Posts tagged Austrian Economics
Posts tagged Austrian Economics
Here is a perfect real world example of malinvestment due to government stimulus. From this Bloomberg article:
China, the world’s biggest steel producer, is exporting at the highest level in two years, exacerbating a global glut…
…Chinese steel mills, set for a record production in 2012, are ramping up overseas sales to avoid a softer domestic market, where prices for the commodity have dropped to a two-year low.
China is producing so much steel, that it must export the excess to keep prices from falling. In a world not dominated by Keynesian economics, this drop in price would signal that too much steel is being produced, prompting steel companies to cut back on production. Instead…
Chinese Premier Wen Jiabao is overseeing a $23 billion investment in new mills to stimulate automaking and housing to reignite growth that fell in the second quarter to the slowest in three years. The strategy already is sparking unfair-trade charges by Western rivals.
First, it’s a stupid strategy. They are producing an excess amount of steel and thus lowering prices in the process, making it likely unprofitable were it not for the government’s money. This is a perfect example of malinvestment - resources poorly allocated (the money could be used somewhere else) due to cheap credit or in this case government stimulus.
Second, although difficult for steel mill employees and owners to see, it is actually beneficial to the markets the steel is being exported too. By overproducing and exporting the steel at a subsidized price to the United States market, U.S. consumers are likely to see the price of anything built with steel to go down. This allows U.S. consumers to either save, invest, or spend this extra money elsewhere. Savings and investment are the lifeblood to an economy.
Yesterday morning on NPR, I heard a promo for a story that would air later in the afternoon. A private company named “General Fusion” was using $30 million in venture capital to do what billions in government funding could not - generate energy through nuclear fusion. It naturally piqued my interest. The first paragraph sums it up best:
The world would be a very different place if we could bottle up a bit of the sun here on Earth and tap that abundant and clean energy supply. Governments have spent many billions of dollars to develop that energy source, fusion energy, but it’s still a distant dream. Now a few upstart companies are trying to do it on the cheap. And the ideas are credible enough to attract serious private investment.
This is the power of the free market. Good ideas get funded by investors who feel there is a good chance they will succeed, but also will be profitable (and thus affordable). They don’t waste billions of dollars on theory that will never become a reality, or if it does, will be so outrageously expensive that there will be no practical use for it.
Richard Siemon used to run the fusion program at Los Alamos National Laboratory, which is part of the multibillion-dollar federal research effort. He says radical ideas like this get dreamed up at the big labs, but they get starved for money, which flows mostly to the industrial-sized projects. Sure, he says, those big projects are exploring important physics, “but when they are working on a concept and somebody says, ‘Yeah, but it’s going to cost too much for the customer in the end,’ that’s sort of like a non-issue for a government researcher.”
General Fusion is relying heavily on funding from venture capital firms, which are generally accustomed to quick turnarounds. This project is pioneering the idea that such firms can have the patience to invest in longer-term projects.But private investors are only interested in projects that could become commercially viable power sources. That’s why Siemon is happy to see private investors taking an interest in fusion energy.
Just imagine what would happen if these billions of dollars were available to private investors and inventors who actually care if what they are working on is practical. This waste of money by the government is what Austrian economists call ‘malinvestment’. Malinvestment takes resources (not only money, but other brilliant scientific minds and scientific equipment that could be used to help the private sector work on real world solutions) away from people who have good ideas, thus delaying mind-boggling improvements to our standard of living, and in this case, our environment.
Who knows what kind of world we would be living in (clean, cheap energy which is pollution free) if the markets were allowed to work efficiently.
BTW, Here is an excerpt from another NPR story on nuclear fusion research from July, 2010…
What would you pay for a clean technology that could meet all the world’s energy needs without producing an ounce of carbon dioxide?
On Tuesday morning, governments from around the world are meeting in France to discuss exactly that. On the agenda is ITER — Latin for “the way” — which is a major experiment to harness the power of nuclear fusion.
ITER’s promise of clean, nearly limitless power has won support from politicians. But the experiment’s multibillion-dollar price tag has critics wondering whether it’s really worth the cost.
It will be interesting to hear tonight’s GOP candidates talk about the economy. This is what I know about the candidates so far.
Mitt Romney doesn’t understand how foreign investment/international trade works very well. He specifically takes a hard line against China. Starting a trade war with China right now would be the best way to tank our economy.
Then we have Herman Cain who said one week before the collapse of our financial system, that the economy is great! He obviously have very little understanding of the business cycle or what causes booms and busts (Austrian economics).
Next we have Rick Perry who brags about his job creation record in Texas, despite the fact that under his watch, it was the government creating these jobs. I thought Republicans were against this approach.
The only two candidates that I think truly understand the economy, business cycles, and what we need to do to get back on track are Ron Paul and Gary Johnson.
Unfortunately, Gary Johnson is not only being ignored by the media, but excluded as well. He was not invited to the debate tonight despite his brilliant economic record. Nor has he been invited to several of the previous debates. As governor he vetoed a record 750 spending bills (more than all other governor’s combined during the same period) and left his state with a $1 billion surplus.
Which leaves Ron Paul, who has actually written books on the underlying problem with our economy, the Federal Reserve and the reserve banking system. He saw the housing bubble 5 years before it happened and predicted the consequences. Why? Because he is a student of Austrian School of economics which can be summed up as follows:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine the can design.”
― Friedrich A. von Hayek
If a candidate says they can create jobs, they are no different than President Obama. They just have a different plan. What we need is a President that is willing to let the market create jobs.
Russ Roberts from CafeHayek.com talks about the fallacy that one can “calculate” the number of jobs that will be created from this stimulus or that.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." - Friedrich Hayek
Crony Capitalism is when a business is rewarded, protected, or subsidized by the government. Under the Obama administration, alternative energy companies seem to be some of the biggest beneficiaries of government money. Political favors aside, this is good right? In order to save the environment and all? The answer is no. No company, no matter who they are, what they do, or what you think their potential might be, should receive government money.
Today we learn that solar company Solyndra is going out of business. They were major donors to Obama and were rewarded with a half billion dollar loan from the Energy Department, in 2009. And now tax payers will get stuck with the bill.
The economic conditions that have put Solyndra in such dire economic straits – the “regulatory and policy uncertainties” to which its CEO referred – may have been perceptible, even when the company received the loan guarantee. But the Department of Energy did not undergo its usual financial assessment when considering that guarantee.
“An independent federal auditor who has reviewed the energy loan program said moving so quickly without completing thorough reviews exposed the program to perceptions of political influence and put taxpayers at greater risk,” CPI’s iWatch News reported at the time.
The article also mentions that one of Solyndra’s top investors raised about $50,000 for the Obama presidential campaign, and the bank that made the loan (which was guaranteed by the DOE) raised about $100,000 for his campaign.
Here is the problem with this sort of thing from the Austrian School of Economic’s perspective. The $535 million given to this company was taken from tax payers. Tax payers are potential investors. These tax dollars were used to purchase resources such as factories, equipment and employes for a company that was failing. Some may argue that we need to take risks in order to come up with new solutions. Determining these risks however, should not be the job of the government.
Milton Friedman’s theory on how we spend money fits perfectly here. When people spend their own money on themselves, they care about how much they spend and the quality of what they spend it on (ie. ‘private investors’). When people spend other people’s money on other people, they don’t care about the price or the quality (ie. ‘government loans’). Private investment is therefore much more likely to find actual solutions to real problems.
In the case of the Solyndra company, there may have been several other non-politically connected companies or individuals who could have used these resources. Had they received that money through private investment, maybe they could have found a major breakthrough in the field of solar technology. If they weren’t competing with Solyndra to have a factory built, perhaps they would have had more money to use new manufacturing technique that make solar power more affordable. We’ll never know.
I’m all for solar energy, wind energy, ethanol, or any other kind of energy that can replace coal and oil, but only if they are economically viable. Markets ALWAYS win. If the energy these technologies produce are not economically viable, people will not use them. If they are constantly being subsidized, we will never know if they are economically viable. The only way we will ever find a solution to climate change, or any other problem, is through free markets. This means freeing up resources the government typically squanders and letting individuals make informed decisions with their own money.
Today I saw the following headline, “Are Pessimistic Consumers’ Fears of High Inflation Exaggerated?" The crux of the story is that for some reason, consumers think inflation is going to be much worse than it actually is.
My initial thought when I started to read this was that the disconnect is because consumers feel the real cost increases of prices, while the government does everything it can to keep the numbers lower. He actually addresses this in the story, although he is very flippant about it.
It could be that the nation’s primary measure of inflation, the consumer price index, systematically undercounts inflation and has been doing so for decades. There could be an immense conspiracy carried out under the last several presidential administrations aimed at making Americans believe prices aren’t really rising much.
He’s obviously trying to discredit this possibility by labeling it a conspiracy. Nobody wants to be a conspiracy theorist! But the fact is, the government has changed how they measure inflation over time and they do distort the numbers. This is how:
For an excellent article on this, see the Forbes article, “Government Inflation Numbers Are Bogus”.
Likewise, see this article from Reason.com, “Good ol’ Fashioned Inflation Like in the Late 1970s”. It points out that our inflation rate would be at around 10% if we measured inflation like we did in the 1970s.
Personally, I think my initial thought was right. The reason we think inflation is higher than it is, is BECAUSE IT IS!
Right after this, he gives another reason why we might think inflation is higher than government numbers say, and that is…
Or it could be that there is a disconnect between what people think, feel, and fear about inflation, and the reality of rising prices. It’s easy to notice the price of things that are going up — especially gasoline, which people purchase frequently and whose price is loudly and publicly advertised. When prices of goods and services stay the same, or fall a bit, or deliver a higher value for the same price — think of toys, or cars, or computers, or internet access — it frequently doesn’t register.
I have a major issue with this. He’s essentially talking about deflation. Deflation is a good thing. In the real world, we find more efficient ways to create the things we use. As we become more efficient, prices go down. What he is suggesting is that lower prices don’t register and we only feel the higher prices. Inflation is low, but we think it is high because of a few unstable goods.
This doesn’t make sense. If in the course of time we had even zero percent inflation as measured currently by the government, we would still have inflation. If we are constantly improving the ways we make things, thus making them cheaper, a zero percent inflation rate would simply mean that the overall rate of inflation is keeping up with the overall rate of deflation. Sigh.
Inflation is Good?
In the end, he takes a typical Keynesian view about inflation, which explains his apparent lack of understanding (at least in my mind).
Here’s the irony. Many experts believe that a higher level of inflation would be helpful given the macroeconomic circumstances — low interest rates, slow growth, high levels of debt. […] Given that people seem to be incorporating higher inflation into their mindsets, perhaps policymakers should consider indulging them.
Brilliant idea. Instead of the actual 10% inflation we’re experiencing now, let’s up it to 50 or 60% (as measured in 1970’s terms). I mean hyperinflation is a good thing, right?