The Search for Economic and Monetary Theories

Many church leaders and theological educators give public declaration concerning economics and finance, which Austrian economists considered fallacious. This unfortunate phenomenon is due to ignorance of vast literature on economic and monetary theories from this school and the widespread influence of socialist literature in the academe. 

Our goal therefore is to correct this anomaly by retrieving the works of economic and monetary theorists. We believe that economic theories related to praxeology, Keynesianism, and entrepreneurship will help us illumine this chaotic intellectual atmosphere. Moreover, the vast literature on monetary theory, which includes currency, business cycle, credit, inflation, banking, and the gold standard will provide us an analytical framework to critique the existing monetary system and to lead us to sound monetary policy. Furthermore, as theological educator, it is part of our goal to search the literature on Christian economics to know the answers to the following questions:

1. What does the Bible say about economics and business?

2. What does the Bible say about money and credit?

3. What does the Bible say about banking and business cycle?

4. What does the Bible say about inflation?

Nothing to Fear

Companies and banks are also financially healthier...All signs so far - from manufacturing to consumer spending - are pointing to a firmer rebound, not just in the US but also in other recently stagnant developed economies like Europe and Japan...So while Asia may be in for a rocky ride as the US eases out of QE, most economies are in a good position to manage the adjustment without giving in to fears of a new crisis. - The Korea Herald 

Fiona Chan wrote the "Fears of Asian financial crisis may be overblown" at The Korea Herald dated August 29, 2013. Her article attracted my attention for it is about the economic situation of Asia and contains materials related to the Philippines. She thinks that Asia has nothing to fear for it has strong economic fundamentals and actually have experienced "boom for the last three years". Countries, which she identified as strong include Taiwan, Philippines and South Korea. In fact, she also thinks that the US, EU and Japan were already out of recession pit and on their way to recovery. 

My reading of Austrian analysis about Asian economy leads me to a different conclusion from Chan. If she thinks that those who see a repetition of the Asian financial crisis in the coming years are misguided, Austrians think that a far greater crisis is actually approaching. We just do not know when. It depends on several factors particularly in relation to the political and economic move of the US. But either way, we cannot escape a far serious economic bust. 

Even reading Chan's article, you will see a hint about the kind of monetary system that we have right now. She said that "if the authorities tighten monetary policy to stabilize currencies or reduce inflation, that risks sapping economic vitality." This is an admission that existing monetary system is unstable. Any attempt to stabilize it will make the situation worse. So the tune that we are playing now is to allow lose monetary policy and let inflation has its way.

You can detect another indication that we are not in a healthy condition when she quoted one economist saying " 'Asian economies have been on a steamroller boom for the last three years, and the fact is that many Asian economies are fundamentally on a much firmer economic footing this time around. '... they do not 'appear to be in danger of falling into an outright currency crisis.' " From Austrian point of view, this is exactly the one to fear - the boom she is referring to for it is caused not by sound business practices, but by credit expansion. After this, bust follows depending on the length of the impact of the easy money injected to the economy in the first place. So I assume that if we could interview an Austrian, he would say "It's actually the reverse: Asian economies are on a more serious and shaky economic footing right now." 

If Chan saw that the world economy has already escaped the 2008 crisis, for an Austrian, the crisis has never been solved. It was actually expanded...

Austrian School

"The great practical advantage of the Austrian School is that it is a form of economic analysis that is founded in realism and helps us understand both progress and problems in the real world. Therefore, it is a useful tool for people in the real world, but is of little use, and indeed is a threat, to mainstream academic economists" (Hulsmann and Kinsella, eds., "Property, Freedom and Society", 2009, p.358).

Encouraged After Being Disappointed

After writing “Savior of Capitalism and Champion of Free Market,” I happened to join a LinkedIn group, Ludwig von Mises. Since I am new to this “Austrian School,” my intention in joining is just to have a feel of the current developments in Austrian ideas. One thread caught my attention. It is about Milton Friedman.

To my surprise, members of the group are praising Friedman as a libertarian. I could not understand for it is contrary to what I have been reading so far. So I raised a question and quoted Murray Rothbard about the need to precisely identify the economic position of Milton Friedman. I received an immediate reply implying that Rothbard’s position is invalid in “real world economics,” and Rothbard himself an “escapist” into economic fantasy land. The responder further asserts that to ignore the contribution of Milton Friedman going to the “right direction” is foolish. Murray Rothbard is foolish in the eyes of this group member.

Being a new member, I just voiced out my disappointment by stating what I thought to be in his mind. My greater disappointment is caused by the silence of other members that to me, it only means that the position of the group on Milton Friedman is the dominant one.

Resulting from that experience, I made a tentative conclusion that for Austrian ideas to spread, the economic position of the followers of Friedman must be exposed. They claim to be proud members of the “libertarian” camp. To me, they are nothing but confused followers of the statist version of “libertarianism” and “free market” ideas.

After a day, as my custom, I visited LewRockwell.com to see new articles written by Gary North. I am happy to read The Future of Austrian School. It is a confirmation of my early conviction. I am glad to receive such confirmation from an Austrian economist himself about the future of Austrian School. In that article, North reports about a seminar at Mises Institute attended by more than 150 students from 20 different countries. As a result of such experience, he foresees a promising future for the spread of Austrian ideas. He recalls that from a humble beginning in the 1950s, the Austrian mindset is now an international movement that is rapidly growing.

North cites how the web serves as a powerful tool to educate the people. The present economic crisis is waking up increasing number of people to the significance of Austrian thoughts. Ron Paul is the common starting point for most people. His consistent message serves as an eye-opener to many.

Note: First posted last  August 7, 2012

Austrian School - Misunderstood and Misrepresented

Another example of Keynesian-Austrian tension in the market today is demonstrated by two articles respectively written early this year. Matthew Yglesias wrote the January 6 article,  What is “Austrian Economics”? And Why is Ron Paul Obsessed with it? and Sheldon Richman wrote  the January 13 article, Austrian Economics Hits the Headlines: Critics Ought to Understand it First.

Reading the above two articles is like watching an online debate between a misinformed critic and a well-grounded defender of the Austrian school. The first article is an example of a prevailing misconception and misrepresentation of Austrian economics. Richman recommends it as   “highly informative – about what Austrian economics is not.”

My intention in this article is not to repeat Richman’s refutation, but to limit myself in an overview of just three discrepancies of ideas between a Keynesian and an Austrian when it comes to economic issues.

First, Yglesias describes Austrian economics as Ron Paul’s “idiosyncratic passion” and “set of beliefs that put him at odds with the vast majority of well-known economists of all ideological inclinations.” Well, that is true, but this lone politician at least knew long beforehand and anticipated the 2008 crisis that those “well-known economists” caught unprepared and at a lost to provide clear and believable answers to the American public and the world.

The critic portrays the Austrian school next as “a set of classical liberal thinkers with diverse interests who came out of the Austro-Hungarian Empire.” Sheldon Richman replied that such piece of history is inaccurate. Instead, the Austrian pioneers are actually neither interested with politics nor in government economic policies. Their common goal was to provide a sound theoretical basis of market operation: good, value, exchange, price, commodity, and money.

And finally, Yglesias argues, “…along with rejecting the legitimacy of any intervention to protect the poor or regulate anything… Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations.” There is an omission here. We are not sure if it is deliberate or the writer really does not know anything about the Austrian idea identifying the government itself as the primary source of economic crisis. Of course, the government can do something to address the situation; Austrian just do not believe that the government’s action could “stabilize macroeconomic fluctuations.” At best, what the government can do is to stop stimulating the money supply and reduce spending.

Richman identifies other misconceptions in Yglesias’ article. His refutation is really and highly informative of what true Austrian economics is. Those who want to know Richman’s informed refutation can personally read the article here.

Note: Posted last July 23, 2012

Two Schools - One Crisis

After finishing two lessons based on Carl Menger’s Principles of Economics(1871), I have to pause for a while and read some recent articles. This is more fun and pleasurable to me than studying primary books like Principles. I think, the advice of a fellow minister is timely. He knows firsthand the struggle to attain understanding. I experienced it in my quest to understand the Austrian school of economics. My mind is wavering between two approaches: directly going to the primary books or reading existing articles. Again, I changed my decision. I will do both simultaneously.

Reading primary source requires more time and concentration. It requires greater hard work. Entering the world of ideas especially written in the past is more difficult to me than studying present-day articles. At least, one consolation is that you will no longer at the mercy of someone’s interpretation. Your questions in mind can immediately be answered by the original writer himself.

On the other hand, studying contemporary articles is more fun and pleasurable than hard work.  You are still in the world of ideas, but at least, they are now applied in the present setting. And it is fun to know what is really going on out there in the world of business and finance between the two major schools of economics: Keynesian and Austrian.

One example of such tension is reported by Chidem Kurdas last July 20, 2012 in his article, Uncertainty and the Keynesians.  The future of global economy is uncertain. Two schools of economics offer their distinct analysis. From the Keynesian school, we have Joseph Stiglitz and Paul Krugman. From the Austrian school, we have Allan Meltzer.

We have here one economic problem, two different analyses, and two distinct solutions. Which one is right? Which one is correct? If one school is correct, the other is wrong. They cannot be both correct at the same time. For the Keynesian, the solutions are “further monetary easing by the Federal Reserve” and “massive new federal deficit spending.” Based on a superficial analysis and as short-term solution, the Keynesian rhetoric makes sense.  On the other hand, the Austrian is against “monetary stimulus” and favors reduced government spending.

I am no economist and I am not familiar with the economic terms used by economic experts generally reported in the news. I wonder how many people out there share my lack of knowledge. To my mind, what the Keynesian calls “monetary easing” and the Austrian describes as “monetary stimulus” refer to one action – printing more money by the Fed, and that is how I understand inflation.

Basically, inflation means increase in money supply. Price increase of market goods is just an outcome of the decrease in purchasing power of currencies resulting from the increase in money supply. What most people do not know is that inflation is an “invisible tax.”

Economists’ use of words really matter in public discourse to convince society that their analysis and solution are correct. At face value, the Keynesian proposal appears harmless, but in reality, what they propose is more taxes. The problem is only few are informed, others are confused, and the greater majority are still living in the world of fantasy.

Note: Posted on July 23, 2012

Influence of the Austrian School

This is the continuation of “My First Article.” At least, I kept my promise to myself that I will read the first three articles I got from Google Reader before I sleep.

The first article I read was“The Austrian School of Economics.” This article was written on August 20, 2011 by Manoj Singh, an Investopedia writer. He provided a rough overview of what the Austrian economists do. At the outset, the writer claims that the Austrian school is radically different from conventional economists that we hear today.

Most present-day economists are difficult to understand (I thought at first that it was only the theologians and philosophers who are difficult to understand by the public). The public find them speaking “alien” words with their sophisticated graphs, complex formulas, and difficult terms. To me, they serve as great tools to hide the real world from the people.

The writer claims that our society is being deprived from the insights coming from Austrian economists; insights, which are very critical to assist us in addressing vital economic issues in our time.

In the first section of the article, we find the names, the books and the main ideas of the pioneers of the Austrian school: Carl Menger, his Principles of Economics (1871), and his idea about “diminishing marginal utility;” Ludwig von Mises, The Theory of Money and Credit (1912), and Friedrich Hayek. He forgot to mention Murray Rothbard.

The main content of the article centers on the primary ideas of this school and their distinction from more popular thoughts of economics. They include the methodology, the way to determine prices of goods, interest rates, inflation, business cycles, and creation of market mechanism.

The writer concluded with an invitation to learn Basic Economics. I planned to accept his invitation after finishing my reading of the remaining two articles.

The second article, Austrian Economics and Modern Monetary Theory was written last June 20, 2011 by Robin Koerner of Huffpost Business. The article has two main sections. In the first section, he praised the Austrian school. He mentioned about its rise to popularity, its ability to see the problem in existing monetary system, and its promotion of the free market. The writer also identified favorite themes today, which were exposed due to Austrian influence. They include issues like the government and the bankers’ manipulation of money supply, fractional reserve, and fiat money.

In the second section, the writer introduced the idea of “Modern Monetary Theory” (MMT). He mentioned the weakness of Austrian school to grasp the complete picture of existing monetary system. This is where the Austrian school needs MMT. The writer proposed an interaction between the two with the hope of seeing a synthesis expecting to find a solution to our economic problem. After reading the writer’s explanation of the pros and cons of MMT, personally, I am not impressed. I still go with the Austrian school.

The third and last article was written just two months ago, May 7, 2012 by Brian LaSorsa. It is a very relevant article for it concerns the upcoming US election. The title of the article is Bachmann, Ludwig von Mises Would not Endorse Romney. The writer shares the story about Bachmann’s inconsistency between her claim that Ludwig von Mises is one of her favorite economists and her support to the candidacy of Mitt Romney. LaSorsa then provided his evidences that Bachmann’s support for Romney shows that she really knew nothing about Mises. He provided four important issues where Romney’s position is different from Mises. They include drug prohibition, Federal Reserve, war, and taxes. If Bachmann’s claim that Mises is one of her favorite economists, she should have supported the Tea Party candidate, Ron Paul.

So far, these are the insights I glean in reading the first three articles on Austrian school of economics. Summing up the three articles, we find that in the first article the Austrian school is mentioned to promote a course in economics; in the second article, the Austrian economics is mentioned as part of the solution to economic crisis, and; in the last article, we read how a prominent figure in the Austrian school was used in politics. So these three fields – investment, finance, and politics – are now experiencing the pressure and influence of the thoughts of the Austrian economists.

Grace and peace!

Note: Posted in my WP blog last July 19, 2012