great Panic (2008) before its savior — Fed quantitative easing — propelled it forward into new riches. There is no surprise therefore that its barons who join the political stage (think of the last Republican presidential candidate) have no interest in monetary reform. And the same attitude is common amongst leading politicians who hope private equity will provide them high-paid jobs when they quit Washington.

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Economics

Sunday, January 04, 2015

The "Dog-Eat-Dog" Economic Delusion / Economics / Economic Theory

By: MISES

Gary Galles writes: When people want to add extra “oomph” to negative depictions of self-owners acting without coercion — that is, market competition under capitalism — they turn to name-calling. One of the most effective forms is describing such competition as dog-eat-dog. When that characterization is accepted, the mountain of evidence in favor of voluntary social coordination can be dismissed on the grounds that it involves a vicious and ugly process so harmful to people that it outweighs any benefits.

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Economics

Friday, January 02, 2015

How Reducing GDP Increases Economic Growth / Economics / Economic Theory

By: Joseph_T_Salerno

Recently, the Financial Times published an article containing charts displaying the correlation between government spending and real GDP growth.1 Based on these correlations, the author of the article, Matthew Klein, comments: “It’s no secret that spending cuts (and tax hikes) have retarded America’s growth for the past four years.” He goes on to argue that from mid-2010 to mid-2011, the reduction in government spending in the US shaved 0.76 percent off of the economic growth rate. Klein conjectures that this slowdown in the growth rate caused a level of real GDP today that is 1.2 percent less than it would have been in the absence of this exercise in “austerity.” He also points out that since 2012 almost all of the depressive effect on real GDP growth of government austerity was the result of the reduction in military spending. While some of the reduction was beneficial, Klein opines, “some of it represents a self-inflicted wound.” Indeed it may represent a self-inflicted wound on the Federal government, but in that case it benefits the private economy.

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Economics

Thursday, December 25, 2014

A Capitalist Christmas / Economics / Economic Theory

By: MISES

Dale Steinreich writes: Halloween has a socialist tenor. Menacing figures arrive at your door uninvited, demand your property, and threaten to perform an unspecified "trick" if you don't fork over. That's the way the government works in a nutshell.

Thanksgiving has been reinterpreted as the white man, after burning, raping, and pillaging the noble Indian, trying to make amends with a cheap turkey dinner. New Year's can be ruined as the beginning of a new tax year, and the knowledge that the next five or six months will be spent working for the government.

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Economics

Wednesday, December 24, 2014

Correcting Scrooge’s Economics / Economics / Economic Theory

By: MISES

Ryan McMaken writes: As Charles Dickens himself admits, Ebenezer Scrooge is a thoroughly peaceful man, guilty of no true crime, who has robbed no one. Therefore, we must conclude that his wealth is a sign of his ability to please at least some people, and as Michael Levin notes: “Dickens doesn't mention Scrooge's satisfied customers, but there must have been plenty of them for Scrooge to have gotten so rich.”

But as he is a person with bad manners and a disagreeable personality, many have conflated Scrooge’s personality traits with his business practices, although the two are unrelated phenomena. As a miser and businessman, Scrooge provides numerous valuable services to the community including, as Walter Block has shown, driving down prices and making liquidity available to those who, unlike the wrongly maligned misers, have been either unwilling or unable to save in comparable amounts.

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Economics

Sunday, December 21, 2014

The Social Function of Economic Inequality / Economics / Economic Theory

By: MISES

Mark Tovey writes: The unhampered market creates economic inequality. Free marketeers tend to concede this fact as an unfortunate defect in an otherwise laudable system. F.A. Hayek, however, in a chapter from The Constitution of Liberty, argued that inequality is fundamental to a society's progress. Hayek explained how, by purchasing luxuries unimaginable to the average man, the rich unwittingly perform a vital public service. Indeed so fundamental is inequality to economic progress that egalitarian societies, Hayek concluded, would be faced with no choice but to deliberately re-inflict upon themselves the very class systems they had sought to escape, should they wish to achieve well-directed economic advancement.

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Economics

Wednesday, December 17, 2014

An Unorthodox Solution to the World’s Economic Problems / Economics / Economic Theory

By: Frank_Hollenbeck

We currently face a monumental dilemma. How do we extract ourselves from all this excessive debt without crashing the world economy? There is a solution which is totally counterintuitive: print even more money. In other words, to get out of the deep, deep hole we are in, dig even deeper.

It is called the Chicago plan. With a stroke of a pen, money would be substituted for debt, without the negative consequences of printing money. Banking would be restructured so that it never again leads to boom and bust cycles, and most debt, public and private, could be cancelled.  It’s basically a “one time” get out of jail card for the world economy.

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Economics

Wednesday, November 12, 2014

The Economics of Tipping / Economics / Economic Theory

By: MISES

Ken Zahringer writes: My dinner companion sounded indignant. “It’s a shame we have to tip the waitress,” she said. “The restaurant owner ought to pay the staff enough to live on.”

I imagine that is a common attitude among those steeped in our current cultural climate of envy and dislike of economic success — the anti-capitalist mentality, as Mises put it. It’s easy to fall into the trap of thinking that we tip waiters out of sympathy, due to their misfortune of having to work in an industry full of greedy restaurant owners who won’t pay a “living wage.” In fact, tipping is an elegant market solution to a particular set of circumstances, often present in service jobs, that makes determining an appropriate wage extremely problematic. The practice of tipping used to be more common, applying to many more service positions than at present, when it is largely restricted to waitstaff and skycaps. Part of the reason for its partial demise is just the wandering course of economic change, but many jobs that used to be paid primarily by tips came to be covered by minimum wage legislation and simply disappeared.

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Economics

Sunday, November 09, 2014

Why The Theory of Money and Credit Is More important Than Ever / Economics / Economic Theory

By: MISES

Richard Ebeling writes: Eighty years ago, in the autumn of 1934, Ludwig von Mises’s The Theory of Money and Credit first appeared in English. It remains one of the most important books on money and inflation penned in the twentieth century, and even eight decades later, it still offers the clearest analysis and understanding of booms and busts, inflations, and depressions.

Mises insisted that the economic rollercoaster of the business cycle was not caused by any inherent weaknesses or contradictions within the free market capitalist system. Rather, inflationary booms followed by the bust of economic depression or recession had its origin in the control and mismanagement by governments of the monetary and banking system.

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Economics

Thursday, November 06, 2014

The Errors in Liquidity Preferences / Economics / Economic Theory

By: Frank_Hollenbeck

The theoretical construct of Keynes’s monetary view of the world is known as the liquidity preferences theory of money. This theory is the foundation of many macroeconomic models and stands in stark contrast to the classical view of interest rates, the loanable funds theorem.

Much of Keynes’ work, including this theory, disproportionately elevated the importance of holding cash as a key economic variable. Income can be consumed, saved or held in cash. Consumption is for personal satisfaction. Saving is a transfer of claims on goods and services from consumers to investors. Holding cash, or hoarding, is the equivalent of stuffing money in your mattress.

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